Buying property with post-handover payment plan in UAE? What overseas buyers need to know
While generous post-handover payment plans of up to ten years from real estate developers have provided an important resource for many residents who had been priced out of Dubai’s property market, these schemes have also opened an avenue for overseas buyers to consider investing in Dubai real estate.
“The post-handover plans are best suited for both end users and overseas investors as the buyers don’t have to put all the money at once, which gives them the leverage to buy a bigger property as the payment is spread for a few years,” says Riyaz Merchant, CEO of Realty Force.
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“For the investor, a post-handover plan becomes a compulsory saving, as part of the rent is used to cover the purchase price,” says Merchant. “So the buyer ends up saving seven per cent of the principle purchase [price] depending on the length of the post-handover plan offered by the developer. For example, if it was a three-year post-handover plan, you would have saved an average of 21 per cent of the price, considering that a residential property offers a 7 per cent annualised return.”
However, when an overseas investor buys a unit with a post-handover plan, there are several factors to consider. Mario Volpi, sales and leasing manager of Engel & Volkers, says payment options for off-plan and ready properties differ significantly from developer to developer.
“When an overseas investor doesn’t have a local bank account, this can prove to be especially difficult to buy a ready property direct from the developer,” says Volpi.
“In the current market, some developers require a much larger initial down payment and then allow the buyer to pay via bank transfer for the remaining stage payments, while others insist on one security cheque covering the full amount. However, if the overseas buyer can pay in cash and does not avail [himself of] the payment plan, attractive discounts are offered by developers in return for receiving all the sales money in one go.”
Developers typically require post-dated cheques to secure each instalment of the purchase price, says Aruna Mukherji, real estate associate at Al Tamimi & Company.
“The developer encashes the relevant post-dated cheque when that payment comes due, which is not always viable for overseas buyers,” says Mukherji. “Moreover, such property purchases are typically registered in the deferred sales register of the Dubai Land Department.”
However, there are developers who do not require post-dated cheques until handover, points out Philip Sequeira, head of property regulatory at Hadef and Partners. This can create problems during handover when buyers are unaware of this requirement.
“If the terms of the SPA cannot be complied with, then the buyer may be in default, and they may not be able to obtain a mortgage very easily to remedy that default,” says Sequeira.
Some developers have tied up with UAE banks to provide finance to non-residents. Sequeira says, “This happens only if the country where the investor resides is on the bank’s approved list of countries or if they meet certain requirements of the bank. Also, developers might sell down their revenue stream on the remaining payments post-handover at a discount, so they push the default risk onto the bank.”
Leasing the unit
When an overseas buyer invests in Dubai property, seeking legal advice on the terms of the sale and purchase agreement can prove beneficial. “It is not uncommon for a developer to restrict the buyer from leasing the property to a third party,” says Mukherji. “Consideration should also be given to whether the overseas buyer’s tenant can register the lease with Rera on Ejari, so long as a no-objection certificate is obtained from the developer. This is because a title deed will not be issued in the overseas buyer’s name until the last instalment of the purchase price is completed.”
For overseas buyers who do not have a UAE bank account or cheque facility, Sequeira warns they might find it difficult to rent the property out or manage it without the assistance of a property management company.
Given the inability of overseas buyers to issue post-dated cheques, Mukherji says certain wire transfer facilities are available. “Commercial arrangements are done whereby the developer permits the overseas buyer to wire transfer the payment instalments to the developer’s bank account,” she says.
Some of the commonly used means of securing the payment from the buyer, according to Mukherji, are personal guarantee and a large upfront payment. In a personal guarantee, the developer could consider obtaining a personal guarantee from a UAE resident on behalf of the overseas buyer and also require the UAE resident to provide post-dated cheques in the event of default committed by the overseas buyer. The developer could consider securing a larger upfront payment, as then buyers would be more reluctant to default because of the substantial amount already paid to the developer.
When a buyer defaults on payments, Sequeira says the developer could terminate the sale without the need of a court order, as per Dubai’s new termination laws for off-plan property.
“Some developers have a reputation for being lenient and understanding in respect of default, but others also have a reputation for not being so understanding,” says Sequeira. “The investor must bear in mind that he does not get the title deed until the property is fully paid. Therefore, the developer generally has the upper hand because the property is difficult to deal with without the approval of the developer, and the developer doesn’t have to look far to find an asset to enforce its rights.”
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