Buyers should be Cautious about Joint Ventures in Real Estate
13 Sep 2016
In the realty sector, a joint venture usually takes place between two or more developers, or between a builder and a land owner. This agreement involves the details of construction, profit sharing in percentage and time frame.
As conflicts may arise in these agreements, which could harm a buyer’s interests, you must be aware of the following things when buying a home that’s been constructed as a JV:
- In a joint venture between two builders, the common bone of contention is the profit-sharing mechanism. As both the parties are engaged in the same business, they know how much capital is required and what returns can be earned on it. There is often a struggle to get the better of each other.
- If the joint venture is between a builder and a land owner, the owner contributes the land. The responsibility regarding construction, investment required for constructing a house and process for obtaining approvals is taken by the developer.
- The land owner should not invest any money into the project apart from the capital in the form of land.
- The profit is shared equally between the developer and the land owner so that it benefits both the parties.
- Most land owners take the developer’s help to sell his share of the property in addition to the developer’s share of the property, as per the agreement.
- Nowadays, a site owner does not get more than 30 to 40% of share from the completed property, especially if the property is constructed in an area which does not have a high land cost.
- To make a joint venture work, each party should have reasonable expectations. The land owner shouldn’t overvalue the land and the developer should make sure that the execution is done professionally and with honesty.
- The builder is responsible for getting all the clearances for the project. However, he may claim that he had to incur heavy expenses for getting the clearances. So he may also demand a higher share of revenue than which was initially agreed upon.
- Sometimes, the developer may delay the project and then demand a higher share of the revenue, claiming that the costs have escalated. If the land owner does not agree, the builder may stop the construction work. Conversely, the land owner may try to delay the transfer of title to the builder to retain bargaining power in the joint venture.
Impact on Buyers
Fights between the two parties lead to delays in completion of projects, resulting in higher costs for the buyers/end users.
- As a buyer, you may have to bear the burden of paying EMIs and rent for a longer duration.
- If you plan to rent out the house, your expected cash flow will get delayed.
- If interest rates rise in the interim period, your EMI escalates. Moreover, delays in project delivery may make it difficult for you to sell the house.
What can buyers do?
- Preferably, select a project where the builder is also the land owner.
- If you opt for a joint venture project, you should conduct due diligence and ensure that the developer has received the title to the land - examine the developer’s track record such as his past joint venture plans, is any of his previous projects was stuck in land-related disputes, etc.
Authored by Goel Ganga Developments, one of the top real estate developers & builders in Pune