Once, a passionate dog lover bought a puppy lured by mesmerising facts about its unique breed, as claimed by the seller. However, to his dismay, he later discovered that the puppy was merely a street dog with no historical lineage. Despite regretting his decision, his unconditional love for dogs compelled him to care for the puppy for the rest of his life. The case of pre-launch real estate sales in Pakistan echoes the same sentiment: developers are selling a pup.

Regarding real estate assets, selling before launch becomes complicated for various reasons, including dishonest representation, potential future defects, overstated amenities, miscalculated pricing, inadequate transparency, unauthorised material statements and flimsy delivery promises.

Developers usually network with property dealers and flip apartments from hand to hand to elevate prices artificially. The flippers then distribute the profits amongst themselves. During the housing boom of the early 2000s in the United States, pre-launch condo flipping schemes occurred. These schemes employed illusive marketing strategies and fraudulent appraisals and thus resulted in a housing market collapse and the financial crisis of 2008.

Grupo 21, a Spanish real estate development company, allegedly sold a thousand apartments planned on land the company never owned. In May 2023, the company faced the music regarding a criminal case filed by innocent investors.

Pre-launch real estate bookings are a breeding ground for scams with over-priced projects that differ from promised specifications

Thailand’s off-plan properties scam is a true indication of selling a pup, where the developers pledged lucrative returns on investment. Pattaya’s Crime Suppression Division has been probing the anomalies regarding Emerald Palace and Spanish Village property scams.

China has encountered numerous real estate investment frauds, in which developers misrepresented the value and potential returns of pre-launch projects, which later appeared to be overestimated.

Likewise, India has witnessed copious pre-launch real estate deceptions, with developers selling properties based on misleading assurances of forthcoming infrastructure development or inflated potential profits. In certain cases, developers have neglected to secure required approvals or permits, resulting in project setbacks or cancellations.

In Pakistan, developers often initiate the sale of real estate assets well before obtaining the necessary approvals from the authorities concerned. This unlicensed practice provides a breeding ground for real estate scams. Initially, overselling prevails. Subsequently, phantom projects emerge, wherein purported developers fabricate fictitious real estate ventures complete with tempting promotional materials and simulated tours. They gather funds and, in most cases, vanish.

Home buyers can hardly practice due diligence on a future project. Pre-launch sales, therefore, set a stage to manipulate the gullible investors. Lastly, fake discounts in the pre-launch phase attract more buyers. These discounts are always based on inflated original prices.

Real estate developers are selling projects that do not even exist. It is startling why governmental bodies allow individuals and groups to start selling houses, apartments, and commercial outlets when the foundations are not even laid. The authorities could immediately devise a Real Estate Action Plan to abolish the practice of deceptive deals.

The initial concern is the misrepresentation of a futuristic real estate project. Developers often form a consortium with property dealers who entice investors by creating illusions. They promise to incorporate ultramodern facilities, few of which actually materialise in the finished project.

Developers simulate investor alliances to ensnare investors during pre-launch sales. The second-line investor suffers more once the asset is resold before its realisation. The cash-strapped developers reserve a specific number of units to instigate the big game of speculation during later stages.

As part of an aggressive marketing campaign, developers hire brand ambassadors, display hoardings, and propagate digital messages. Developers also devise tricky advertisements, price incentives, and special invitations. This is how the aggregate support is accumulated for selling a pup.

Around 80 per cent of the pre-launch bookings in the country are transacted in cash giving rise to the unregistered economy and tax evasion. In the unregistered economy, transactions occur outside the purview of official government oversight and taxation. Recently, the IMF has demanded a comprehensive restructuring of Pakistan’s real estate industry.

Typically, the pre-launch sales of a project progress through two stages. In the case of apartment buildings, the initial price is usually set at Rs12,000 per square foot during the first pre-launch stage, followed by an increase to Rs15,000 per square foot in the second phase. This entire process spans three or more months. Subsequently, developers announce captivating changes to the project, prompting a restart of the pre-launch period to attract additional investors.

Practising due diligence and seeking legal advice before investing in pre-launch real estate projects is recommended.

The writer is a socioeconomic analyst and founder of Real Estate Research Centre Pakistan.

Email: waheedurrehmanbabar@gmail.com

Published in Dawn, The Business and Finance Weekly, April 1st, 2024