Smart Socho: How to invest in a pre-launch project and live to tell the tale

Investing in a pre-launch project in a subdued market is like playing with dynamite next to a furnace. Both cases are likely to blow up in your face. Yet it's quite possible to minimize the risks and book a tidy profit, if a buyer sticks to a few simple guidelines, writes Rajesh Kulkarni.

It's a well known fact that investing 'early' in a pre-launch project can save a buyer upto 30 percent in terms of the final cost. It's equally well known however that this perceived 'saving' comes with several risks attached - namely, the project getting delayed, the developer back-tracking on his promises, sudden changes in design or specifications and so on.

In other words this can be categorized as a high-risk method of investing into property. It's a route that risk-averse buyers normally stay well way from, since it involves putting your money where the builder's mouth is, in other words your paying for a dish that is yet to be cooked let alone served.

This is not to say however that all buyers or investors who had invested in a pre-launch project were short-changed. Far from it, there are a sizeable number of investors who have indeed got what they were promised and even saved a sizeable amount form the final cost.

The distinction here is that all these happy investors were those who only invested in pre-launch projects by leading developers, who enjoyed an excellent reputation in the market, had a long list of completed projects behind them and were known to generally deliver on their promises to customers.

From an investor or buyer perspective, it's all about his/her trust and confidence in the said developer's reputation and ability to deliver that propels them to expose them to certain risk and invest in their pre-launch projects.

Yes, regardless of the builder's reputation, there is still a certain amount of risk involved in investing in a pre-launch project, but the tidy gains on project completion are usually enough to offset the potential risk assessment in such cases.

So the first rule of investing in any pre-launch project is to first verify the developer's credentials and track record. Every city has its share of reputed builders who enjoy a privileged standing among their customers and are known for their reliability.

Such players are usually a 'safe bet' for investment since buyers feel a lot 'safer' parking their hard-earned monies in their project in the knowledge that they will get what was promised and what they paid for, making the entire process from booking to delivery, a pleasant experience.

In the case of a lesser-known builder, it does not automatically imply that he cannot be trusted, however its upto the buyer to conduct due diligence and check the builder's track record and credibility in the market. There are several examples of new upcoming developers with fewer completed projects but a solid reputation for timely completion.

Yet buyers still need to do their bit and ask all the right questions. These may range from finding out if the builder has all the approvals in place to the actual completion and handover schedule for the selected project. For those who find this quite a handful, it's safer to stick to established developers.

However if it happens to be the builder's very first project, it calls for the highest level of caution and due diligence on the part of the interested buyer or investor. Most buyers tend to make the mistake of leaving the verification process to the bank. While this is ok when dealing with reputed builders, it's simply not enough in the case of greenhorns.

In such a situation buyers must take on the onus of self-verifying the legal aspects and sanctioned approvals at every stage of the project. This typically includes asking for and verifying important project-related documentation like the sanctioned plan, draft agreement, commencement certificate and the title search report which proves the builder's ownership rights to the plot the project is being built upon.

The single most important factor that governs all investments into pre-launch projects is the scheduled time or date for completion of the project. From an investing perspective, a timeframe of between 2-2.5 years falls in the acceptable category.

Buyers also need to be clear about the inclusions in the purchase agreement ranging from the size of the apartment and promised amenities to the maintenance cost and parking options. More importantly, the agreement should also contain a clause which defines the penalty to be paid by the builder in the event the project gets delayed or the design is altered without prior notice.