Real estate investment or loan to builder?

In a recent development, the real estate firm Unitech was asked by the Supreme Court to refund the money to home buyers for failing to deliver the homes as per the schedule.

However, the firm’s lawyer told the Court that the firm has no money to refund to the home buyers. (See the news).

Many home buyers probably wanted to buy a home to live in, but some might be buying the property for investment. Having said that, this was a classic case of not understanding the risk one was taking. While these buyers were buying property, the investment would be considered an investment in real estate only after the said property is constructed, all legal approvals are taken and the possession given to these home buyers. Till that time, it was akin to a loan to the builder. If the broker defaulted on the commitment, getting the money back would take looooong time.

Here is a paragraph from the book:

Investors investing in “under-construction” properties are taking a credit risk by making payments to builders. Very often, they consider the property as their security. However, a property, yet not constructed, cannot be considered as a property. Someone would be required to complete the construction, whereas the builder has already got the money, and the chances are, already used it.

This is evident in the Unitech case going by the argument of their counsel. The company has no money to refund, which means the money the home buyers paid to the firm has been used already.

It is important for one to understand the risks associated before signing the cheque.

#RidingTheRollerCoaster – 218