Buying property abroad-is Escrow all it is cracked up to be?

March 5, 2012

The theory is that buying with Escrow provides a guarantee, or additional level of protection, for buyers of property abroad. So we’ll take a look at this, but first let’s make sure what we are talking about is clear.

Definition of Escrow in overseas property

Something of value, such as a deposit of money, that is put into the custody of a neutral, third party by a buyer, to be retained until the performance of a condition or specific conditions have been fulfilled by the seller.

It is a means of addressing the issue of trust, when handing over money to someone you may have only just met, or might not meet, and is helpful in off-plan property purchases. It usually involves drawing up a tri-partite agreement (contract) between buyer, seller (developer) and “trusted” 3rd person (usually a legal representative), prior to signing a purchase contract. After the Escrow agreement has been entered into, the terms for holding and releasing the money, or deposit, cannot be altered in the absence of an agreement by all the parties.

Buy Property Abroad-Escrow-risk or reward?

By way of example, if you want to buy a €200,000 property from a developer via Escrow, you and the developer might select an Escrow agent, (sometimes a developer might already have this set up) often a lawyer or bank. The Escrow account’s conditions might stipulate that when all the title checks and building permission checks have been successfully completed and verified as satisfactory, the €60,000 deposit may be released to the developer.

The Escrow account ensures the buyer knows that no payment will be made unless the right paperwork is in place, or the relevant stage of building work has been completed. The developer knows that cleared funds exist and that he can access these by providing the necessary paperwork or adhering to the building schedule.

Let’s take a look at a couple of European countries.

Spain

It is the legal responsibility of banks, to ensure deposit amounts need to be placed in special accounts, separate from any other kind of funds belonging to the developer or promoter. It is in effect a developer´s Escrow account, controlled by the Bank. It is designed to protect against the situation where construction is not started, or not finished, by the agreed deadline.

Poland

Poland is one of just a few EU countries where much of the onus of risk, related to the buying and building of property, is on buyers. Currently use of an Escrow account is not a legal requirement, but a Bill is going through Parliament in 2012, which prescribes that funds for the purchase of the property will not be transferred directly to the developer’s account – they will be paid into an Escrow account (a third party independent account) and transferred to the developer only upon the project completion.

Conclusion

Although property-buying abroad using an escrow is a low risk option, the use of an escrow account may be used less regularly in international trading because local laws differ and it is more challenging to find an escrow agent who is known and trusted by both parties, across borders.

Pros and cons

Not all developers, however, offer Escrow accounts. Even if they don’t it is theoretically possible that a client can initiate one with the agreement of the developer. If a developer doesn’t want to and a client is insistent on an Escrow, they might lose their desired property. Just because a seller doesn’t offer Escrow doesn’t mean they are dodgy. Laws in some countries don’t require developer Escrow accounts, so they might not offer something that adds cost to the process. In a sellers’ market there is less scope for negotiation, but in a buyers’ market there may be scope for negotiating an Escrow.

PROS

CONS

Safer for client and provides peace of mind for off-plan purchases Not widely used as it increases costs for the seller and the buyer may foot some of the costs too
More available in buyer’s market In sellers’ market it might be less available
Each stage is signed off before developer receives money Developers might not use Escrow, if not enshrined in Law
Administered by independent 3rd party May add to administrative burden, requiring more paperwork and proof of identity, as well as time negotiating the terms of the Escrow agreement
If a developer goes out of business without having completed building work, he should not get any money Not fail-safe method if intermediary is not trustworthy in the first place or biased to Seller, (some developers’ use their Lawyer’s “client” account)
Reassures seller they will get the money when selling May be a legal requirement in some countries, e.g. Spain, but not all banks adhered to law and  held deposits separately
Either the seller or the buyer can propose using Escrow Both parties must agree to use Escrow and not all developers do

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Property Venture® is an award-winning, UK-based agency for overseas property who helps people buy investment property and holiday homes in Europe, more easily and safely than they can on their own, because we offer grounded common-sense advice.

The focus is mainly greater Europe: Poland property, UK investments, Spain property, Turkey property, Cyprus property

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