Cash-strapped developers are coming out with pre-launch offers that were reserved for a closed group. This is in violation with the provisions of the MOFA and yet developers are flouting the rules and regulations in the absence of any check from the authorities

Several developers are coming out with pre-launch offers through advertisements and special invitations. However, according to experts this is completely illegal as developers are selling apartments even before the grant of the licence to develop the property.

"It (pre-launch offers) is a big zero. Pre-launch offers are 100% illegal. Unless you pass the plan (for the building) you cannot allocate flat or apartment number to a buyer. And several developers are found doing the same,” said advocate Vinod Sampat.

He said as per the Maharashtra Ownership Flats (Regulation of Promotion of Construction, Sale, Management and Transfer) Act, 1963 (MOFA), it is clear that developers cannot do this (pre-launch offerings). “There is no provision in the law that before obtaining clearance for the plan, a developer can launch a project. However, developers both big and small, across the country are using this method,” Adv Sampat said.

According to Pankaj Kapoor, managing director of Liases Foras Real Estate Rating & Research Pvt Ltd, this (pre-launch offers) is not good for a fair and balanced market. "People are lured to invest into such properties and it needs to be stopped. This practice spoils the market. Even in terms of parity, the price in the pre-launch offers is not lucrative. This is deception and should be stopped. I hope the new regulatory bill may stop this practice,” he said.

With higher interest rates and restrictions from the Reserve Bank of India (RBI) on lending to the real estate sector, several developers are using pre-launch offer route to fund the project. While welcoming the RBI’s decision to cut repo rate and cash reserve ratio (CRR) by 25 basis points, the Confederation of Real Estate Developers’ Associations of India (CREDAI) has called for a special thrust on realty sector. “The developer community expects key initiatives and boosters like according the status of infrastructure to housing and reducing the risk weightage to 1 from 1.25,” said Lalit Kumar Jain, president, CREDAI.

According to an expert who does not want to be quoted, developers buy the land and then announce pre-launch offer without taking any prior approval for the development plan. “Earlier, this was reserved for a closed group of people or associates of the developers. However, now days, everybody is coming out in the open with the pre-launch offer. The main reason is without a plan approval, the developer cannot obtain funding from legal sources and then opts for such route for financing the project,” he said.

Cautioning investors and buyers about such pre-launch offers, the expert said, since majority of developers only give an ordinary letter and there is no contract involved, in case of any dispute, the buyer stands to lose.

Several big developers like Lodha, Unitech, DLF, Godrej Properties, L&T Realty and Indiabulls are among those who are actively pursuing this model. Exploiting the anxiety of missing out that the phrase “first come first served” generates in the minds of buyers, the Lodha Group claimed that last month it received “tremendous response” for its Worli property.

Another interesting gimmick used by the Lodha sales team was the price rise. Following the pre-launch of its Blue Moon project, Lodha has also announced that the launch price for the project will be at least 20% higher that the “pre-launch offer”. This is surprising, as just a few days ago, Liases Foras, in its third quarter review of the residential market, had said the price of new launches was 24% lower than that of the existing supply across India, indicating signs of correction and increase in affordable housing. However, buyers are made to believe that real estate prices would only go up and this is the right time to buy the property at discount.

The Union government is planning to table the much awaited Real Estate Regulatory Authority Bill in the budget session of the Parliament. Ajay Maken, minister for housing and poverty alleviation, expects the Bill to reduce prevailing rampant corruption in the real estate and housing sector. “Not only will it (the Bill) protect the rights of home buyers, it will also bring in greater transparency. Developers will be restricted from channelizing funds collected from customer for one project to another one, which will provide better security to the home buyers’ investments. Even the property agreement documents, which are prepared and executed by the developers, will not remain one-sided, thereby not favouring the developer alone,” he said, while speaking at a conference in Mumbai.

The Union minister is also contemplating providing “infrastructure sector” status to the affordable housing segment, which will enable banks to come forward for providing loans to urban poor and provide an unprecedented boost in this segment. The banks will be able to provide long-term loans and also with the change in industry status, the ratio of non-performing assets (NPAs) from this category will reduce.

One thing is clear, despite a clear provision in the MOFA, developers are coming out openly with the pre-launch offers. And this is mostly due to inefficient checks from the authorities. Haryana is among the states which not just banned pre-launch offers from developers, but also have rules in place to prosecute people involved in such cases. However, developers are openly flouting the ban and rules and advertising properties even without getting requisite approvals.

Haryana’s Department of Town and Country Planning, in an advisory had said that certain unscrupulous persons and companies may indulge in illegal activities of “pre-launch” of plots without obtaining a licence for development of such colonies. It also advised buyers to contact the department and verify whether licence has been granted to avoid any legal problems and financial implications.