An escrow account as a collateral for the buyer
Investment security is crucial for people who decide to buy an apartment or house from the primary market. For this purpose, developers have been obliged to keep escrow accounts. Check what they are and what they guarantee.
An escrow account - what is it?
An escrow account is one of the most important elements of protection when purchasing residential premises on the primary market. It is used to secure the funds of the property buyer - the developer may withdraw money from the account only after meeting the conditions specified in the contract with the client. The obligation to keep fiduciary accounts is imposed on developers by the Act on the protection of the rights of the buyer of a flat or a single-family house (Journal of Laws 2011, No. 232, item 1377). It is commonly referred to as the developer act - it was adopted on November 16.11.2011, 29.04.2012 (as amended), and entered into force on April XNUMX, XNUMX. The funds on the escrow account are intended for a specific purpose - the developer cannot allocate them to anything else. The main idea behind the legislator was to secure the interests of people who buy a house or flat on the primary market. There are two basic types of fiduciary accounts - open and closed.
Open escrow account - what is it characterized by?
An open escrow account is an account from which the developer can withdraw money during the implementation of the investment. Payments to this account are made gradually - in accordance with the schedule of the project. The disbursement of funds is also similar - it is made in tranches after the completion of subsequent construction stages. These tranches range from 10 percent. up to a maximum of 25 percent total cost. The schedule must, however, include at least four stages of the investment.
There are three types of open fiduciary accounts:
- with an insurance guarantee,
- with a bank guarantee,
- without warranty.
A guarantee from an insurance company or bank is an additional form of security in the event of the developer's insolvency. Due to the relatively high cost, the bank guarantee is usually used by the largest investors, but it provides the buyer of the property with an immediate return of money in the event of the developer's bankruptcy or failure to comply with the contract. The mechanism of functioning of the insurance guarantee is similar - with the difference that the money is not paid out by the bank, but by the insurance company. Both the insurance and the bank guarantee expire upon signing the sales contract with the notary public.
Closed escrow account - the most important information
A closed escrow account seems to be a safer solution from the real estate buyer's point of view, because the developer obtains access to the funds accumulated on it only after the completion of the investment - namely, after concluding a final agreement with the client transferring ownership rights to the premises. Any undesirable claims or charges are inadmissible. Such a structure of the bill means that the developer has to finance the entire project with his own money or money obtained under the loan. This is associated with a greater risk of losing financial liquidity, and thus, bankruptcy. Therefore, it is very important to choose reliable and financially stable developers. It is also a good idea to use the services of a proven real estate agency dealing in sales agency. On www.wilsons.pl you will find all the necessary information on this topic.
Trust account - how does it work in practice?
It should be remembered that the real estate buyer has the right to demand the refund of the entire amount paid to the escrow account only in specific situations, i.e. when:
- the developer does not fulfill his obligations,
- the developer contract does not comply with the developer law,
- the entrusting party (the person paying the money) withdraws from the contract.
If the contract between the developer and the customer is terminated by mutual agreement, both parties recover part of the money - in accordance with the declaration of will required by the bank when opening an escrow account. On this occasion, it should also be mentioned that money deposited in fiduciary accounts is not subject to bailiffs. In some cases, they are also not included in the developer's bankruptcy or estate assets.
When deciding to buy real estate from a specific developer, it is worth checking which bank keeps his escrow account. It is not recommended that it be the same bank where the buyer of a new home or apartment keeps their private savings. This is due to the fact that in the event of bank bankruptcy, the Bank Guarantee Fund can obtain a maximum of PLN 100. euro. The sum of payments to an escrow account and payments to a private account may not exceed the equivalent of this amount if the developer has an escrow account in the same bank, the services of which the client uses individually.