Escrow account investment

Question: If I receive a down payment on my home and an escrow account is opened, is there any way I would be permitted access to the funds? For example, could the buyers approve access to X per cent of the money in escrow or perhaps a fixed amount? I understand the new law, but am wondering if there is any alternative to tying up all of the money?

Answer: The new regulations relating to Escrow Accounts were introduced by the Real Estate Regulatory Authority (RERA) last year, to bring much-needed transparency into the freehold property market and provide greater security for home-buyers like you. Ultimately, you want to protect the money you are investing and enjoy the dream home you are buying without major construction defects arising.

An escrow account means that investors in off-plan acquisitions are protected because their investment is held in a bank account under the stewardship of a neutral third party. The developer has a limited amount of access to the funds to cover essential costs - with the approval of the authorised account operator - but the bulk of the investment remains within the account until the property is ready for handover.

The law essentially states that all developers must obtain approval from the Land Department to open an escrow account (or escrow accounts) in connection with any off-plan sales for a development which must be managed by financial or banking institutions approved by the Land Department (called "Escrow Agents"). The Escrow Account Law requires that 5 per cent of the total value of the relevant escrow account be retained by the Escrow Agent for one year after the date - the retention amount gives purchasers security for the developer's obligation to rectify any defects in construction that are discovered during that period.

Although you probably still consider the investment to be "your money," you cannot access it while it is in the escrow account. You will be able to check on the status of the account, and many of the banks also take care of some of the administrative aspects on your behalf.

Understandably, you would like to look at opportunities to further invest your money; however it is important to understand that every investment you made needs to be protected and meets your long term expectations. With an escrow account you are offered protection for one of the biggest investments you are making. A home is important to every individual and ensuring that your future home meets your requirements and is protected from unforeseen defects is important.

As an investor, you certainly do not have the responsibility of setting up the account! A limited number of financial institutions have been authorised by RERA to open and operate escrow accounts, and these accounts are only available to property developers registered with the agency. In fact, you should check with the developer immediately for their Escrow Account details, since this provides you with the reassurance that they are a bona fide company.

Of course, one of the infrastructural benefits of the Escrow process is that it should help streamline delivery of your property. Since the funds are only made available to the developer once the construction work is complete, there is less chance of a delay in receiving your property.

Financial planning is key to building up a comfortable future for you and your family. Owning a home is a major step in ensuring part of that lifestyle and security. Speak with a financial adviser to see how best to budget and look at other options that you can further invest your money in, in addition to buying your home.

The writer is sales director of Life Insurance at Nexus, one of the the region's leading financial advisers. The views expressed are the author's and do not necessarily reflect the views of Gulf News. If you have any questions, please email advice@gulfnews.com

A home is important to every individual and ensuring that your future home meets your requirements and is protected from unforeseen defects is important.