Many home-buyers in Dubai opt to purchase an off-plan property instead of a home in a completed project, driven by lower property prices, extended payment plans and a host of incentives offered by developers.
However, investing in an off-plan property can be as risky as it is attractive. Since buyers invest money in a property that is yet to be constructed, they have to rely on the developer to complete the project on time and use the money for the right reasons. Unfortunately, unscrupulous builders have taken advantage of buyers over the years, forcing the government to enact strict laws to ensure that homebuyers are not exploited.
What are the top concerns of off-plan property buyers?
Misuse of funds: When you buy off-plan property, you are required to pay the amount in periodic installments unlike a lump sum payment for a completed project. This money is utilized by the developer to complete the project. However, one of the biggest concerns of buyers of off-plan units is that the developer won’t use their funds towards the construction and timely completion of the project. Many instances have been recorded where the developers would fail to complete the construction despite receiving partial or full payment for the property from the buyer.
Inordinate delays: Even if developers are using the money for construction, there is no guarantee of the project being completed within the promised timeframe. Developers try to attract buyers with estimated milestones for the completion of different phases of construction. These are mentioned in the Sales and Purchase Agreements (SPA). However, more often than not, these milestones are unrealistic and the real purpose of the developer is to make the buyers feel confident about the progress of construction.
What exactly is an Escrow Account?
In 2007, the Dubai Government made it mandatory for developers to open an escrow account for each off-plan project. The law was introduced to address the concerns of buyers, like the ones mentioned above, and bring greater transparency and accountability to the table.
An escrow is a bank account opened especially for the real estate project by the developer, where all money paid by the property buyer and financiers is collected and used by the developer for the construction of the property. A bank acts as the trustee and manages the escrow account until the time the project is completed.
It is important for the purchaser of an off-plan property to get information of the project escrow account from the developer and deposit all payments directly into that account. An escrow account helps regulators like Dubai’s Real Estate Regulatory Agency (RERA) in monitoring all issues related to off-plan projects and enforcing accountability in case of any discrepancies.
How does an Escrow Account safeguard buyers’ interests?
The bank acts as trustee: Since Escrow is a designated account for a real estate development project, the bank where the account is in operation acts as a trustee and assumes the responsibility of the account. The bank ensures that the account is used for the right reasons and that there is no misuse of funds on the developer’s part.
Transparency: The developer is required to furnish a progress certificate to withdraw funds from the escrow account. The bank’s job is to match all the funds received from the buyers and financers with the payments made to the developer, contractors, and consultants. Thus, an escrow account ensures a high level of transparency and minimizes the risk of fund misuse.
Control: The law directs developers to link the installments to the completion of construction milestones. In other words, each of your subsequent installments will be due only after the developer completes the phase as promised in the SPA. This ensures greater accountability.
Since the introduction of the law, the real estate market in Dubai has seen a radical shift from the uncontrolled boom it witnessed before 2007. Moreover, the market has also witnessed a significant growth with buyers now feeling more confident about investing in off-plan projects.
[Related: 5 tips for renting out your property faster]