Escrow accounts - what is it in simple words: in shared construction, news

On July 1, the so-called law on escrow accounts comes into force. The developer opens such a bank account, and the shareholder deposits money.

But the developer will not receive the money immediately: it will be kept in the bank until the developer delivers the property. This helps to control developers and not lose investments if the developer goes bankrupt.

But will escrow accounts be the answer? Will they increase people's trust in developers? And is it true that their introduction will actually protect shareholders’ money?

What are escrow accounts?

These are special bank accounts that deprive the developer of the opportunity to use shareholders’ money directly.

The developer opens a bank account, the shareholder deposits money, which is kept in the credit institution until the house is put into operation and the title is registered in Rosreestr. The developer must pay for construction from his own funds or through loans.

He will receive the money only when he rents out the house and registers at least one apartment. This is called project financing.

If the developer is unable to complete the house for some reason, the shareholder will receive all the money back. Money is deposited into escrow accounts after registration of the agreement for participation in shared construction in Rosreestr.

There are special requirements for escrow accounts: in the agreement, the shareholder must indicate that he undertakes to pay the price of the agreement for participation in shared construction to the escrow account. You must also provide bank information.

Why do you need project financing?

Let's say you decide to buy an apartment at the excavation stage. But I remember these terrible stories from the 2000s: the developer withdrew the shareholders’ money and disappeared. Or the construction has been frozen for an indefinite period of time and people cannot get their money back or get an apartment.

Buying an apartment in a building under construction is a risky undertaking. The developer is not always some kind of villain who wants to embellish the money of shareholders. A crisis or problems within the company can “help” a developer go bankrupt.

But people who have lost both money and hope of buying a home care little about this.

To protect people's funds, the industry was switched to project financing. The purpose of the changes is to eliminate the occurrence of defrauded shareholders. If the developer does not fulfill his obligations, people receive money back from the bank.

What if the bank fails?

Since 2018, funds in shareholders’ accounts have been protected by a fund insurance mechanism. These are additional guarantees - the money in the account is insured. Now a similar mechanism protects citizens’ deposits, but in the amount of up to 1.4 million rubles. The insurance limit for shareholders' accounts is higher - up to 10 million rubles.

This mechanism protects the shareholder from two sides: both in case of bankruptcy of the developer and in case of bankruptcy of the credit institution.

What does this change and for whom?

Project financing is unlikely to affect homes that are almost ready for delivery. But it can attract much more attention from shareholders to projects that are just at the construction stage.

Developers will have to attract additional capital to meet the bank's requirements. And all market participants need to get used to the changes. Including shareholders.

A lot depends on the work of developers and banks with people: will they be able to explain to equity holders that the new conditions are beneficial for them?

Firstly, the introduction of escrow accounts actually reduces the risks of shared construction. For example, if you signed a contract, but after some time you changed your mind about buying an apartment. Then you assign the right of claim under the contract to another construction participant. The rights and obligations of the new shareholder are preserved. Secondly, you will receive the money in any case upon termination of the DDU.

Developers will reduce risks

The risks for the developers themselves will also be reduced. It works like this: the more escrow accounts are filled, the more the loan rate for the developer decreases. The developer himself will receive guarantees that the project will not fail, even if the proceeds from the sale of apartments do not cover all construction costs.

In a certain sense, he (the developer - ed.) becomes independent of the buyers’ money. But we must not forget that the bank loan rate is tied to the amount of money in escrow accounts: the more money, the lower the rate,” Lyudmila Korneva, director of the investment department at Inteko, told RIA Real Estate.

Director of Warranty Products at Dom.RF Anton Voronin expects a positive effect from the changes. The company believes that project financing will increase the pace of housing construction. According to Voronin, this can significantly increase the population’s confidence in purchasing housing during the construction phase.

Source: https://www.vbr.ru/banki/novosti/2019/06/11/ppk-eskroysceta-dlya-dolsikov—cto-eto-takoe-i-cto-oni-menyaut-/

Escrow account - what is it in simple words, what has changed in the DDU

Escrow account - how to open and when to use it

When making large transactions, for example, buying an apartment, everyone fears for their money, for the honesty of the seller or the development company. Unfortunately, cases when people lose money and do not become property owners happen from time to time.

To ensure the security of such transactions, the bank can provide escrow accounts. At the same time, he himself becomes a third party and monitors the fulfillment of all contractual obligations.

Let's consider options for using escrow accounts when purchasing real estate on the secondary market or shared construction, as well as their distinctive features in comparison with letters of credit.

Escrow accounts – what are they? Let's explain in simple words

The most sensitive moment in any transaction with secondary housing is the paperwork. The amount of money is too large to carry with you and exchange it for signed documents at the right time.

Throughout the process of registration, both the buyer and the seller are afraid of being left with nothing.

This is exactly what banks can avoid by opening an escrow account and assuming obligations to support the transaction.

When there is an agreement for the purchase and sale of real estate, the buyer ( depositor ) and seller ( beneficiary ) are sent to a bank that provides an escrow service and is called an escrow agent .

A tripartite agreement is concluded. The depositor deposits the required amount into the escrow account. At the same time, the conditions under which the right of use is transferred to the seller are clearly stated.

The bank keeps the amount in an escrow account until the transaction is completed and monitors compliance with all conditions.

In simple words, an escrow account is an account where the buyer deposits money and the seller withdraws it, but after fulfilling all pre-agreed conditions. It is open for up to five years. At the same time, the bank is responsible for the safety of funds and the honest fulfillment of all obligations. Today this is the safest option for processing real estate transactions .

Detailed information about escrow accounts is disclosed in Article 860.7 of the Civil Code of the Russian Federation. It talks about the specifics of drawing up an agreement, the procedure for closing it, and the specifics of transferring the right to manage money on the balance sheet.

Using an escrow account when purchasing real estate

When opening such an account, the agreement must specify the powers of the financial institution. There are two options here:

• The bank, without obligation, monitors the accuracy of the documentation. In this case, his representative only checks the availability of the full package listed in the escrow agreement. If all the documents are in place, he considers the obligations fulfilled and transfers the money to the seller. In this case, it may later turn out that some papers were not completed properly. This may bring both the need for re-registration and problems with the legality of the transaction. This is especially true when purchasing real estate on the secondary market.
• In the contract, the escrow agent’s responsibilities include checking the legality and correctness of the documents. Then the bank’s lawyer, before recognizing the transaction as completed, will check each document for authenticity, correctness of execution and compliance with current legislation. In this case, firstly, the risk of controversial issues in the future is minimized, and secondly, if they do arise, it will be possible to demand that the financial institution fulfill its obligations in full. It is precisely because of this duty of control over the transaction that not all banks have the right to open escrow accounts.

If during the execution of the transaction any difficulties arise with the documents, for example, when discharging minor residents from an apartment during the acquisition of secondary real estate, access to finance is possible only for the buyer.

The seller has the right to withdraw money after the bank verifies the transaction documents and declares it completed.

If it is necessary to make changes to the escrow agreement, this can be done in a pre-agreed form by agreement of all three parties or by court decision.

An escrow account is opened for a strictly defined period; after the transaction is completed, it is closed. Early termination is possible for reasons included in the contract. Then the money is returned to the buyer, unless other options are provided.

Features of working with escrow accounts during shared construction

According to changes in Article 214 of the Federal Law, from July 1, 2019, the developer can receive investments from buyers participating in shared construction only from an escrow account. This allows you to avoid situations with defrauded shareholders.

The accounts are insured, the building is being erected with funds from a construction concern or a financial institution, if a loan is used.

Financial investments from the escrow account are transferred to the developer within ten days after the delivery of the apartment building.

If the shared construction agreement is terminated, the funds from the escrow account are returned to the participant (buyer), or, if he took out a loan, to the credit institution. The return procedure must be reflected in the contract in advance. The situation with defrauded shareholders will no longer be repeated.

If the developer is not able to complete the house on his own, the bank will find funds and opportunities. The buyer will receive his property. If a decision is made to stop construction, the money will be returned in full to the buyer’s account.

If the developer changes, if desired, the buyer will be able to either return his money or wait for the appointment of a new developer and ultimately receive his own apartment.

When inheriting or transferring ownership by court decision, if a participant in shared construction decides to assign rights to real estate, then all previous obligations are transferred to the new applicant for housing.

You should know that the bank does not charge interest on the escrow account. No remuneration is paid to the bank. Money in escrow accounts is subject to mandatory insurance. The insurance amount is 10,000,000 rubles.

If, during the fulfillment of obligations under the escrow agreement, the bank’s license is revoked or it goes bankrupt, the return of funds will be made in the manner and amount described in Article 177 of the Federal Law “On insurance of deposits of individuals in banks of the Russian Federation.” Unfortunately, if the property was worth more than 10 million rubles, then the portion exceeding the amount will be lost. In addition, the buyer will have to pay the seller or developer in full.

The difference between an escrow account and a letter of credit

A letter of credit is a bank’s obligations under which it is obliged to transfer money to the seller’s account after the transaction is fully completed and all documents confirming this are provided. An escrow account is an amount deposited by the buyer and given to the bank for safekeeping until the transaction is completed.

If the contract for a transaction is terminated, for example, due to the death of the seller of secondary real estate, the bankruptcy of the developer, or other circumstances in which its execution becomes impossible, the escrow account will automatically be closed; with a letter of credit, there is no reason for this. If the transaction is not completed, the money will be returned to the buyer, if the obligations have already been fulfilled - to the seller. The bank can track this moment very clearly. In addition, the buyer is able to revoke the letter of credit, in which case the seller may be left without money.

An escrow account can be closed early by agreement only if representatives of all three parties are present. Control of the transaction by the bank protects not only the buyer, but also the seller; the risk of fraud is practically reduced to zero. The buyer can close the letter of credit at any time at his discretion.

A letter of credit is a legally established procedure that does not allow derogation at one’s own discretion. Escrow is an agreement that allows changes to be made, even during the transaction, if all parties agree.

For example, in shared construction, while the house is being built, the buyer decides to assign the right to his share to another person. He coordinates this with the developer, registers the assignment in Rosreestr, and the rights to the escrow account are transferred to the new shareholder. With a letter of credit, the bank only checks the availability of documentation.

For escrow, the bank is a guarantor of the correct execution of documents, the legality of the transaction and the fulfillment of contractual terms.

Escrow agents

Not all credit institutions were ready for increased obligations to clients. For now, escrow services are provided by the largest banks. According to world practice, these can be different financial organizations.

The work of agents is still complicated by a lack of experience in litigation.

If the escrow agreement did not stipulate the bank’s responsibility for checking the documents, then the financial institution is not responsible for the legality of the transaction.

That is, if the signatures on any documents when purchasing secondary real estate were forged, and the bank accepted these documents, then it is not responsible for this, even if the transaction is subsequently challenged in court.

At the same time, during shared construction, a financial institution, as a rule, lends to the developer; the legality of all documents is checked very carefully.

When concluding an escrow agreement, you need to especially carefully study the bank’s responsibilities and, if there are any unclear points, ask them to clarify them or describe them in more detail in the agreement. If the escrow bank ceases its activities during the transaction, then the funds from the account are returned to the depositor, if the obligations have already been fulfilled - to the seller.

Read also: Family car program 2020-2021: conditions, list of cars, what it is

Escrow accounts are used not only in real estate transactions, but also in any large projects, for example, in contracts for work or development of projects, when purchasing shares or shares of companies.

Features of using an escrow account by a developer

As already mentioned, developers now cannot use equity holders’ funds to build houses. A third party, the bank, takes part in the agreement, and the funds in the escrow account are frozen until the building is handed over. Those construction companies that managed to coordinate projects and receive money before the law came into force can use it to build a house.

Only construction companies with extensive experience and experience in the market have the right to work with escrow accounts:

1. at least three years of work;

2. from 10 thousand square meters of rented housing;

3. administrative expenses during construction should not exceed 10% of the total amount required for construction.

Advance payments should not exceed 30%. If this amount is exceeded, the bank blocks the account.

The commissioning of facilities must occur within the time period specified in the contract. If the delivery of at least one object from a large residential complex is overdue, the developer may subsequently lose the right to work with escrow accounts.

Source: https://avprrb.ru/articles/poleznaya-informatsiya/eskrou-schet-chto-eto-takoe-kak-i-kogda-im-polzuyutsya/

Share participation in construction - changes since 2019

In 2019, a transition will be made to project financing of housing construction - the construction of apartment buildings with the predominant attraction of bank funds. In fact, this means the beginning of the process of canceling the DPA (share participation agreement). It is expected that the new apartment sales scheme will change the market for new buildings.

The main goal of the shared-equity construction reform is to reduce the number of defrauded shareholders: citizens will stop risking their own funds, and the apartments purchased will already be in a built building.

From July 1, 2019, raising funds from citizens will only be possible using escrow accounts . A separate account will be opened for each shareholder. Opening accounts is impossible without the participation of the bank and, in fact, the DDU will become a tripartite agreement - the developer, the equity holder and the bank.

Photo pixabay.com

In accordance with the instructions of the President of the Russian Federation, with the participation of executive authorities, criteria , taking into account the degree of readiness of MKD and the number of concluded DDUs, which must be met by construction projects for which the attraction of citizens’ funds was started before July 1, 2019 and the completion of construction of which is possible by old rules.

What is equity participation and a DDU agreement?

Shared participation in construction is a form of investment activity in which citizens finance the construction of a house at their own expense. Participants in shared construction are:

• Builder (developer) is an organization that has a plot of land on which it undertakes to build an apartment building using the funds of shareholders, by lease or free ownership.
• A participant in shared construction (depositor) is a citizen or legal entity that invests money in the construction of a house with the goal of subsequently obtaining an apartment in it.

The legislation provides for a number of conditions and requirements for the shared-equity construction procedure, as well as for documentary support and activities of the developer himself. The shared construction process is regulated by Law No. 214 of December 30, 2004.

An equity participation agreement is a document that describes the terms of the transaction between the developer and the participant in shared construction. The DDU is subject to mandatory state registration and is considered concluded from the moment it is carried out (Clause 3, Article 4 of Law No. 214). A period of 1 month is allotted for registration.

The apartment becomes the property of the shareholder after the house is put into operation and the transfer deed is signed. The DDU ceases to be valid after the parties have fulfilled all their obligations.

Changes in shared-equity construction since 2019: latest news

In the early 2000s, home buyers under equity participation agreements often encountered fraud: they could wait years for the houses to be put into operation, the developer could disappear along with the shareholders’ money, the same apartment could be sold several times, etc.

In many ways, the situation was improved by the adoption of Law No. 241; some “gray” schemes were eliminated. However, unscrupulous developers still found loopholes in the legislation and could not completely solve the problem. The federal register of defrauded shareholders includes over 30 thousand citizens .

• Proposals to abolish shared-equity construction arose back in the mid-2010s.
• In 2015, Igor Shuvalov made a decision to phase out the abolition of the DDU by 2020.
• In 2017, Mikhail Men (Minister of Construction and Housing and Communal Services) announced the transition to project financing of development instead of equity participation agreements.
• In 2018, Putin, during the “Direct Line”, instructed the government to move towards civilized methods of purchasing housing and abandon pre-employment housing by July 1, 2019.
• As a result, at the end of 2018, Law No. 478 dated December 25, 2018 introduced amendments to the legislation that formed new rules for shared-equity construction in 2019 .

On April 22, 2019 , Government Resolution No. 480 came into force, approving the criteria for the degree of readiness of the construction project, provided that the developer can attract funds from participants in shared construction without using escrow accounts . The purpose of this decision is to ensure the completion of residential buildings in cases where completion of begun construction is possible only according to the old rules.

Completion of apartment buildings without switching to escrow accounts will be allowed if the degree of completion of the object is at least 30% , and the number of concluded DDUs is at least 10% of the total area of ​​​​the premises in the house.

Cancellation of shared construction in 2019

In order to finally solve the problem of defrauded shareholders, Russia must move to more developed methods of housing construction - its implementation using bank loans, as well as the use of escrow accounts in which the shareholders' money will be stored until the construction of the house is completed.

As of July 1, 2019, Russia will completely abandon the existing model of attracting citizens’ money for housing construction. From this date, participation agreements will no longer be concluded .

Strengthening construction control by the state also contributes to solving the problem. After tightening requirements for developers, many unstable construction companies will have to leave the market.

According to the government, the abolition of the DDU will help secure transactions for buyers, despite the emergence of some difficulties for the developer when constructing residential buildings.

The changes began on July 1, 2018 (due to the entry into force of the law dated July 1, 2018 N 175-FZ) and will continue until June 30, 2019 - this period is considered transitional . The main part of the amendments came into force in 2018, the rest - from mid-2019.

The main thing is that from July 1, 2019, all transactions for the purchase of apartments during the construction phase will be concluded through special escrow accounts in authorized banks. The developer will receive money from escrow only after submitting to the bank permission to put the house into operation and registering ownership of one shared construction project.

Other changes in the legislation on shared participation in the construction of apartment buildings :

• the obligation of the developer to separately account for the funds of shareholders and construction costs has been introduced;
• if the developer uses targeted loan funds, escrow accounts must be opened with the bank that provided the loan;
• in order to recover damages, shareholders must first contact the developer, and only then the person representing his actions (the founder of the developer);
• the list of grounds for unscheduled inspections of construction organizations without prior notice has been increased.

What are escrow accounts in shared construction

An escrow account is a bank account designed to store citizens’ funds during the construction of a house. Money from the account is transferred to the developer only after he fulfills his obligations to the depositor. The use of an escrow account is regulated by Art. 860.7 Civil Code of the Russian Federation.

An escrow account is a mandatory element in lending to developers for project financing.

There are currently 55 approved banks in Russia that can open escrow accounts. By 2020, it is planned that 95% of sales under DDU will be carried out using only such accounts.

Features of escrow in construction:

• in case of bankruptcy of the developer, the funds are returned to the shareholder;
• the developer cannot use funds from the account until construction is completed;
• the buyer can return the money from the bank account if the delivery date of the apartment is delayed by more than 6 months;
• after the invisible object is delivered, the money from the escrow will be used to repay the loan, and the remainder will be the developer’s profit.

If the house is not delivered or the developer goes bankrupt, the money in the escrow accounts is supposed to be reimbursed to shareholders. The maximum amount for reimbursement of deposits is 10 million rubles per apartment.

How will the changes affect developers?

Requirements for developers became more stringent in 2018. In order to obtain a building permit, the developer must meet the following conditions:

• the developer's bank account must have at least 10% of funds from the planned cost of development ;
• the company must have more than 3 years of experience in the construction of apartment buildings , the area of ​​the completed objects must exceed 10 thousand square meters. m.;
• no loan debts.

Due to tightening requirements for developers and changes in the procedure for equity participation, a decrease in the number of construction companies , as well as a slowdown in the pace of construction. Also, if the developer has at least one object with a delay in commissioning by more than three months, he will not be able to begin construction of a new house under the DDU.

Pros and cons of innovations for buyers

The new financing mechanism through escrow accounts should eliminate the appearance of defrauded shareholders. The bank becomes the controlling party to the transaction and has the right to refuse to carry out transactions related to misappropriation of funds. The funds of the shareholders will be protected, and in case of failure by the developer to fulfill their obligations, they will be returned through the Deposit Insurance Agency .

In addition to banks, construction will also be controlled by the state. Requirements for developers will be established by law. The Ministry of Construction will be able to appoint and remove the head of the regulatory body. Also, the owners and founders of construction companies will be jointly and severally liable to citizens.

The Unified Housing Construction Information System has already been launched , which contains all permits for the construction of houses, every stage is taken into account. A special commission has also been created to review the practices of interaction between developers and executive authorities that exercise control and supervision in the field of shared-equity construction.

However, the abolition of the DDU in 2019 will affect the cost of housing. There are fears that many citizens will not be able to afford to buy an apartment at the new prices, unless mortgages become more affordable.

Photo pixabay.com

How will the cost of housing change after the abolition of the DDU?

Buying an apartment in the early stages of construction was attractive to many because the price was significantly lower than for finished housing. Due to the refusal to sell at the foundation pit stage, it is logical to expect an increase in the cost per square meter .

The costs that developers will incur after the reform will inevitably affect the cost of housing. With the abolition of the DDU, the developer will have to turn to investors for help or take out a loan from a bank.

Experts predict an increase in developer costs by about a third . In such conditions, the developer can pass on the amount of costs to buyers by increasing housing prices.

There is no exact price forecast. If the DDU is abandoned, the prospect of a price increase in the primary market is at least 10% and this is due to the fact that apartments will be sold in ready-made (commissioned) houses.

However, you should not expect a sharp increase in cost in the near future - in apartment buildings, the construction permit for which was received before July 1, 2018 and which will be built according to the previous standards, despite the introduction of new rules, the cost of apartments will not change.

As follows from the passport of the national project “Housing and Urban Environment”, by the end of 2024 the number of existing DDUs concluded using escrow accounts should exceed 1 million. According to V. Mutko, as of March 1, 2019, the four largest Russian banks concluded 55 agreements to receive project financing in the amount of 34.1 billion, 1262 escrow accounts were opened.

Read also: Marriage agreement for a mortgage: sample and cost

Source: http://kvartirniy-expert.ru/dolevoe-stroitelstvo/izmeneniya-s-2019-goda/

Escrow accounts

In 2019, developers will have to switch from shared construction to project financing using escrow accounts. How the new mechanism will work and how people will be able to use it - we tell you in short cards

Evgeniy Razumny/Vedomosti/TASS

In 2018, the most significant reform of the construction industry in Russia began in Russia since 2004 - in the summer of 2019, developers will have to switch from shared construction to project financing using escrow accounts.

Improving the mechanisms for financing housing construction should ensure the safety and reliability of citizens' investments in housing construction, making it impossible for the emergence of new defrauded shareholders.

How the new mechanism will work and how people will be able to use it is described in short cards.

Escrow accounts What's new for buyers of apartments in new buildings

From July 1, 2019, money for apartments purchased in new buildings will no longer be transferred directly to developers, but will be held in special escrow accounts in banks called escrow agents.

The new payment mechanism is structured in such a way that money for the purchased apartment is deposited into the account after registration of the agreement for participation in shared construction and is deposited (frozen) on it until the registration of ownership of the first apartment in the completed building. If the developer has problems completing the construction of the house, the buyer can always count on a refund of the amount paid. The new calculation option makes it impossible for a shareholder to pay the full price of an apartment to the developer, but if construction is frozen, he is left without money and without an apartment.

Purchasing How to get a mortgage using an account

A mortgage using an escrow account will also maximize the protection of the interests of all parties to the transaction.

The buyer can take out a mortgage loan both in the same bank where the developer received project financing, and in another that offered more favorable conditions (and then the escrow agent and the lender will be different credit organizations).

In both cases, the borrower will have equal conditions for servicing the escrow account - commissions for opening and maintaining the account, in accordance with the requirements of Law 214-FZ, are not charged. However, in the second case, the borrower may have to pay a fee for transferring the mortgage loan amount to another bank.

In general, the scheme for issuing a mortgage is simple: according to the requirements of Law 214-FZ, the amount of the borrower’s down payment can be credited to the escrow account only after registration of the agreement for participation in shared construction - that is, at the moment when both the borrower and the lender are sure that the deal took place.

After the loan is issued and the entire amount is credited to the escrow account, the borrower begins to repay the mortgage and wait for the completion of the house.

If desired, the borrower at this stage can even refinance his loan with another bank, because during the construction of a multi-storey building (on average, one and a half to two years), lending conditions on the market may change for the better, and the money placed on the account will in no way change the lender will not affect.

Financing Where will the developer get money to build a house?

Banks will issue project financing to developers for the construction of residential buildings. Escrow accounts will be opened in the same bank that lends to the project. Therefore, escrow funds will become a source of cheap funding for loans to developers, and successful sales of apartments during the construction phase will allow the developer to reduce the interest on the loan.

Risks What if something goes wrong?

There are situations when, after registering the transaction, the buyer decides to refuse to purchase the paid apartment and asks for all the money to be returned to him.

In this case, in accordance with the procedure established by law, the agreement for participation in shared construction is terminated, and the funds from the escrow account minus the amount of the down payment must be returned to the bank that provided the loan. The down payment is returned to the buyer.

In cases where the termination of the transaction occurs due to the fault of the developer (for example, failure to comply with the terms of the contract within the framework of project financing, delaying construction periods beyond those permitted by law, bankruptcy of the developer), the money from the escrow account must be returned to the buyer. Previously, the participant in shared construction lost his down payment and still owed the bank on the loan. Now, if problems arise with the developer, the buyer will be able to get his down payment back, and the bank will be able to get the amount of the loan issued. If the buyer does not exercise the right to terminate the agreement for participation in shared construction, but decides to wait for the decision to appoint another developer to complete the construction of the problem object, the amount paid will remain in the escrow account until the completion of construction.

If a bank acting as an escrow agent has its license revoked, the developer and the participant in shared construction are required to enter into an escrow account agreement with another authorized bank. In this regard, too, the state has provided a safety net for citizens participating in shared construction: their funds in escrow accounts are insured by the Deposit Insurance Agency for an amount of up to 10 million rubles.

“Up to 10 million rubles. the deposit insurance system applies"

Danila Litvinov, Deputy Chairman of the Board of DOM.RF Bank:

— The use of the escrow mechanism minimizes the risks of shareholders when purchasing apartments in buildings under construction. Previously, people found themselves alone with their problem when developers for some reason did not complete construction, often with a valid loan.

Now a mechanism for protecting shareholders is appearing on the market: the developer will not be able to use the money of the buyer of the apartment until the house is put into operation; the buyer’s money will be in a special escrow account in the bank.

An account is opened free of charge, and for an amount up to 10 million rubles. The deposit insurance system applies. The risks of unfinished construction are transferred from home buyers to professional market participants - developers and banks.

This will solve the problem of defrauded shareholders.

“It is not profitable for a bank to keep an unfinished facility on its balance sheet”

Nikolay Alekseenko, General Director of the Rating Agency of the Construction Complex (RASK):

— Launching a mechanism for purchasing housing at the construction stage through escrow accounts, first of all, allows us to remove from the market the situation when on one side of the transaction for an unbuilt object there is a shareholder (individual), and on the other side there is a developer (legal entity).

This imposed a legal and information asymmetry: in practice, it is impossible for an ordinary citizen to meaningfully assess the reliability of a particular developer, and in the event of his bankruptcy, shareholders had to cooperate in some way to protect their interests.

In turn, with the launch of project financing, the interests of all shareholders are protected by the bank that accredited the developer.

This takes all relationships to a fundamentally different level. Firstly, the bank has professional competence in assessing the developer and an individual property, which already significantly reduces risks.

Secondly, if the developer goes bankrupt, the fate of the property will depend on the bank: either finding and attracting a new developer, or making payments to equity holders.

In any case, it is not profitable for the bank itself to keep an unfinished object on its balance sheet, so it actually has the same interests as the equity holders.

 

Source: https://realty.rbc.ru/news/5caae41f9a79479fb7af9d10

“It is a common myth that with escrow accounts there will be no defrauded investors”

From July 1, developers will not be able to directly raise money from shareholders. The shared-equity construction reform is primarily designed to protect apartment buyers from unscrupulous developers.

But can keeping the funds of buyers of new buildings in escrow accounts be called 100% protection against losses? Dmitry Loginov, head of the legal department of Bon Ton, spoke about this specifically for Novostroy-M.

What legislative trends in the new buildings market would you highlight today?

The implementation of the shared-equity construction reform is currently in an active stage. In the summer of 2019, we expect the beginning of the transition to the mandatory use of escrow accounts and a change in the main mechanism for financing construction from the use of equity holders’ funds to bank loans.

Can this year be characterized as a “farewell to the share” or, due to relaxations, will the farewell last for several years? For how long, by the way?

“Farewell to share” is a fundamentally erroneous term. The shared-equity construction reform assumes that payments for participation in shared-equity construction agreements (DDU) will be made using escrow accounts.

That is, no one is going to cancel the “dolevka”. DDUs will remain as they were. Only the method of payment changes.

As for the timing of the transition to a new work mechanism, it can still be predicted that these processes will drag on for the next 2-3 years.

Do you think escrow accounts adequately protect mortgage holders?

Escrow accounts are positioned almost as an absolute panacea against all problems. It is a common myth that with escrow accounts there will be no defrauded investors. However, the bankruptcy law already has article 201.12-2.

, which bears the following title: “Features of satisfying the requirements of participants in shared construction who have deposited funds into escrow accounts for settlements under agreements for participation in shared construction.”

That is, shareholders with escrow accounts may end up in the bankruptcy process of the developer and, therefore, join the ranks of “defrauded shareholders.” The possibility of this scenario is already enshrined in law.

What is the average share of interest on overpayments today? Is this a third, a quarter of a loan? How much money can “float away” in theory?

The specific amount will depend on the terms of the bank, the size, rate and term of the loan, as well as the construction period. It is also important to understand that most of the first payments are interest, not principal.

For example, a mortgage loan in the amount of 5 million rubles, issued for 20 years at 9.7%, will cost 1.1 million rubles for 2 years with an annuity payment. The loan amount will be 150,000 rubles, but the interest will be 950,000 rubles. Now the question is: will the shareholder agree to terminate the DDU under such conditions?

Why do you think the authorities left such shortcomings regarding mortgages under escrow? After all, mortgages, one might say, are the engine of the new buildings market? Last year, such transactions on the primary market broke all records.

At the initial stage of any reform, there are always shortcomings of this kind. The devil, as we know, hides in the little things, and there are many such moments now.

In addition, the new rules overlap with previous changes, which greatly complicates the work of lawyers.

The transition to escrow accounts is the fourth reform of shared construction in the last five years! Even experts get confused in the intricacies of legislative innovations.

I know that you made a proposal to combine installment plans and mortgages in order to minimize the risks of buyers. Is there room only for interest-free installments in this scheme? After all, if interest accrues on the balance, it can burn out, just like a mortgage?

Installments can be either interest-bearing or interest-free. However, it is important that all payments during the construction stage are taken into account as payments under the DDU and, accordingly, are blocked in escrow accounts. Then, in the event of termination of the DDU, the entire amount paid for this period will be refunded.

Interest-free installments are a rare beast in the new buildings market. Either it is not among the offers in principle, or it is negotiated individually and the down payment must be large. If now all the money is in bank accounts, can we assume that interest-free installment plans will become more common and have friendlier terms for customers?

These prospects exist. As for the difficulties that hinder the development of the installment instrument “to escrow”, it should be noted that there is a weak legal protection mechanism. 214-FZ allows builders to terminate the DDU unilaterally if the shareholder violates the terms of the installment plan.

However, in practice, this method of termination can take up to 4-5 months, during which the apartment actually falls out of circulation.

In the new realities of escrow accounts, the developer will still not see the shareholder’s money until construction is completed, and, therefore, can afford to offer installment plans as a possible alternative to a mortgage. Calculations show that such a scheme is more economically profitable for both builders and shareholders.

In addition, in the case of long-term construction, the protection of the shareholder is much higher. After all, installment payments count towards the price of the DDU, are blocked in escrow accounts and are subject to return in full in the event of a difficult situation with the developer.

Read also: Deprivation of parental rights of the father in 2020: grounds and what documents are needed

Today, developers already make all their expenses through special accounts under the control of banks - isn’t switching to escrow a redundant measure? Or do current calculations still allow for bankruptcies of developers and the emergence of new defrauded shareholders?

Special accounts are a fragment of one of the previous reforms. Developers who will work using escrow accounts are exempt from the financial control of banks. We can say that escrow is a continuation, development of this mechanism and a replacement for special accounts.

As for possible bankruptcies of developers, here, as they say, we need to dot the i’s. Escrow accounts, like special accounts, are necessary to combat the “leakage” of money from shareholders.

At the same time, the construction project remains a business, and the developer may go bankrupt due to purely economic factors. 

The main question that interests our readers today is what will happen to apartment prices? They have already risen in price based on the results of the first quarter, should we expect more growth and what kind?

The rise in price of new buildings during the first quarter of 2019 has practically nothing to do with the reform. Today, projects with escrow accounts make up 1-2% of the market and do not yet have a global impact on pricing.

In the first half of the year, prices react to inflation, an increase in VAT, rising fuel prices, etc. The transition of developers to project financing will also push prices up, but the market, in my opinion, will begin to feel this pressure only by the end of the year.

At the same time, in addition to the factors that raise prices, there are also aspects that inhibit such growth. The main one is the fall in real incomes of the population.

How do you see 2019 on the market of new buildings in the Moscow region? Should we expect shocks in the form of bankruptcies or, on the contrary, will everything be fine?

We will see a gradual shift to the use of escrow accounts and project financing. The new scheme will lead to the emergence of new strategies for project implementation, methods and forms of payment. The role of banks will increase significantly. In general, experts in the field of construction will definitely not be bored. But ultimately we expect positive changes.

• “Developers will no longer be able to use free money from shareholders”
• In Russia, 117 developers in 214 properties have opened sales of apartments using escrow accounts

Publication date May 02, 2019

Source: https://www.Novostroy-m.ru/intervyu/eto_rasprostraneniy_mif_chto

Escrow accounts - what they are and how they will affect the fate of shared-equity construction

Yulia Chistyakova

August 17, 2019 at 07:06

Hello, friends!

For those who are interested in purchasing housing in the near future, it will be useful to get acquainted with the concept of escrow accounts: what they are, what they are used for and what advantages they have. This is what we will look at in today's article.

Concept and features

Escrow translated from English means escrow. For decades, it has been actively used in other countries for secure payments between parties. Escrow accounts came to the Russian Federation 5 years ago. From July 2019, it is expected that they will be actively used with shared participation in construction. I will pay special attention to this issue in the article.

In simple words, escrow is a special account that is opened by agreement between the seller and the buyer for the safe payment of any expensive transaction. For example, the purchase and sale of real estate, business, car, etc. The presence of a third party is required, which acts as a guarantor of security.

Participants:

1. Depositor (buyer) is an individual or legal entity who opens an account and transfers property (money, securities, other valuables) to it, so that later they will be received as payment for a transaction with the seller.
2. Beneficiary (seller) is an individual or legal entity who undertakes to fulfill all the terms of the contract for the provision of services or delivery of goods to the buyer on time and of proper quality. Only in this case will he have access to the deposited funds in the escrow account.
3. An escrow agent is a special organization (for example, a bank) or person (for example, a notary) who ensures that the other two parties do not deceive each other. One of them paid money or other property under the agreement on time and in full. And the second fulfilled the conditions under which she must receive payment.

In this case, all the depositor needs to do is transfer the property. The beneficiary must prove with documents that the agreement has been fulfilled in full.

Storage objects:

• cash and non-cash money;
• documentary and uncertificated securities;
• documentation.

Alternatives to escrow accounts: letters of credit and safe deposit box.

A letter of credit is an obligation that the payer’s bank undertakes to transfer money to the recipient’s account after presenting the latest documents confirming the fulfillment of the terms of the letter of credit.

The hero of our article has undeniable advantages over other methods of secure payments.

Firstly, you do not need to take cash to the bank in order to deposit it in a safe deposit box. To purchase a home you will need several million rubles. Agree, it’s not the best option to travel with such an amount. It is enough to make a simple bank transfer to the escrow account.

Secondly, the money in escrow falls under the government deposit protection program.

The difference from a letter of credit here is that up to 10 million rubles are reimbursed (for real estate transactions), and under a letter of credit - only up to 1.4 million rubles. There are no refunds for safe deposit boxes.

However, in the event of bankruptcy or revocation of the license, the client has every right to withdraw the money stored in the cell.

Thirdly, the commission for maintaining an escrow account for shared construction is 0. For letters of credit and a deposit box, this is a few percent of the amount.

Fourthly, if the letter of credit is revocable, then the payer can revoke it at any time. The recipient risks being left without money. According to escrow, the consent of all parties to close the account is required.

Features of escrow accounts:

• maximum opening period – 5 years;
• The escrow agreement must be notarized, except for the storage of non-cash money and uncertificated securities;
• property that is stored in the account cannot be seized or collected by bailiffs;
• the agent can charge a commission for storage and transfer of property, but for shared construction it is equal to 0;
• The bank does not charge interest on money held in the account.

Mechanism of action and procedure for concluding a contract

Mechanism of action of escrow:

1. The payer and recipient come to the escrow agent (bank, notary, other individuals and legal entities). A tripartite agreement is concluded, which specifies the validity period and conditions under which the agent transfers the property to the beneficiary.
2. The depositor transfers the property for storage. He will not be able to use it until the end of the contract. The terms can only be changed by agreement of all parties.
3. After completing the transaction, the recipient comes to the agent and provides documents confirming the fulfillment of his obligations to the payer (for example, an extract from the Unified State Register of Real Estate, an act of acceptance and transfer of property, a purchase and sale agreement registered in Rosreestr, etc.).
4. The agent checks the correctness of the documents and their compliance with the terms of the account. If everything is in order, transfers the property to the recipient. The contract is terminated.

Real life example. A man decided to buy an expensive car. Naturally, he is afraid to transfer money to the seller without completing the purchase, even in the form of an advance payment.

And the seller, in turn, is afraid of being left without a car and without money. The solution is an escrow account. Both parties come to the bank or to the notary. They sign the contract and negotiate the terms. The buyer deposits money into the account.

After registering the car, the seller receives money. Everyone is happy.

Escrow account in shared construction

From July 1, 2019, all development companies that previously sold apartments in an unfinished building (shared construction) are required to do this through escrow accounts. The reasons for introducing amendments to the law are clear.

In recent years, mass protests of defrauded shareholders have swept across the country. People lost money without getting housing. Developers went bankrupt, construction projects were frozen.

Many of the buyers took out a mortgage and continue to pay it off.

To reduce risks and protect shareholders, amendments to the law on shared-equity construction were adopted. Time will tell how it will work. It's too early to say. Experts fear that housing prices will rise. The reasons are simple.

Construction companies will lose access to shareholders’ money, so they will be forced to build with their own funds or raise borrowed funds. And these are the interests that will most likely be passed on to the end consumer, i.e.

real estate buyers.

In the case of using escrow accounts for shared construction, the parties to the agreement will be:

1. Developer (legal entity) is a company that has received permission to build a residential building.
2. The buyer is an individual or legal entity who has signed the DDU and contributes money in full or in parts to pay for it.
3. A bank is an organization that is included in a special register of the Central Bank and has received the right to open escrow accounts for shared construction.

Currently, there are 96 banks in the Central Bank register that have the right to open escrow accounts. But, as experts have calculated, only 43 of them are actually doing this and are going to do this in the future. The rest do not work according to the proposed scheme, but were included in the list on a formal basis, because they meet the criteria of the Central Bank.

Using escrow will help avoid cases where builders:

• used the money received from apartment buyers for one project to complete the construction of other houses;
• closed their holes in the budget, paid off loans, etc.;
• carried out dubious operations that had nothing to do with the construction of the house.

Features of an escrow account for DDU:

• the agent bank for opening an account is chosen by the developer, not the buyer;
• money will no longer go directly to the construction company, only to an authorized bank in a special account;
• the developer’s activities become more transparent (all monetary transactions are controlled by the Central Bank);
• companies are required to disclose information about all persons who influence their decisions (beneficiaries), and they, in turn, will be responsible to property shareholders;
• money will be transferred from the account to the developer when he delivers the house and gives out the keys to at least one apartment.

Information about developers (contacts, details, founders and beneficiaries, quarterly financial statements) and construction projects (project declarations) for individuals is now available on the single Internet portal “nash.dom.rf”.

Advantages and disadvantages

Most likely, all the pros and cons will manifest themselves in the subsequent months of operation of the new mechanism. Preliminary estimates for now.

Advantages:

1. Maximum reduction of financial risk for all parties to the transaction.
2. The ability to transfer money non-cash, as well as store other valuable property.
3. A small commission for services, and in case of shared construction - its complete absence.
4. Participation in the deposit insurance program and increased reimbursement when using the account for real estate transactions.
5. The developer is not interested in delaying construction deadlines. I rented out the house and got the money.
6. Prohibition on forced collection and seizure of property on the account.

Flaws:

1. A possible increase in the cost of housing due to the need for developers to use borrowed money.
2. For some transactions, the amount of compensation in the event of bankruptcy of an agent of 10 million rubles is insufficient (for example, the purchase of a business, luxury housing). You need to open several accounts, which is not very convenient.
3. No indexation of money in the account. With long-term transactions, money gradually depreciates. If the seller fails to fulfill his obligations, the agent will return the entire amount to the buyer. But taking into account inflation, it will not be the same money at all, and time will be lost.

Conclusion

Having studied the mechanism of operation of escrow accounts, I came to the unequivocal conclusion that its use can change the situation with deception of shareholders for the better.

As a buyer, I am ready to overpay for an apartment if I am sure that I will definitely get it.

Giving money to a construction company that simply could not complete the construction due to the reasons “prices for energy and materials increased, I had to bribe officials, the owner turned out to be a fraudster and took the money abroad” is not an option for me.

What do you think about this new defense mechanism? Will it be developed in Russia?

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Source: https://iklife.ru/finansy/ehskrou-scheta-chto-ehto-prostymi-slovami.html