How does an escrow account work?

How does an escrow account work?Image Credit: Supplied

If you have considered investing in real estate, you would have certainly heard of escrow accounts. If you are an investor, it is important to understand what it is exactly to protect your interests.

In layman's terms, an escrow account is a temporary financial arrangement made via a third party while a transaction is under process between two parties. What makes it especially unique is that it is temporary yet binding to both parties. It only exists until the terms and conditions of the transaction are settled between the buyer and the seller.

An escrow account can be thought of as a safe place where money can be held until a transaction is complete. For example, on a commercial level, when a real estate project is in progress, the money that is utilised for construction and the money generated are never held in the personal account of the developer. On a personal level, i.e., between the developer and the buyer, the buyer's money is deposited into the escrow account. Unless and until the sale happens according to the pre-determined terms and conditions, the money is not released to the seller's account.

The Dubai escrow account law specifies that property developers are required to open an escrow account before commencing the sale of any off-plan development. A developer is required to open a separate escrow account for each project with an accredited bank. Once the account is open, the developer should provide adequate documentation to prove that it is indeed operational. The law further requires that all payments should be deposited into the specified bank account, which should be operated in line with the conditions approved by the Dubai Land Department (DLD). The fine levied for non-compliance is not less than Dh200,000. Furthermore, if the developer cites bankruptcy or cancels his licence, he will be struck off the register.

An escrow account is not only about convenience, it is also safe. When appropriate precautions are taken, it is a hassle-free way to ensure cash flow happens without inconvenience to either party.

Handy Hints:

• Money generated for off-plan projects goes to a special account

• The Dubai escrow account law hugely benefits home purchasers

• Developers that do not comply with regulations will be penalized

Get an insight on ethical practices in Dubai's realty market

Source: Urmila Santosh, Special to Properties

The writer is a freelancer

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