Shared construction: how to buy an apartment that doesn’t exist yet and not lose money

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Shared construction: how to buy an apartment that doesn’t exist yet and not lose money

What is shared construction?

An apartment under construction, and even more so a project, can cost much less than finished housing. Future tenants pay in advance for their square meters – and thus contribute to the financing of the construction. This is called participatory construction.

Today, the most common option for shared construction is through an escrow account. In this scheme, the buyer enters into a tripartite agreement with a construction company and a bank. During the construction period, the bank keeps the money of future residents and at the same time issues a loan to the developer.

As soon as the house is commissioned, people get their apartments, and the bank transfers their money to the developer – and he pays off the loan. The rest of the buyers’ money is his profit.

In some houses, developers sell apartments directly, without escrow accounts. But there are fewer and fewer such offers on the market. In addition, this option is more risky for the buyer – if the construction stops, there may be problems with the return of money.

How to buy an apartment under an escrow agreement?

  1. You choose the developer, house and apartment. The developer tells you which bank he works with. This must be one of the banks authorized to finance shared construction .
    A list of such banks can be found on the regulator ‘s website (simultaneously press the Ctrl and F keys, and then enter “shared construction” in the search bar). If the developer offers you to open a bank account that is not on this list, he is breaking the law.
  2. You conclude a tripartite agreement with a construction company and a bank. Open an escrow account and deposit the full cost of the future apartment into it. If you do not have the full amount, you can take a loan from the same or another bank and transfer it to an escrow account.
  3. The money in the escrow account is considered yours – until the construction company puts the house into operation.
  4. The developer gives you the keys and you move into a new apartment.

pros

  • The risk of losing money is minimized.
  • In the event of bankruptcy of the developer, the buyer can withdraw money from the escrow account at any time. You don’t need to take any additional steps.
  • Up to 10 million on escrow accounts are protected by the deposit insurance system.
  • Construction companies build a house not with the money of equity holders, but with credit funds. In such a situation, it is beneficial for them to complete the construction as quickly as possible in order to pay less interest to the bank. And you have every chance to move into a new apartment at least on time, which the developer promises, or even earlier.

Minus

  • Apartments under this scheme can cost more than similar housing, which equity holders buy directly. This is because the developer does not receive money from buyers, but takes a loan for construction from a selected authorized bank and pays interest on it.

Although you are protected from unfinished construction, you need to choose your builder very carefully. Even if you have claims, for example, regarding the quality of construction or finishing, and you do not want to accept the finished apartment, the money from your escrow account will still go to the developer. Therefore, it is better to look in advance at the houses that the company has already handed over and pay attention to customer reviews.

Insurance for construction company

How to buy a house under a contract with the developer?

There are few houses left where you can buy an apartment under this scheme. If you manage to find such an offer, then the procedure will be as follows:

  1. You choose a house and an apartment. Sign a contract with a construction company.
  2. The developer gives you the account number to which you transfer the cost of the future apartment.
    The account must be opened in one of the banks authorized to finance shared construction. A list of such banks can be found on the regulator ‘s website (simultaneously press the Ctrl and F keys, and then enter “shared construction” in the search bar). If the developer offers you to transfer money to a bank account that is not on this list, he is breaking the law.
  3. The bank makes sure that the developer spends your money only on the construction of the house in which you bought the apartment. He will not be able to direct them to other objects. Control will last until the end of construction and commissioning of the house.
  4. The developer gives you the keys and you move into a new apartment.

A plus

  • When developers receive money directly from buyers, they do not have to take out construction loans and pay interest on them. Therefore, the cost of housing may be lower.

Minuses

  • When builders have already received money from equity holders, they have no incentive to hand over the house as early as possible, as, for example, when building on credit money. Therefore, the delivery of the house may be delayed.
  • If the company goes bankrupt, then the refund procedure will be much longer and more complicated than when an escrow account is used. In the event of bankruptcy of the developer, the escrow agreement is terminated automatically and the buyer immediately gets access to his money.

What to do if the developer goes bankrupt?

If you have an escrow agreement, you can immediately withdraw money from your escrow account. After all, until the house is delivered, the money in the escrow accounts belongs to the buyers. How much you paid for the future apartment, the same amount will be returned to you.

If you entered into a contract directly with the developer, your investment will not be lost either. In the event of bankruptcy of the developer, you must return the money or the construction of your house will be completed by another construction company, which will be determined by local authorities or found by the bankruptcy trustee. But in any case, it will take much longer to get your home or money than to get the money back from the escrow account.

How to return the money or get housing in case of bankruptcy of the developer, if the contract with him was signed directly?

Construction companies are required to make contributions to the State  Fund for the Protection of the Rights of Citizens – Participants in Shared Construction. In case of bankruptcy of the developer, the Fund finds another company that will complete the housing, or return the money to the equity holders.

Until June 27, 2019, most developers insured their liability to equity holders in insurance companies. If the developer was declared bankrupt and you submitted a claim to its insurer for compensation before this date, the insurance company will return the money to you. From June 27, the obligations of builders to equity holders are guaranteed by the Fund for the Protection of the Rights of Shared Construction Participants – it is he who should be contacted in the event of bankruptcy of the developer.

Features of the developer’s bankruptcy procedure:

  • The court will appoint a bankruptcy trustee to conduct bankruptcy proceedings. Within three months from the beginning of the bankruptcy procedure, you must submit an application to the manager so that you are included in the register of creditors of the developer.
  • Whether everyone will be paid money or the search for a new developer will begin to complete the construction is decided by the general meeting of equity holders. This meeting must be organized by the bankruptcy trustee.
  • If the majority of equity holders choose the money, then within 14 days the Fund will inform on its website where, when and how it will be necessary to apply for a refund. Within 10 days after the submission of documents, the Fund will pay the money.
  • However, the law provides for restrictions on payments. The most you can count on is the average market value per square meter of new housing in the city where the facility is being built, multiplied by 120 square meters. In this case, the calculation uses the average price per square meter, which was valid at the time of the conclusion of the shared construction agreement. That is, if you invested in the construction of an elite apartment of a larger area, you will not be able to fully return the invested money.
  • If the majority of people make a choice in favor of housing, the Fund will finance the completion of construction. Within a year from the start of the developer’s bankruptcy proceedings, the bankruptcy trustee must find a new company that will agree to complete the construction. Then you will have to wait for the completion of construction. If new builders cannot be found within a year, the Fund will pay money to equity holders.

And what if the bank through which equity construction is going bankrupt goes bankrupt?

The probability of this is extremely small. The Bank of Russia draws up a register of authorized banks according to strict criteria. To be included in this list, banks must hold a universal license and participate in the deposit insurance system.

But even if the bank’s license is revoked, you can quickly return the money through the Deposit Insurance Agency. The amounts on escrow accounts for financing shared construction are protected within 10 million rubles.

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