The conquered peak: escrow in real estate
After discussing the definition and purpose of escrow, we can confidently state that it brings numerous improvements to all business processes.
The implementation of escrow to the local environment will significantly affect the real estate market, widening the opportunities for non-resident investors in Ukraine.
When a foreign investor and Ukrainian buyer agree to sell the property, the seller wants to be sure that the money will come; the buyer – that real estate ownership rights will belong to them.
Until November 2019, the procedure was the following: the parties should sign the sales-purchase agreement with the notary, and the buyer sends the funds to the seller through SWIFT transaction, which takes a couple of days to appear on the seller’s account. To secure the parties during this period, the notary opens the State register and “freezes” the status of the property for up to five days so no one can dispose of it. Once the funds are on the seller’s bank account, the notary certifies the fact of reception, changes the titles in the State register, so the deal is considered closed.
On November 2, 2019, the law «On Amendments to Some Legislative Acts of Ukraine on the Protection of Property Rights» came into force. This change in legislation removed the time gap between the agreement signing and the registration of a new owner’s rights. As a result, after signing, there are two scenarios, neither of which acceptable to the parties. Either the seller transfers the ownership rights to the buyer, not being sure the money will come, or the buyer accepts the risk that anything can be done with the property until the funds are received, and their titles are certified.
Such a complication puts any agreement in jeopardy. Even though foreign business people are okay with some delays as they refer to the agreement signed, Ukrainian sellers are not that flexible. They believe in cash, not in documents, and they try to avoid any possible difficulties on the way.
Vestor.Estate team has been working in real estate for more than five years, showing the foreign clients that investments in Ukraine are profitable and safe. Therefore, we cannot accept to take such risks; especially, when there is an instrument widely used all over the world to remove the pitfalls of this kind.
As a result, a few months ago, Vestor.Estate conquered the peak and closed the first deal on apartment purchase involving escrow. The whole sales pipeline looks complete and precise with it, and it gets investors rid of uncertainties and complications caused by the lack of such a toolkit in our country.
The idea of using this tool concerned Sean Almeida (Vestor.Estate CEO) a long time before the changes in the law made it necessary, to use for some foreign buyers who could not or did not want to open a local Ukrainian bank account. Theoretically, escrow itself has existed in Ukraine since 2017, when, according to changes approval, it was allowed to open escrow accounts to process business deals. But no one started to offer such services right away – as it is common that any changes in the Post-Soviet environment are hard to learn and accept.
This old-fashioned way of handling business processes is a huge negative. When you involve the escrow agent into the deal, the purchase price of the apartment, as well as all closing costs (for taxes, notary and lawyer services, and other expenses), can be kept on the escrow account during the process.
What are the main advantages of this approach?
- Each party’s interests will be protected – the escrow agent will be the neutral third party who obliges to introduce both sides in terms of the fulfillment of the obligations stated in the agreement signed.
- The process of sending the payment to the seller’s account shortens from days to a matter of hours or even minutes, as the transaction from the escrow account to the seller’s one is done within the Ukrainian banking system).
- The buyer places all the money on the account at the very beginning, so there is no need to deal with taxes and services fees afterward – the agent will control the payments to be made accurately on time to every entity and individual involved.
So, Vestor.Estate sales team found and offered the solution with evident benefits for all participants. We just needed to find a way to realize the goal of implementing the escrow mechanism in the Ukrainian residential real estate market.
Sean insisted, that the new process should be also client-oriented. Escrow is supposed not to create additional headache for the clients with the search or explaining the subtlety of the certain agreement. At the same time, it is necessary to let the clients avoid the organizational details, but still ensure the full control over the process.
That is how Vestor.Estate came up with the decision: we united the forces with our lawyer, Ihor Kydalov, whose experience and qualification help us in every deal, to open a new legal entity – escrow company.
Such a combination is a double-win for a buyer, as well as for a seller. Broker is more aware than anyone of all the necessary procedures and sequence of distributing funds during the signing process. Therefore, there is no need for the clients to worry about any terms or payments.
No matter who you are in the deal, the seller or the buyer – the escrow agent, who understands the peculiarities of your deal, speeds up the deal duration, lowers your participation in the side red-tape questions that usually take a lot of time and effort. And, of course, they minimize risks and losses in case any of the parties fails to fulfill the obligations of the agreement.
We believe this is the precedent of a new era for the development of the real estate market and business in general. It is important to realize we are already several years behind, as escrow has been an integral part of any large business transaction in Western countries for a long time.
Any buyer, seller, investor, or broker in Ukraine now has this entity to rely on. Becoming an escrow agent, our experts made maximum efforts to combine previous knowledge and experience from foreign markets and reproduce it, considering all the elements of the Ukrainian reality.
In the future, we expect government bodies and financial institutions to adjust the regulations to allow for more consistent use of escrow and contribute to the rapid expansion of its use.
As for investors, after familiarizing themselves with the new procedure, they will, hopefully, encourage third party involvement and will try all the benefits of using escrow themselves.