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By Venture Briks

Escrow account in real estate – A boon for home buyers!

May 23, 2020

To furthermore reduce the plights of home buyers, RERA has brought in pace the use of escrow. A regulation that puts all the real estate developers in a protocol where they transfer 70% of the money collected from the home buyers into an escrow account overlooked by a commercial bank.

The new imposition of escrow in the real estate industry is apparently the most natural step towards regulating and strengthening the sector even more as compared to the past. This provision of transferring a major portion of the funds to a secure escrow account will prevent the developers from using the money to fund other projects than the one for which the sum was collected. This will further prevent scenarios like insolvency to surface.

What is an escrow account?

In an escrow account funds are held in trust under the purview of a third party while two or more parties see through a transaction. In real estate, the imposition of escrow puts the developer in an agreement where it can access the funds from the account only for the development of the project for which the funds belong to. Also, the request for withdrawal follows a certification and approval process by an engineer, architect, and chartered accountant to ensure the eligibility of the claim.

Impact in the current scenario

The real estate sector is going through some massive shifts in terms of supply, demand and regulation for the past 4-5 years. With several lakhs homes under hundreds of projects being stalled or running behind timeline across all the major cities, the market is dealing with a shake in trust. A system like escrow will ensure that projects don’t go dry on funding and deliveries are made on time. The mandatory audits of the escrow account by a certified CA make the regulation, even more, fail-proof. Such a system in its complete functionality will not only rebuild trust in the sector but will also create beneficial results for involved parties.

Limitations and further scope of escrow in Indian real estate

While escrow arrangements have made its way into the development sector, it is still to find its footing in the other verticals of real estate business such as the secondary property market and rental housing.

The resale property market lacks direct intervention and regulation by RERA, which makes the market subject to foul play. With unjustifiable heavy cash payouts being a regular thing between real estate players and customers, the market is pretty much murky without an effective supervisory body. The government can bring a lot of regularity and transparency in such market conditions with strategies like escrow.

Meanwhile, the rental housing space which is quite unregulated in our country can have an effective imposition of easy to use solutions of modern-day escrow services. In the rental space holding legal ends of an agreement between the tenant and the homeowner can become messy and having escrow based on the agreement of maintenance, safety, and respective repayments can bring a high level of regulation and benefits to the market.

With the current impositions and scope of future growth, escrow is definitely big support for homebuyers in the current real estate conditions.