If you plan to develop your residential plot, you wonder what’s the better way to go about it. There are two ways: either you can hire a builder on a turnkey basis or collaborate with the builder. Let’s first understand the difference between both methods.
In turnkey construction, you hire a builder and pay for the construction. Whilst, collaboration is more like the barter system, where instead of paying the builder, you give a share of your property in exchange for the services and the investment made by the builder.
Prithu Homes provides both services. Our clients often ask us how they should choose between the two. So, to help our clients decide whether to go for turnkey or collaboration, Prithu has done a detailed analysis. The following analysis is based on the fact that you are willing to invest in building your home. However, if you do not want to do so, the question of selecting between the above two options does not arise.
Financials play the most significant role in the construction market. So, from a cost perspective, the cost of construction is broadly the same for both cases. However, the cost marginally increases in the collaboration method because there is a need for due diligence and then registration. Additionally, in Gurugram, stamp duty is also payable. All these expenses are not there in Turnkey.
Besides, the marginal increase in cost in collaboration; there will be a significant financial impact on the owners due to market risk and the cost of financing the project. Let’s understand it through an example: Suppose the construction cost for your home is 3 Cr. You hire a builder under the collaboration method. So, in return for construction, the builder gets one floor in the building.
Now, suppose the flat is worth 4 Cr in the market. You will expect the builder to pay you back 1 Cr. However, the builder may say that he is bearing the market risk (the floor may sell at less or more than the expected price and the timing of scale can also vary significantly), and the cost of investment is borne by the builder; thus, he decides to pay you back only 50 Lcs. So, if you had built your home under turnkey; you could have received a 1 Cr profit for the sale of the floor. However, in the collaboration model, your profit will be just 50 Lcs.
Another significant factor is that in collaboration you will have a co-owner. So, if you wish to sell your share of the floors separately; that’s okay. But, you won’t be able to sell the entire property. Also, if you plan to redevelop the property after 20-30 years, you will require the co-owner's consent. You may not want to think that long; but, keep in mind that today lots of properties are stuck where a share was sold 20-30 years ago.
So, from a financial perspective, it always makes sense to do turnkey development instead of collaboration. (Based on the assumption that you are willing to invest your money in the development of the plot).
Under turnkey construction, clients have full control over the design, and maintenance of the property. Additionally, at times, people build an assumption that in collaboration, clients need not worry about the quality of construction or development because the builder has a vested interest so he will take care of everything.
However, that’s not true and in fact, in some cases, if the builder believes the sale of the floor is not beneficial at the moment or if the markets are bad; he then may compromise on the quality or even delay the project.
Last and the most important factor, under collaboration the power dynamics are different. Once the plot is handed over to the builder for construction; the builder automatically assumes more power in practical terms; despite whatever is written in the agreement. However, in turnkey development, that’s not the case.
After much analysis, if you come to think of it, turnkey home construction will always be more beneficial than collaboration as it is better in all aspects. Again, the analysis is based on the assumption that you are willing to invest in the development of the plot. In case, you do not wish to invest, then you should go for the collaboration method.
Most of the homes in Delhi are built under the collaboration method. Hence, there is nothing wrong with going ahead under the collaboration approach. However, you must select the collaboration builder wisely. To know how to wisely choose a builder for collaboration, please click here.