Watch Your Back in Real Estate Deals in Moscow
Regardless of whether a buyer chooses to go for an apartment in a newly-built—and often not yet completed building—or focus on secondary-market offerings, there are always risks of striking a deal that would later be annulled by a court—with all sorts of unpleasant consequences— or having to wait years before being able to move into a brand-new property.
Of course, the safest way for a buyer would be dealing with a respectful realtor, but quite a lot of buyers prefer to conclude deals by themselves or use the services of lesser-known companies that appear to be cheaper. So, they at least have to know what potential risks are involved.
“Risks are different for the primary and secondary market,” Vasily Mitko, general director of MIAN, told PASSPORT. “If someone buys an apartment in a building that is still under construction, the main risk is that construction works could be suspended if the developer faces financial problems or performs of fraud by directing cash collected from individual co-investors elsewhere.
“To minimize this kind of risks, one has to carefully examine the developer’s reputation and collect information on its financial state,” he went on to say.
Over the last few years, a lot of public attention has been drawn in Russia to the issue of obmanutye dolshchiki – “deceived co-investors.” Those are private individuals who invested in apartments in buildings that were not yet constructed at the time and were never completed.
Sometimes, people did eventually move into their new homes, but had to wait for that moment for years as opposed to in a year or two, which developers luring individual co-investors normally promise.
Deceived co-investors have staged mass rallies and addressed the country’s top authorities, but tens of thousands of people all over the country are still waiting to get what their paid for, while construction sites of the buildings they invested in are standing idle.
The main incentive for paying for apartments that don’t yet exist is trying to save money: developers often sell apartments in not-yet-built buildings much cheaper than such an apartment would cost in the secondary market. But the desire to save often leads to problems.
Still, buying an apartment in the secondary market is by no means safe. Even though the property that a buyer is looking at physically exists and could be visited, there are several swindling scenarios that potential buyers should be aware of.
In the secondary market, according to Mitko, the biggest risk is the cancellation of the deal by a court decision, for instance, because of violation of third party rights that the buyer was not aware of at the time of the deal. “In that case, checking the ‘legal cleanness’ [of a property], would require not only the knowledge of the real estate part of the Russian law, but also substantial practical experience in conducting [real estate] deals,” he observed.
One popular trick is based on the fact that there are many reasons for a property deal to be pronounced void by a court. There is nothing bad about it at first sight, but what if the sum a buyer actually paid for an apartment is much higher than what the contract states?
“If a court upholds [the seller’s lawsuit demanding that the deal should be annulled], the sum stated on the contract is to be returned [to the seller],” Alexander Ziminsky, director of the elite property sales department at Penny Lane Realty, told PASSPORT. “If the sum on the contract is lower, the buyer will lose the difference between it and what they actually paid.”
Why would a buyer agree to a smaller sum on a contract? Sometimes, a seller would profit from a smaller declared price by paying a lower tax and would try to persuade the buyer to put a smaller amount on the contract. That would not necessarily hint at a dubious play but the buyer should be alerted by such a request.
Another popular swindle is probably as old as the real estate market, but some people still fall for it. It is selling a property to several buyers at the same time. “The best way to defend yourself against this kind of scheme is to ensure that the [buyer’s] money will stay in a safe deposit box at a bank until a property rights registration [for the apartment] is issued,” Ziminsky recommended.
“A situation when a sale contract is signed by someone acting on the buyer’s behalf rather than buyer himself, is not uncommon,” Ziminsky went on to say. “Once it is done, several options are possible. For instance, the owner could claim that he did not entrust anyone to act on his behalf, or at the time of the deal the power of attorney was already void. In that case, if all the payments have been already made, chances are that the buyer will lose the property by a court decision and will have to wait for years while the police are looking for the swindlers.
“If someone is acting on the owner’s behalf based on a power of attorney, a potential buyer has to make sure that the document is legitimate,” Mitko suggested. “To that end, they have to check the date of issue, list of powers and registry number with the notary. Also, it is necessary to make sure that the document has not been recalled.”
There are several steps a potential buyer could take to lower the risk of being conned, according to Ziminsky. First, documents stating the seller’s property rights should be carefully examined—such as a sale contract, a will or a court’s decision.
Second, the seller should be requested to provide a certificate from the United State Registry of Property Rights that would state a complete history of transactions involving the property in question. Third, the identity of the seller and the authenticity of their passport should be checked, and the seller should provide a certificate proving that they don’t have a history of mental health problems or substance abuse, which could be a ground for questioning the deal in court later.
“One should also be very careful when buying a property that was inherited by the seller,” Mitko added. “To examine the ‘cleanness’ of such an apartment, one has to collect reliable information on other potential heirs to the previous owner.”
Even if an apartment was legitimately inherited by someone, there could have been other heirs who didn’t show up earlier, and if the apartment is sold by the time they show up, they could make the new owner’s life quite miserable by claiming their rights to the apartment.
Another important step would be checking the history of residents in the apartment in question. Although this may sound strange to a Westerner, the Soviet-time relic of propiska —a person’s permanent registration at a certain address—still exists in Russia, which means a person could claim the right for residency in a certain property even though they have nothing to do with the property’s ownership.
The most bizarre cases of this kind, according to realtors, could happen, for instance, if someone registered in an apartment was sentenced to a prison sentence, and the apartment was later sold to someone who didn’t care checking the resident’s history. Once the former resident is released from prison, they can claim back their registration in the apartment and, therefore, the right to permanently reside there, even though the property have changed hands once or several times. Normally, in such a case, the new owner would have to pay to the unexpected house mate, and the payoff could be substantial.