Saturday, May 10, 2008
Gulf News
Q: I am confused by the new laws relating to escrow accounts. I am currently buying property in a new development in Dubai. However, I am not clear how the escrow mechanism works - should I be setting up the account and paying into it? Can I access the money at any time? How can I ensure that my investment is still safe?
A: The new regulations relating to escrow accounts were introduced by the Real Estate Regulatory Authority (Rera) last year, to bring much-needed transparency into the freehold property market and provide greater security for home-buyers like you.
However, as with any new legislation, it takes time for people to fully understand how it works and how it impacts them. As a buyer, you should take the time to understand the mechanism. Your property agent, on the other hand, should fully understand the regulations by now, and Rera is, in fact, in the process of implementing standards to ensure that professionals in the real estate sector not only understand the rules, but also explain them clearly to their clients.
Putting it simply, an escrow account means that investors in off-plan acquisitions are protected because their investment is held in a bank account under the stewardship of a neutral third party. The developer has a limited amount of access to the funds to cover essential costs - with the approval of the authorised account operator - but the bulk of the investment remains within the account until the property is ready for handover.
As an investor, you certainly do not have the responsibility of setting up the account! A limited number of financial institutions have been authorised by Rera to open and operate escrow accounts, and these accounts are only available to property developers registered with the agency. In fact, you should check with the developer immediately for their escrow account details, since this provides you with the reassurance that they are a bona fide company.
Although you probably still consider the investment to be "your money," you cannot access it while it is in the escrow account. You will be able to check on the status of the account, and many of the banks also take care of some of the administrative aspects on your behalf.
Of course, one of the infrastructural benefits of the escrow process is that it should help streamline delivery of your property. Since the funds are only made available to the developer once stages in the construction work are complete, there is less chance of a delay in receiving your property.
You should look at the existing contract for the so-called "construction milestones" - the contractual stages when payments are released to the developer. It might be the case that if you're buying a flat in a tower, for example, the completion of a certain number of floors may trigger payments to the developer.
Please send your questions to: advice@gulfnews.com.
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