The builders like any other industrialist, also believe in enhancing profitability from a given project. Apart from getting profitability by selling flats, it is observed that builders are gaining profits from corpus fund (life time maintenance fund) & services which has to be provided by them till owners association come into existence. The scope of this article to discuss a few strategies used by builders to gain profitability from corpus fund and services provided by them.
Before we jump into different strategies, it is worthwhile to understand the term - legal avoidance. The builders innovatively make the government rules & regulations ineffective so that they are not caught. Then they break rules & regulations to generate profits for their benefits and no one can challenge them legally. This is the basic strategy followed by builders.
Profitability from Corpus fund
One of the fund, which builder has to collect on behalf of the to be formed owners association is the corpus fund or life time maintenance fund. Corpus fund is usually collected for replacement of assets when they reach their end of life.
Usually no owner gives such big amounts in future for replacement of assets, hence regulations have been made in which builder is made responsible to collect the funds and hand over the same to owners association whenever it gets formed.
The builder is not supposed to touch the principal amount of the corpus fund and just use the interest from the fund for management of daily services & security. This has to be shown as liability in the balance sheet of the builder firms balance sheet.
Usually you will see that in each residential complex builder will have few of his relatives or friends as owners. Usually they will purchase the flats in the beginning itself. The builders will hand over flats to these people initially, form a dummy owners association with these people as members & leaders of the association. This helps him to get a bank account in the name of dummy association. After this he will deposit all the corpus fund in that bank account and also for any new flat which is sold out the corpus fund is directly deposited in the dummy owners association bank account. The best part is the builder has all the control on corpus fund without being legally bound.
By doing this, the entire liability is transferred from the hands of builder to dummy society leaders, who are builders close aides too. Now, without any fear builder can take out the corpus fund and use it in his business.
Profitability from initial good services provided to society
Usually, a new society will have many design defects as well as construction defects examples - the slope of water flow in common road will be defective, water clogging on the road due to rain water from the terrace, seepage in basement etc. To sell his flats in the existing project as well as in other related projects, builder will show good face to everyone-
a) to owners of flats - he will not charge any maintenance and provide very good housekeeping as well as security services.
b) to prospect customers - he will hide all the defects during site visits
c) to media - he will show that he is the best in class in the market by participating in sustainability events or drives done by local municipality
It is seen that the expenses incurred by builder during this period are 60-70% covered by the market value of interest if he would have taken loan from bank for the equivalent amount of corpus fund.
Remaining expenses, are his marketing expenses which help in sale of his inventory in existing as well as other projects. This also give him to gain a brand in market place for himself. The owners of the existing society are so overwhelmed by the builder that they keep praising about him in all the forums.
Even after the owners association is formed, the leaders of the committee do financial calculations and find that they cannot match the services provided by builder at the interest they will be gaining from corpus fund. They go to the builder and request him to continue the operations in the society. This gives builder time to sell his inventory, hide his defects in the project and gain branding.
Profitability when most of the inventory in the existing project is sold out
Once the inventory is around 5% -10 % in the existing project, it is observed that builder will find some conflict with the owners association committee and reduce the services provided to society by 3/4.
This is much less than the equivalent interest gained from the corpus fund or in the worst case will just match the interest component.
This is like no loss- no profit case for the builder. Here the committee wakes up and requests the builder to hand over the fund.
To this usually builders will say that they will return after 18 months - 2year time. The committee which is comprised of people from different fields, gets afraid to file a legal case against the builder and depend on good will with the builder to hand over the society in any condition as well as in whatever time he wishes to hand over the corpus fund.
The best solution to the problem is - take over the society & fund from builders at the very beginning when builders inventory is still in 30-50% range. The biggest problem is the GOOD IMAGE illusion which is created by builder during that period, forces owners to go with builder managing the corpus fund as well as society services.
What are your experiences, please share in the comment box below.