by Vaibhav Tambe, Founder & CEO, TransBnk
Realty sector in India in the recent past has seen an uptick in growth like never before. While the pandemic did dent demand for real estate initially, the year FY2022 and currently ongoing FY2023-24 underscored the sector’s bullish performance wherein JLL’s Residential Market Update Q4 2022 highlighted the highest-recorded home sales in the past decade across the top seven Indian metro cities. The sales of residential homes in Q4 2022 saw a 68% year-on-year growth. Interestingly, as per the ISB – Housing.com Housing Price Index (HPI), the second quarter of 2023 continued to see growth in property sales through the metro cities with a growth of 9.91% year-on-year as compared to the same period the previous year.
However, the real estate sector’s long-standing poor reputation remains as is which predominantly is driven by developers diverting homebuyers’ funds to other ventures, using substandard input materials, and defaulting on land cost payment. To help multiple stakeholders navigate the sector’s chief intricacies and uncertainties, escrow accounts have emerged to safeguard the interests of both buyers and sellers.
The challenges in India's realty sector
Delays or failure of real estate projects on the back of mismanagement of homebuyer funds has hurt the sector’s reputation gravely in the past decade. Here are some of the challenges that the Indian realty sector currently faces:
Project Delays: Real estate projects in India have a tarnished reputation for their prolonged timelines. Delays not only cause stress to the buyers but also lead to significant financial and emotional distress.
Lack of Transparency: No access to property transactions has been a significant concern in real estate. Buyers are often left in the dark about the status of their investments and the utilization of their funds.
Financial Perils: The substantial upfront payments required for property purchases leave buyers at risk of financial fraud or project mismanagement by the developers.
Legal Complication: The legalities linked to property transactions are pretty complex and can be cumbersome, which ultimately culminate into disputes and litigations.
Developer’s Reliability: The credibility and financial health of developers remain in question which keeps several potential buyers skeptical.
Funding Challenges: Developers face funding challenges, leading to delayed delivery of the projects on the back of cash-strapped situations especially during critical construction stages.
The challenges in India's real estate sector are significant, but the industry has not remained passive in addressing them. RERA has invoked trust homebuyers’ trust with transparent details of the developers and the project. Furthermore, the introduction of escrow accounts has gained traction as a solution to streamline the fund management fiasco, hence making inroads for transparency.
What are Escrow Accounts?
Escrow accounts, an age-old financial concept, are addressing the plethora of issues that have plagued the Indian real estate sector. These accounts stand to safeguard while acting as an intermediary, where a neutral third party temporarily holds and manages funds on behalf of the buyer and seller. Funds are released only when specific pre-agreed conditions are met, creating a custodian of trust and accountability in the transaction.
Protection for Buyers
For potential buyers in the real estate market, escrow accounts provide a breath of hope by addressing their fears. Here's how escrow accounts protect buyers:
Financial Security: Escrow accounts prevent buyers from making full payments upfront, protecting them from fraudulent schemes and project delays.
Transparency: With the use of escrow accounts, buyers can track the status of their investments, ensuring their funds are being utilized for the intended purpose.
Legal Compliance: Escrow accounts guarantee that all legal formalities, including obtaining necessary approvals and permits, are fulfilled before funds are disbursed.
Timely Delivery: The disbursement of funds at various construction milestones incentivizes developers to follow project timelines, hence ensuring timely delivery.
Reduced Litigation: Escrow accounts minimize disputes, as funds are disbursed according to predetermined conditions, reducing the likelihood of legal battles.
Benefits for Sellers
Like buyers, sellers also reap significant advantages from the use of escrow accounts:
Enhanced Trustworthiness: The implementation of escrow accounts enhances the credibility of the seller, making them more attractive to potential buyers.
Risk Mitigation: Developers can use funds from escrow accounts to meet construction expenses, reducing the risk of project delays due to insufficient funds.
Legal Compliance: Escrow accounts ensure that the seller complies with all legal and regulatory requirements, which is essential for a smooth transaction.
Faster Closures: With transparency and security in place, transactions can proceed more smoothly and close faster, benefiting sellers in terms of cash flow and efficiency.
Challenges in implementing escrow accounts
While escrow accounts have brought in measurable positive changes in the Indian real estate sector, challenges with their implementation remain. The need for regulatory intervention, education of buyers and sellers about escrow accounts, and ensuring the impartiality of the escrow agent are essential aspects that require constant attentiveness.
Regulatory intervention: The effectiveness of escrow accounts is thoroughly tied to the regulatory framework that governs them. Ensuring that the regulations are strong and consistently enforced is crucial for their success. Regulatory bodies must remain mindful to adapt to changing market dynamics and protect the interests of all parties involved.
Education and awareness: Many buyers and sellers are not fully aware of the functionality and advantages of escrow accounts. Real estate industry associations and government bodies can play a crucial role in imparting knowledge about the same to the masses.
Impartiality: The neutral third party, often a bank or financial institution, serving as the escrow agent, must maintain impartiality throughout the transaction. Ensuring that these agents do not have conflicts of interest is essential for building trust in the system.
The introduction of escrow accounts in India's real estate sector is slowly helping to invoke a sense of trust, transparency, and security among all stakeholders in the industry. The road ahead may still be bumpy and long, but with increased adoption of escrow accounts, the Indian realty sector looks forward to a concrete future.
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