The festival season is here. The developers are sharing offers on their real estate projects too. Now, these offers can take any form. Recently, I came across an article in Hindustan Times, where the author listed different types of offers from various builders.
What Form Can Such Festive Offers Take?
- Upfront discount (You won’t see this often. The builder wouldn’t say we were selling this property for Rs 1 crore until yesterday and today we are selling this for Rs 80 lacs. The builders may have their reasons for this. At least they wouldn’t shout about this).
- Pay some money now and the remaining later (say 20% now and remaining after 2 years or when the construction is complete).
- Gift vouchers (Exercise discretion. Gift vouchers can be of any type and can be quite useless).
- We will pay the interest on your behalf for some time.
- We will cover the stamp duty or you don’t have to pay maintenance cost for a few years.
While any offer is good since it reduces the effective cost of ownership, you cannot take these offers at face value and need to look deeper. Following are the aspects you must keep these things in mind while evaluating such offers.
Don’t Soften up on the Price
Negotiations work on reciprocity. If you are overwhelmed by the offer, you may not drive the bargain hard. Hence, your focus may shift from negotiating the price to getting the most out of the offer. You may end up overpaying for the property.
Understand the Ramifications
Tata Housing has an offer where they will cover the interest cost in excess of 3.99% p.a. for one year for select project. After 1 year, the borrower must bear the entire interest burden. What could be the issues here? Firstly, Tata Housing may have tied up with a lender (bank, HFC or NBFC) for this offer. You must take loan from that very lender. For the first year, you pay 3.99% p.a. However, from the second year, the regular interest rate will apply.
For instance, under this arrangement, let’s say you have to take a Rs 50 lac loan for 20 years from Lender A. The loan interest rate is 7.5% p.a. but you pay only 3.99% p.a. for the first year.
|Month||Principal||EMI||Your Interest Component||Interest paid by the builder||Principal Repaid during the month||Principal O/S at the end of the month|
|Interest Cost borne by the Developer||1,73,720|
From your perspective, the interest cost borne by the developer is your discount. If we discount the time value of money, the developer could have given you the upfront discount of Rs 1.73 lacs and you would have been indifferent to the offer. By the way, this discount is not bad per se.
Now, to the more important point. What if given your credit profile, you could have borrowed from another lender at 7% p.a. The loan EMI would have been only Rs 38,765. A savings of Rs 3.63 lacs over the loan term. Even if we deduct the discount of 1.73 lacs (that is available with only 7.5% loan), you would have still saved 1.9 lacs over the loan tenure. Moreover, the interest is not the only cost you bear. You may have to shell out more in terms of processing fees and other ancillary charges.
Avoid Offers Where You Must Spend More Money
Now, this is just an opinion. I suspect this if the developer is offering gift vouchers. For instance, the developer offers a gift voucher of 50% if you purchase an expensive item or experience. You must still spend the remaining 50% from your pocket. It could be an item/experience you don’t really want or need. These gift vouchers may have an expiry period.
And some of these vouchers can be quite useless. For instance, if someone offers a XYZ spa 75% discount voucher of Rs 1 lac to be used over the next 1 year, it is useless for me. But that’s me. You may see merit in such vouchers. Therefore, don’t take these gift vouchers at face value. Sit with a microscope and evaluate the utility of these gift vouchers for your lifestyle.
The developers can be very generous with the gift vouchers because they know many of these vouchers may expire unused. Moreover, these vouchers (like the spa voucher I mentioned above) may not cost the developer anything. As we discussed any offer is good. However, some offers are better than the others. In absence of upfront discounts from the developers, prefer offers where the cost benefit is more objective and realizable and comes sooner.