Financing - Funding a Real Estate Project

We got a feedback from some of our readers that our last post Ownership - Holding a RealT was a bit too much complicated to understand for a beginner. Totally respecting their valuable comments, we have tried to mellow down this post on RealT Financing (although the topic is way more complicated than the last one :-/).

What is Financing?

So coming back to the main business, the second level of Value Chain in Real Estate circumference – Financing. Just as you require money to pay for your household items, you need money to pay for your house (realty property) too. But financing a RealT deal is not as simple as buying vegetables down the street! More often than not, realty buyers need a proper plan, strategy and an agency to finance their dream projects. This is where this post originates J

How is Financing classified?

There are several ways in which a RealT deal can be financed. Typically all the ways can be classified under 2 heads – Equity & Debt.

To start with, we will cover the Debt portion in this post and try to explain the various options to raise finance through debt.


Debt, in literal sense means – “raising money from the market for a particular time horizon, at some interest rate”. Due to the advancement in the financial markets, many instruments have been developed to carry out this function. These instruments, if used rationally can benefit both lenders & borrowers, but improper use of such instruments can even lead to catastrophes like ‘Sub-prime crisis of 2008’.

Bank Loans

Raising money from a commercial bank is the easiest way for an individual investor. Banks offer attractive interest rates to the borrowers and are easily accessible. But this may not be the most effective way to finance a real estate deal due to the following reasons:
  • Banks disburse loans for short-term
  • The amount of disbursement depends on various factors like – individual’s net worth,  MPBF (maximum permissible bank fund), income statements, securitization etc.
  • Indian Banks generally do not grant loans to a new real estate developer
  • Banks generally do not grant loans on ‘land’ alone


Mortgage typically means taking loan from a party by pledging your property as a collateral against the loan. The mortgagee reserves full right to take a control over the pledged property in case of foreclosure (default, in simple terms).

Whatever you will read after this point is a bit complicated, but we have tried to simplify the concept as much as possible. Let’s see how much sense it makes. So, mortgages can be carried out in 2 ways:

Mortgage Broker:

The whole idea of Mortgage Broking is depicted in the above figure. Few points about this process:
  • Brokers are independent agencies, having tie-ups with fund providers
  • Fund providers generally prefer these brokers so that the borrower is already researched for credit worthiness
  • Mortgage brokers are generally not involved in ‘loan servicing
  • They don’t use their own capital to fund the borrowers

Mortgage Banker:

These are specialized agencies which provides mortgages directly to the borrowers, using their own capital. These agencies do not accept deposits from the public, rather makes money from the loan origination fees & servicing fees.

They typically packages the loans & sell them to the institutional buyers or government sponsored enterprises in secondary markets. In US, there are Freddie Mac & Fannie Mae to carry out these functions while in India there is no such institution yet for this function. The nearest equivalent that can be thought of is Mortgage Risk Guarantee Fund.

We know that this has become a bit too much complicated to understand, but the following diagram may relieve our brain nerves a bit ;-)

So the whole process of Secondary Markets is depicted in the above figure. It shows step by step process followed by the loans to finally reach the borrower.

Note: We understand that this post has been a bit too much complicated. Please feel free to write to us in case you need any explanations on any of the above topics. The remaining portion of financing by equity will be covered in our next post. Stay tuned!!

----- Keep Reading RealT Horizon J -----

Ownership - Holding a Real Estate Asset

Continuing from where I left my last post - Understanding the reality in RealT – Generic Real Estate Value Chain, let me take you further by trying to elucidate the first component of the value chain – Ownership.

So what is the meaning of Ownership?

Just going by the literal gist, ownership implies having a hold or right on something. Just as any other commodity always has someone to claim for it, so is the case with real estate properties. Of course here it comes with some complications due to the nature of this business. In Real Estate, this function – Ownership holds a much more significant stature due the to the following reasons:

  • The first reason, time horizon, is important as some of these investments span across generations. In such a case, an unclear ownership can result in blunders in future.
  • Involvement of ‘unreported money’: Owners prefer not to disclose their true identity and goes for complex ownership structures. This is due to the nature of this business because there is a requirement of humongous capital for property projects.
  • Property taxes, though not very obvious, are also responsible for ownership problems. Reason is simple, to save taxes!

Rights of Ownership

So what does having an ownership title on a property mean? It means that if you have that title, you have the right to:
  • Use the property
  • Delegate the ownership title to anybody
  • To enjoy the monetary/other benefits derived from the property
  • To sell/lease the property

Types of Ownership

Ownership can be categorized in 2 ways – Holding Pattern (Structure) & Tenure.

By Structure                                                                
There is a single holder of the property and he/she holds all the rights mentioned above.
A form of co-tenancy where the title is shared by 2 or more holders, in EQUAL proportion. In this type of ownership, the interest of one partner is automatically transferred to other upon former’s death. Generally common for spouses.
Tenancy in common
A co-tenancy wherein the proportions NEED NOT BE EQUAL. Unlike the above case, here the ownership is not automatically transferred to the other partial partners.

By Tenure
Complete rights to the owner forever.
Right to possess and use the property with compliance to the pre-specified terms of use.
Right to possess free interest in real estate after the expiration of a Life estate,
Estate for years or Leasehold.
Life Estate
Complete rights ONLY till the owner’s death.
Estate for years
Complete rights ONLY for a specified term.

Alarming state in India!

Although I couldn’t find very vivid stats on this but what I found out was enough to raise few eyebrows. Nearly 90% of properties in India don’t have a clear title! Let’s see what impact it has.

Impacts of Unclear Titles

  • Scarcity of land – resulting in increased prices
  • Inefficient legal practices
  • Increase in the use of black money
  • Increased insurance complications
  • Frauds


  • Fast track courts
  • Computerization of land records
  • Audits on existing properties
  • Stricter land rules
  • Education to investors

Note: The above mentioned information is a just an indicator of what is 'Ownership' in RealT Sector and what relevance does it hold in creating a new Horizon! Hope this was useful :)

 - - - - -  Thanks for reading J   - - - - -

Understanding the reality in RealT – Generic Real Estate Value Chain

As soon as I sat down to pen the first post for RealT Horizon, I was bombarded with several areas of concern which need to be addressed here. To start with, I decided to go with the basics. So let’s look at the overview of the Value Chain of this sector.

Real Estate Value Chain typically comprises of 5 broad levels:

Figure 1: Broad levels of Real Estate Value Chain

These 5 steps more-or-less comprise all the possible activities that one can associate with the development and transaction of a property. Of course some of the blocks shown above do interchange their positions sometimes, depending on the usage category. I will try to touch on that aspect later, or in the following posts. But before that, the usage categories:

Whether the 5 levels shown in figure 1 will remain intact or some of them will get merged or eliminated depends totally on the 3 usage categories. If, for instance, the category is ‘Residential’ and that too for single housing, probably the ‘Transactions’ level can be skipped.

Let me dig a little deeper in the value chain. If expanded, the chain will take the following shape:

Figure 2: Detailed Generic Real Estate Value Chain

As can be seen in the above figure, each level can be further fragmented into several components. This is the multiplicity that results in all the complexities that this sector is facing currently in India and probably in various other developing nations.

This sector needs treatment, and it will be possible only if there is a subtle understanding of its basics ingrained in all the investors. I will cover all the components individually in my future posts. So stay tuned and pour in your comments & suggestions to help me analyze RealT Sector more effectively!

Forward detailed links to each level:

- - - - -  Thanks for reading J   - - - - -

Related Posts Plugin for WordPress, Blogger...