Buying a property before construction is complete is commonly known as buying off-plan.
In an off-plan purchase, the property may still be under development or construction when the buyer enters into the purchase agreement. The process is different from buying a completed property because the buyer is purchasing based on the project, the agreed terms and the expected development process.
One of the important terms connected with off-plan property is escrow.
What is an escrow account?
An escrow account is a designated account used for a specific purpose.
In certain real estate markets, payments for an off-plan project are deposited into a project-related escrow account rather than being handled in the same way as ordinary corporate funds.
The purpose and operation of the account depend on the rules of the jurisdiction where the property is located.
For example, Abu Dhabi's real estate regulations provide for a project escrow account and state that payments made by off-plan purchasers are deposited into the project's escrow account. The regulations also set out conditions concerning payments from the account to the developer.
Why did escrow become part of off-plan development?
Off-plan property involves construction that takes place over time.
A project may involve:
Land.
Design.
Construction.
Contractors.
Consultants.
Financing.
Government approvals.
Infrastructure.
Buyer payments.
Because the project develops over a period of time, some real estate systems created specific structures for handling payments connected with off-plan projects.
Escrow accounts are one part of this structure in jurisdictions where the system applies.
The development of off-plan markets
Off-plan property has become an important part of real estate markets in several countries.
The model allows a property to be marketed and sold during the development stage rather than only after construction has been completed.
The buyer may therefore enter the process at an earlier stage of the project.
The development of off-plan markets has also created a need for clear information about:
The project.
The developer.
The payment structure.
Construction progress.
The purchase agreement.
The applicable property regulations.
The designated payment account.
Off-plan and completed property are different
A completed property and an off-plan property are not the same type of purchase.
With a completed property, the buyer can generally inspect the existing building or unit.
With an off-plan property, the buyer is dealing with a project that is still being developed.
This difference is one reason why the purchase process can involve more documentation, construction stages and payment arrangements.
The role of information
The history of off-plan property shows how real estate markets have developed different systems to manage construction projects and buyer payments.
Escrow is one of the structures used in some jurisdictions.
The exact rules differ from one location to another. Readers considering an off-plan property can therefore examine the project details, the applicable regulations and the payment arrangements before deciding how they wish to proceed.