Escrow Accounts: Mitigating Investor Risk for Off-Plan Properties
What is an Escrow Account?
An escrow account is an account in which money is held on the behalf of two parties that are in the process of completing a transaction. With regards to off plan purchases in the real estate sector, this is usually the account to which a prospective buyers pays into, which is then operated by a trusted third party, usually a bank.
Why have they been introduced?
Off plan properties are often more attractive to prospective buyers due to lower price points and more attractive payment plans. This does come with an increased risk as compared to ready properties. In the past, unscrupulous developers have taken money up front from buyers to develop property only to misuse it or abscond. Frequent delays and cancellations can also leave buyers in a lurch with no recourse to recover their money.
In response, governments across the UAE began to enact laws to help protect property buyers from unscrupulous or unreliable developers. Beginning with the Dubai RERA’s mandatory requirement that all off-plan projects have a separate escrow account in 2007, other emirates soon followed suit. In addition, in Dubai and Abu Dhabi, access to escrow funds is dependent on project completion milestones, which must be verified by registered 3rd party inspectors.
Currently, Sharjah and Fujairah do not have requirements for developers to maintain a separate escrow account for their off-plan offerings, but this could change in the future.
How do escrow accounts protect you?
Escrow accounts and their supporting legislation are vital to protecting the interests of buyers and mitigating the risk in investing in off-plan properties. They ensure that the money collected by the developer is only utilized for that specific project and helps stop unscrupulous developers or fly-by-night operations from duping their customers and absconding with the money.
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