Buying real estate from a developer: types of investment models and potential risks

The buyer often enters the project at a stage when the house has not yet been built, the documents are in the process of being drawn up, and the future apartment exists only on paper. That is why it is important to understand under what legal model the object is sold, what the investor actually receives before the house is put into operation, and what guarantees exist for his rights. Before signing any investment contract, the buyer needs to have a clear idea of ​​​​all participants in the construction and their real powers. Lawyers of the company “DE-JURE” have been accompanying clients in projects of varying complexity for many years. We help to choose the optimal investment model, assess all legal risks and check whether the sales scheme complies with the legislation.

Buying real estate from a developer is one of the most common ways of investing, but it is quite risky. The buyer often enters the project at a stage when the house has not yet been built, the documents are in the process of being drawn up, and the future apartment exists only on paper. That is why it is important to understand under what legal model the object is sold, what the investor actually receives before the building is put into operation, and what guarantees exist for his rights. In this material, we consider the main models of investing in a new building and explain what advantages and risks they contain.

Project participants

Before signing any investment agreement, the buyer needs to have a clear idea of ​​all participants in the construction and their real powers. The legality of the investment model, transparency of financing and further protection of your rights depend on this. Buyers often mistakenly believe that any representative of the developer can sell rights to future real estate, but in practice the circle of such persons is strictly limited. The main participants in the project are:

• the construction customer – the owner or user of the land plot on which the house is being built. It is he who receives urban planning conditions, permits and can sell rights to the future real estate. Sometimes the customer transfers these powers to the developer;
• the developer – the company that organizes the implementation of the project, provides financing and often acts as the seller of rights to future real estate. Its powers are determined by the agreement with the customer, which prescribes the procedure for distributing rights and the possibility of alienating future apartments;
• the general contractor – the executor of construction works. He does not have the right to attract investors or conclude contracts, except in cases where the customer simultaneously performs the functions of the general contractor.

A correct understanding of the roles of these participants helps to assess the legality of the transaction and avoid situations where the contract is signed by a person who does not have any authority to do so.

Investment model 1. Purchase and sale agreement and registration of a special property right

Investment under this model involves concluding a notarial agreement for a specific future premises, after which the notary registers the special property right in the State Register of Property Rights. The buyer actually receives a legally fixed right to the future real estate, which can be used as collateral, depending on the terms of the contract.

The purchase and sale agreement carries the highest level of transparency, because the public register makes “double sales” impossible. This is also a convenient model for bank lending due to the collateral of a special right. But the risk when investing funds is the need to carefully check the developer’s documents and accurately define the object in the contract. Therefore, you should check the extract from the DRRP, the records in the Unified State Register of Civil Status and Permits regarding the availability of MOUs and permits, and the correspondence of the object number to the floor plan.

Investment Model 2. Construction Financing Fund (CFF)

In this investment model, all buyers’ funds are deposited into the fund account managed by the manager. The manager controls the use of money in accordance with the CFF Rules and transfers them to the developer only after the completion of certain stages of construction. The investor receives a claim right or a participation certificate tied to a specific apartment.

The advantages of the model are protected cash flow, control of targeted financing, regular reporting by the manager, and convenience for large residential complexes. However, before signing the contract, check the CFF rules, the developer’s agreement with the manager, the register of securing objects, the procedure for returning funds, reporting, and the reliability of the manager.

Investment Model 3. Cooperatives (Housing and Housing Associations, Consumer Societies)

The investment model through cooperatives is based on membership: the buyer joins a housing and housing association or consumer society, concludes an agreement on contributing a share, and makes payments specified in the charter. The actual receipt of the apartment occurs after the completion of construction by exchanging the share for a finished real estate object. This mechanism has been operating for many years and is often used for small projects.

This investment model is quite flexible, so there is an opportunity to enter the project at a lower starting price. There are convenient contribution schedules, as well as potential collective influence on the management of the cooperative through general meetings, if investors are recognized as full members.

The risk may be the lack of registration confirmation of rights to a specific apartment before construction is completed, which opens up the possibility of double sales or changes in the allocation of objects. Often, the cooperative board has excessive powers, which sometimes contradicts the law, and can change internal rules, adjust the order of contributions, redistribute share rights or even exclude members. Additional threats arise from litigation: some cooperative schemes may be recognized as quasi-financial, which creates legal uncertainty.

Proper audit of the cooperative helps the investor avoid unstable schemes. Therefore, check the cooperative’s charter (voting procedure, list of exclusive powers of the meeting, member rights), protocols for accepting new participants, the cooperative’s agreement with the developer or construction customer, the procedure for returning a share, and possible restrictions on the assignment of rights.

Investment model 4. Forward contracts and derivatives

The derivative investment model involves concluding a forward contract, which actually confirms the investor’s purchase of a security. After presenting it, the developer undertakes to conclude a purchase and sale agreement with the buyer for a special property right to a future real estate object. That is, the forward acts as an intermediate link, a kind of “superstructure” over the main model of selling rights to a future apartment. This allows the developer to structure the project in a more profitable way.

Such a mechanism is attractive primarily for developers, as it helps to optimize the tax burden. In addition, the issue of derivatives has formal regulatory supervision and makes it possible to raise funds at the early stages of construction.

The risk is the complexity of the contractual structure, the lack of a refund of funds paid for the derivative in the event of termination of the main contract. The greatest danger is the widespread practice of trading on “pocket exchanges”, which increases the risk of disputes over transactions.

When using this investment model, you should carefully check the prospectus, exchange documents, the binding of a specific lot to your derivative, the terms of its repayment and the procedure for exchanging for rights to a future apartment, restrictions on early termination.

Lawyer’s advice when choosing an investment model

Lawyers of the company “DE-JURE” have been accompanying clients in projects of varying complexity for many years. We help to choose the optimal investment model, assess all legal risks and check whether the sales scheme complies with the legislation. Our experience shows that there is no “ideal” model, but there is a correctly selected scheme. We advise before investing in a new building:

• check who actually has the right to sell the future real estate;
• give preference to models where there is a notarial fixation or the control of the manager;
• read the procedure for returning funds carefully, because this is where the greatest risks are often hidden;
• require binding to a specific object (number, section, floor).

The main thing is to avoid schemes where there is no mention of you or the object in open sources. The key security criterion is the presence of a legal trace in public registers:

• the property right or other legitimate basis must be recorded in the DRRP;
• The UDESSB displays a full package of urban planning documentation and up-to-date data on the stages of construction.

If you find it difficult to cope with the legal verification of a new building on your own, contact the company “DE-JURE”. Professional lawyers help to verify the developer, evaluate the model and accompany the transaction at all stages.