The real estate market has begun to aggressively promote discounts to beat the slowdown blues. Developers are bombarding customers with a bevy of schemes and packages that sound attractive. But the fine print could be costly proposition for customers and even banks who finance a part of these schemes.Customers should be suspicious of any scheme that sounds too good to be practical and true. This is especially so irrespective of the scare environment where another class of investors have lost heavily in financial schemes that offer too much.The telltale sign of a too-good-to-be-true offer is a clause offering money back with interest even for cancellations. This is especially true for small towns,in metros it is schemes like 20:80 and interest subvention that draw in buyers.Harsh Roongta,CEO,Apnapaisa.com says it is not difficult to distinguish such offers from Ponzi offers being made by “fake real estate” companies. “Firstly they will have a lucrative cancellation clause where you make money if you choose not to go ahead with buying the flat. No genuine company will offer a ‘lucrative’ cancellation option,” says Roongta.POPULAR SCHEMES20:80 scheme: This is the most popular scheme. In this case,buyers pay 20 per cent of the unit price upfront and 80 per cent on possession,with the EMIs (equated monthly installments) in between being handled by the developers. Such developers undertake to pay the EMIs for up to two years,with the assurance that the buyer will get possession of the unit by then.This is how it works. If a flat costs Rs 40 lakh,the bank will pay Rs 30 lakh (80 per cent of cost) to the builder,say at an interest rate of 10 or 11 per cent. The builder will pay around Rs 25,000 per month to the bank for two years. But if the builder stops paying up after one year,the liability falls on the customer who will end up paying Rs 3 lakh as interest for the second year. The actual EMI for the buyer that should have started after second year gets front loaded instead. If the project is further delayed,he will go on paying the EMIs as well.Subvention Plan: In this case,the developer would collaborate with banks and the buyer invests in an under construction property by paying a token booking amount. The rest of the payment is made by the bank as a loan to the buyer. Post this,buyer doesn’t pay any EMI for a specified period (usually 2-3 years or until possession) and the developer pays the interest incurred to the bank for a specific period.Consider this scenario. A customer buys an under-construction flat which requires 2-3 years for completion with a loan from the bank. He pays Rs 1 crore. During the construction period,the buyer gets Rs 1.1 lakh a month (11 per cent per annum) via post-dated cheques from the builder. A Rs 1 crore flat doesn’t get more than Rs 40,000 per month as rent in a city like Mumbai. If the builder goes to a bank,he can’t hope to get a loan below 13-14 per cent rate. Risk: There’s no guarantee that post-dated cheques won’t bounce if the builder faces cash flow problems. If the project is delayed,builder may not go on paying 11 per cent per month to the buyer.A Rs 1 crore flat doesn’t get more than Rs 40,000 per month as rent in a city like Mumbai. If the builder goes to a bank,he can’t hope to get a loan below 13-14 per cent rate. Risk: There’s no guarantee that post-dated cheques won’t bounce if the builder faces cash flow problems. If the project is delayed,builder may not go on paying 11 per cent per month to the buyer.Then there is the “assured returns” scheme popular with commercial projects and developments such as hotel-apartments. Such schemes claim to give assured guarantees to consumers. The offer: you invest the sum with us,and we will give post-dated cheques for the first five years.Roongta cautions investors to stay away from assured return schemes. “Who is assuring that the ‘assurances’ made will be honoured? The very fact that such a scheme is being offered reeks of desperation to sell. It is not that such schemes will always default but clearly these are high risk projects.”Piyush Tiwari,Head-School of Real Estate at the RICS School of Built Environment,says,“Schemes such as 20:80 or no EMI are marketing tools,which become more popular when the market is slow. It is a pure cash flow play. Instead of reducing price during a slow market,builders prefer to offer these forms of discounts. They don’t want to reduce cover price as it will send signals of market softening.”Lenders do not lose as interest on their loans is being paid by developers during the period of discount. Technically in some of these,where the cash flow is delayed,one would expect that the developer is taking larger risk and hence would expect higher return.“So,by offering such discounts the developer is able to sell at a higher net present value than if he had offered an upfront discount in a sluggish market. This is the developer’s gain. Moreover for an under-construction property to keep leverage low,developers need buyers’ cash flows,” says Tiwari.HOW DEVELOPERS BENEFIT“It’s not easy for a builder to get funding these days. These schemes enable the builders to get assured funding at the cost of customers. What the builder pays or offers to pay is two years interest. Ultimately,the loan repayment burden rests on the shoulders of the customer,” says the chief of a public sector bank.As raising money for construction is expensive,developers offer such packages as soon as they identify the land. In the case of assured returns scheme,experts say it’s more of a marketing gimmick than a serious business.State Bank of India chairman Pratip Chaudhuri says banks are cautious while lending funds to the sector. “We don’t extend lumpsum funds in the beginning. We give advances depending on the progress of the project. We look at the creditworthiness of the borrowers.”CHECK THESE OUTThere are no free lunches. The bank loan on 20:80 and subvention plans comes in the name of the flat buyer. The only difference is that builder will pay the interest for two years or till the project gets completed. The EMI starts only when he gets possession. At the end of the day,the customer ends up paying the full interest and principal component of the loan. The reality is that his repayment obligation gets delayed by two years.Secondly,as Ganesh Vasudevan,CEO,Indiaproperty.com says,“The base price for such schemes is higher compared to the actual base price for the project. Also,such projects have higher probability of getting delayed. Even after 2-3 years the principal loan amount for the buyer remains the same. So,eventually you are paying more as cost of the property is higher than normal and so is the interest paid.”Anuj Puri,chairman and country head,Jones Lang LaSalle India,says the hitch here is that if the project is not completed in the stated period,the onus of paying the EMIs falls on the buyer. Considering the high rate of project delays,this can be a risky undertaking and must not be entered into unless there is sufficient evidence of the developer actually being equipped to meet the stated timelines.There is an instance where the builders who offered an assured return of Rs 20,000 per month for a hotel-cum-apartment project in South India reneging on their commitments. In this case,the customer ended up paying the EMI while the property is in the hands of the builder.Puri and other experts say customers who are thinking of availing of such a scheme should keep in mind that as home loan repayment is a long-term process,they should have a clear understanding of how much a concession during the initial years will prove to be beneficial or a bane.