Financiers are a big part of real estate investments. A good financing strategy can make top mexico real estate tulum investments very profitable. However, the wrong financing could lead to disastrous results. In times of industry slowdown, real estate developers have begun to use a variety of financing methods to attract homebuyers. Subvention schemes are one of the most popular. This scheme is being used by a large number of first-time homebuyers to purchase their dream homes. They are unaware of the many pitfalls associated with this type of financing.

This article will discuss how subvention schemes can trap potential home buyers and cause financial hardship.

There is a difference between Subvention Schemes and Construction Linked payments

Subvention schemes require that the buyer pay the margin money. The developer is credited with the full amount of the loan by the bank the same day. The bank pays the developer in full. The builder also agrees to pay interest to the bank for the borrower. The developer receives the entire amount upfront, while the buyer has no other rights than an agreement.

Construction linked payment plans, on the other hand, are where the developer receives a fixed amount of money upon completion of certain milestones (e.g. slabs). How these payments are structured can have a significant impact on builders’ behavior. The builder may hold off on possession if the majority of the payments are made before possession. Many construction-related payment plans attach a lot to possession. Close to 25% of the payment is released once possession is taken by a builder.

Subventions: Why are builders seeking them?

It is ridiculous that builders borrow money from individuals when businesses get money at a lower interest rate. The majority of real estate businesses have assets that can be mortgaged to get the money needed to complete the project. They should be able to access credit at a lower rate than individuals.

It is important to understand that developers are often burdened with heavy debt. Developers already have a lot of debt on their balance sheets. Banks won’t lend more debt unless they charge very high-interest rates. The buyer should therefore borrow money from the builder. The bank will not offer a lower interest rate to the builder. The bank may offer the same rate to buyers depending upon their credit score.

Subvention schemes are not an option for developers. These schemes are being forced on them by banks that won’t lend to them. It begs the question: If banks consider it too risky to invest in these real estate projects, why do individual buyers believe otherwise?

Perhaps the entire concept of subventions is based on ignorance by the home buyer.

The subvention scheme has some major drawbacks:

  • There is no incentive to complete the task on time:  Builders are no longer motivated to finish the work on schedule once they have received their payments. This is especially true if the builder agreed to only pay interest for a certain period. The builder ceases making payments after the specified period, regardless of whether the possession was given to the buyer. Subvention schemes give developers an unfair advantage while putting at risk the interests of buyers.
  • Diverting funds: Builders will likely divert funds from one project to another. This is unethical. There are no laws that would prevent this. Diversions enable developers to simultaneously start several projects even if they can’t complete them all on time. The cost of delays is borne by the individuals.
  • Rating of the buyer:  If the developer does not make the required payments to the bank, their record will not be affected. The loan is credited to the borrower’s bank account. These loans are not their priority as builders don’t have to pay them. They often default or delay on these loans. Credit ratings of buyers are the most affected by their reckless actions. Subventions can cause a serious drop in the credit score of buyers.
  • Exit options are not available The entire scheme has many problems and not many buyers would prefer the subvention program. This is why the few buyers who do not prefer the scheme have very limited exit options. This makes it an in-liquid investment that can take a lot of cash and pose a high risk for the owner. Subvention schemes can be detrimental to the financial health and well-being of buyers.

Avoiding these complex financing arrangements is the best way to purchase a home. A good old-fashioned loan is fair and offers both sides a fair chance. It has been around for many decades.

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