Don’t buy that flat if it sounds too good to be true

The hoardings are in your face—you can’t miss them. Real estate projects in and around the National Capital Region promise returns of 12% if you invest in the upcoming buildings. These are “guaranteed”, says the ad pitch and deliver better than bank deposits through the kicker of capital appreciation. You begin to think: equity markets are down with the annual return at a negative 11.46%, deposit rates for a term of five years and above are about 9% but there is no room for growing your principal over time. The real estate deal looks solid. The builder is giving post-dated cheques to show his commitment to the guarantee. It looks too good to miss and you find yourself dialling the number you’re being asked to call.

Two, if the returns sound very good, ask yourself this question: if the five-year bank fixed-deposit is giving 9%, how is this product offering 12%? Anybody giving you a return has to generate what he gives you, plus his cost, plus at least another 4-5 percentage points for the deal to be profitable. This means that the return of 12% to you should mean a return of 17-20% to the product seller. If there is a business that gives such returns, guaranteed, why would banks, private equity and other high net worth investors not rush to fund it? Why does it take billboards that usually sell movie tickets or milk-additives to get you to shell out the money?

Three, ask in whose name the money will be accruing? Private equity investors and portfolio managers who invest in real estate deals insist that their money is held in an escrow account (an account where the money is held by a person or company but does not belong to them and is to be used for a specific purpose) created for the purpose of setting up the project. If your builder is asking you to pay a large lump sum for a specific project, in whose name are you making the cheque? Is the name on the cheque that of the builder or his company or specifically for the project through an escrow account? If it is a person or company you are writing a cheque to, beware.

Four, think of the worst-case scenario and see if it scares you. What if the builder is unable to generate enough funds and the project stalls? What if the builder disappears with the money and his post-dated cheques bounce? How long will the court case take and do you have holding power or the legal ability to deal with it? Any investment will have a risk factor and taking a close look at these will save you heart burn later.

Finally, take a step back from signing the cheque and give yourself a cool-off period. These deals work on a sense of urgency that is created for you to believe that this great opportunity (that is available only to smart people like you) is open for a limited period only—don’t miss it! The smart thing will be to miss it and look for a less pie-in-the-sky deal. Repeat the words every time you see such a deal: if it is too good to be true, it is NOT true. And try and find the catch. There’ll always be one.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com

Also Read | Monika Halan’s earlier columns