The Arab world, once characterized by unrest and instability, with laws that severely limited foreign ownership, was an unpopular place for foreign investment in the real estate sector prior to 2002. However, in 2002, when the Freehold Decree was introduced as formal legislature permitting foreign nationals to buy, sell, lease or rent property, the Middle East and Dubai in particular, became an immensely popular destination for real estate investments. Today, with the soaring cost of rentals and a healthy property market that continues to grow, buying property is becoming an increasingly viable and attractive option for expats living in Dubai.
The purchasing process in Dubai is fairly simple compared to many other countries in the world; this can be both an advantage as well as a hindrance to purchasers. While the purchasing process is fairly straight forward in some cases (when you buy on the secondary market from a seller who has no loan on the property), the relative immaturity of the legal system in Dubai makes it even more imperative that buyers exercise caution when undertaking such a major monetary transaction. It always pays to understand the purchasing process and to minimize any risks associated with what is usually the largest money-related transaction that most people will ever undertake. Below are 10 essential tips for buying property in Dubai.
1) Understand the purchasing process in Dubai
In Dubai, property can be purchased either ‘off-plan’ from a developer or ‘resale’ from a private seller. When purchasing off-plan, expats will need to submit their passport, along with a reservation form that outlines the terms and conditions of the deal. A reservation fee, of between 5 to 15% is then paid to draw up the Sales and Purchase Agreement (SPA), that commits both parties to the deal. For properties that are still under construction, ensure that the agreement includes a completion date and outlines any compensation to be paid if there is a delay in completion by the stipulated time period. When purchasing resale property from a private seller, a Memorandum of Understanding (MoU) outlines the terms and conditions of the deal, after which the buyer usually puts down a 10% deposit of the property price to confirm his purchase of the property, pending approved financing. Once financing is obtained, the transfer of deeds can take place.
2) Consider why you want to purchase property
Deciding on whether to purchase a property for investment purposes or to buy property that you intend to occupy yourself can have a huge impact on the type of property purchased. If the primary purpose of purchasing property is for investment, most expats will be likely to rent out such a property. It is then important to look at the property market and study the types of properties that have the highest rental yield. Investing in a one or two bedroom apartment would be a more sound investment decision than indulging in a villa purchase, as the former have better rental yields than the latter, even though the latter may seem more luxurious to own.
3) The importance of due diligence
Whether buying off-plan or resale properties, it is important for buyers to ask plenty of questions to determine the reputation of either the developer or the real estate agent. If buying from a developer, you will want to look at the developer’s reputation particularly with respect to quality as well as being able to deliver on time. In most cases when buying from a developer, the unit you purchase is not even ready, so it becomes doubly important for potential buyers to visit show homes to get an idea of what they can expect. If you intend to purchase through a real estate agent, find one that is registered with the Dubai Land Department.
4) Have the property surveyed
If you are looking to purchase an existing property from a private seller on the secondary market, it would be prudent to hire the services of a registered, professional surveying company. Up-keep of a property is the responsibility of the owner; surveyors can assess the property in question by doing a thorough check of the premises and can alert potential buyers to the risk of any future high-maintenance costs particularly for properties such as villas which may sometimes remain unoccupied for several months. Once you take possession of the property, its maintenance then becomes your responsibility so, as a buyer, you want to make sure you don’t inherit any major problems down the line.
5) Seek specialist advice
It is highly recommended that potential buyers seek professional legal advice to help them with the purchasing process, although it is not mandatory by law to do so. However, it is sound advice as doing so can underline any potential future risks. Enlist the services of a Dubai Land Department registered Conveying company, many of which have their in-house property lawyers and Escrow facilities to ensure that the entire process is transparent and safe for both the buyer and the seller.
6) ‘Opt-out’ clause
If you intend to purchase a property with a mortgage, it is essential to request that an opt-out clause be included in the sale agreement or Memorandum of Understanding (MoU). This clause essentially indemnifies the purchaser against the loss of the deposit money put down to secure a property, in the event that the bank evaluation for the property comes out to be lower than expected, resulting in the buyer having to put a larger down payment on the property. Without the opt-out clause, a buyer in this situation, who cannot come up with the larger down payment and opts not to go forward with the deal, would lose the deposit money. This is often 10% of the cost of the property and can result in the buyer being out-of-pocket on a large amount of money through no fault of his. Opt-out clauses should be specifically worded with the anticipated valuation amount so that there is no dispute later on.
7) Check liability on a property
When purchasing a property, ensure that you will be receiving a title that is free from any liabilities or debt. It is the seller’s responsibility to obtain an N.O.C. (no objection certificate) from the developer’s office. Developers will usually do several checks on the property to ensure that it is free from any liability and will then issue the N.O.C. confirming that the said property is ready to be transferred at the Dubai Land Department.
8) Obtain ‘pre-approval’ from your bank before proceeding with any deal
Before you decide to purchase a property, make sure that you are pre-approved by your lending institution. This means that in principle, you have the funds to go through with a transaction. This can save many wasted hours for both the buyer as well as the real estate agents, who may spend time and effort on finding an appropriate property only to find out that the potential buyer does not have the finances to go through with the deal.
9) Additional costs
In addition to the purchase price of a property, keep in mind that there may be several other fees and costs associated with a property purchase transaction. In addition to legal fees, there will be developer fees or fees to be paid to your real estate agent. Additionally, land registration and maintenance fees may also apply. If buying a property ‘off-plan’, expats can expect to pay about 2% on land registration fees. Maintenance fees, which cover the upkeep of gardens and other shared facilities may be a fixed rate or may vary based on the size of the property. This could add up to a fairly large amount, therefore it is important to factor this into any financial plan for purchase of the intended property.
10) Read and understand the contract carefully
In Dubai, property purchases are accompanied by legal documents that may be a Memorandum of Understanding (MoU) or a Sale and Purchase Agreement (SPA) between buyer and seller. These documents outline all the terms and conditions as well as define the buyer’s and seller’s responsibility in completing transfer of the property from the seller to the buyer. Make sure you understand your responsibilities as a buyer as outlined in the agreement; do not sign unless you are sure you understand and agree to all the terms and conditions.