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Buying property in the UAE: scams and pitfalls

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risks pitfalls buying real estate The United Arab Emirates

Everything you need to know is included in our The United Arab Emirates Property Pack

The United Arab Emirates remains a top choice for foreign real estate investment, offering a thriving business environment and diverse property options.

But it's worth noting that navigating the property market here can be a bit of a complex journey, especially for those who aren't local residents. There are plenty of potential hurdles and hidden pitfalls along the way that could easily catch you off guard if you're not careful.

Our community of property buyers and local collaborators have communicated several issues to us. We've listed them all in our United Arab Emirates Property Pack.

This article provides a brief overview of potential pitfalls that may arise during the property buying process in this country.

Is it safe or risky to invest in real estate in the United Arab Emirates?

While it is generally safe to buy property in the UAE, there have been instances of scams, particularly in off-plan property sales.

A notable example is the case of the cancelled "Palm Jebel Ali" project in Dubai, where numerous investors lost their money as the development was indefinitely postponed. This highlights the importance of verifying the credibility of developers and thoroughly understanding the legal mechanisms governing off-plan purchases.

One significant pitfall in the UAE's property market is the reliance on post-dated checks as a common method of payment in property transactions. This practice, while widely accepted, can lead to financial risks for buyers if they are not cautious.

For instance, if a buyer issues post-dated checks as part of the payment plan and the developer fails to deliver the property as promised, it can be challenging to stop these checks from being cashed, potentially resulting in financial losses.

Foreigners in the UAE may also face issues related to cultural nuances and local customs.

For example, while the legal framework may be clear, the concept of "wasta," which involves the use of personal connections to facilitate transactions, can create an uneven playing field. Some buyers, especially foreigners, may find it challenging to navigate this aspect of the market without local insights.

The transparency of the property buying process in the UAE has improved over the years, thanks to regulatory reforms. However, specific emirates or developers may still lack full transparency. For instance, in the past, off-plan projects were sometimes sold without clear details on the project's timeline or the use of investors' funds.

While regulatory changes have addressed many of these issues, it's essential for buyers to scrutinize contracts and ensure they have a complete understanding of the terms.

Resolving property disputes in the UAE can be efficient, thanks to dedicated real estate dispute resolution mechanisms.

In Dubai, the establishment of the Dubai Property Court has expedited the process of resolving disputes. However, one challenge that foreigners may encounter is the potential language barrier when navigating the legal system.

While English is widely used in legal documents, a comprehensive understanding of Arabic can be advantageous in certain situations.

Due diligence for foreign buyers in the UAE should include a thorough examination of the property's history, including any outstanding debts or issues.

One unique consideration is the potential presence of "hidden debts," where developers may have unpaid service charges or utility bills tied to the property. Failing to uncover these hidden debts can lead to unexpected financial burdens for new property owners.

The UAE government has taken proactive steps to support and regulate the real estate market, introducing measures like escrow accounts and mandatory registration of property sales contracts.

For example, the introduction of escrow accounts for off-plan projects has significantly enhanced the protection of buyers' funds by ensuring that developers only access payments upon project milestones.

Challenges reported by foreigners who have purchased property in the UAE often revolve around property management and service charges. In some cases, buyers have experienced disputes with property management companies regarding the quality of services provided or the transparency of fee structures.

Clear communication and understanding of these ongoing costs are vital to avoid such issues.

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Potential real estate buying mistakes in the United Arab Emirates

The concept of "Oqood"

One specific pitfall you might encounter when buying residential property in the United Arab Emirates (UAE) is overlooking the significance of the "Oqood" system, particularly if you're investing in off-plan properties.

The Oqood system is unique to the UAE and particularly vital in Dubai's real estate sector.

The Oqood (which means 'contract' in Arabic) is essentially a registration system for off-plan property transactions. When you buy an off-plan property, which is a property under construction or yet to be built, it's mandatory to register this transaction with the Dubai Land Department through the Oqood system.

This registration secures your rights as a buyer and officially records the transaction.

A common mistake is not understanding the implications of the Oqood registration. You should promptly ensure that your developer registers your property purchase in the Oqood system.

Failing to do so can lead to complications. If the property is not registered, you may face legal challenges in asserting your ownership rights, especially if disputes arise with the developer.

Moreover, the Oqood registration involves fees that you need to be aware of.

These fees are typically a percentage of the property value, and not accounting for them can affect your budgeting.

The risks related to "freehold" and "leasehold" areas

Another unique and often overlooked aspect when buying residential property in the United Arab Emirates, particularly for foreigners, is the understanding of "freehold" and "leasehold" areas, especially in cities like Dubai and Abu Dhabi.

In the UAE, certain areas are designated as "freehold," where foreigners are allowed to own property outright.

However, in "leasehold" areas, property ownership by foreigners is typically restricted to leasehold agreements, which can last up to 99 years but do not confer actual ownership of the land. You must know whether the property you're interested in is in a freehold or leasehold area.

A common mistake is assuming that property ownership rules are uniform across the UAE. This misconception can lead to purchasing a property in a leasehold area with the belief that it's a freehold, affecting your long-term investment plans.

For instance, in Dubai, popular expat areas like Dubai Marina and Jumeirah Lake Towers are freehold, whereas other areas might be leasehold.

You should thoroughly research and confirm the status of the area where you intend to buy property. This involves consulting with real estate experts or legal professionals who are well-versed in UAE property laws.

Failing to do so can lead to unexpected limitations on your property rights, which could affect resale value or property inheritance.

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The risk related to the Sharia law

A specific and less known issue that you might face when buying residential property in the United Arab Emirates is related to the cultural and legal implications of the Sharia Law in the event of the property owner's death.

This is particularly relevant if you, as a foreigner, are not familiar with the local Islamic laws and practices.

In the UAE, Sharia Law plays a significant role in inheritance matters.

If you own property in the UAE and pass away without a valid will in place that complies with UAE law, the distribution of your assets, including your property, will be subject to Sharia Law. This can have significant implications, especially for non-Muslim foreigners.

Under Sharia Law, inheritance is distributed among family members in fixed shares, which might be different from what you would expect under your home country's laws.

A common mistake is not preparing a will that aligns with UAE laws or assuming that your home country's will is automatically enforceable in the UAE.

You should consult with a legal expert in the UAE to draft a will that ensures your assets are distributed according to your wishes and in compliance with local laws.

Failing to address this issue can lead to complicated legal scenarios for your heirs, who might find the distribution of your assets, including the property in the UAE, significantly different from your intentions.

This can be particularly challenging in cases where the family structure or inheritance expectations differ from the norms prescribed by Sharia Law.

The caution about "chiller charges"

A highly specific and often overlooked pitfall when buying residential property in the United Arab Emirates, particularly for foreigners, is the complexity surrounding "chiller charges" in some developments, especially in Dubai.

Chiller charges refer to the fees associated with the centralized cooling systems or district cooling services provided in many apartment complexes and residential areas.

In the UAE's hot climate, air conditioning is not just a comfort but a necessity, and many properties are served by these centralized cooling systems.

The issue arises because chiller charges can be a significant and sometimes unexpected expense.

Some property listings might not clearly state whether chiller charges are included in the service fees or if they are additional. This can lead to buyers underestimating their monthly or annual living costs.

You should specifically ask about chiller charges when considering a property. Find out whether these charges are included in the service fees or if they are billed separately.

In some cases, these charges are based on consumption, while in others, they could be a fixed cost. This can make a substantial difference in your ongoing expenses.

This aspect is particularly unique to the real estate market in the UAE due to the reliance on centralized cooling systems in response to the region's climate.

As a foreigner, you might not be aware of the concept of chiller charges, as it is not common in many other countries.

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“Escrow Accounts" and its risks

A highly specific and often overlooked issue in buying residential property in the United Arab Emirates, particularly in Dubai, is the regulation and management of "Escrow Accounts" in off-plan property purchases.

An Escrow Account is a financial arrangement where funds are held by a third party (the Escrow Agent) on behalf of the transacting parties. In the context of the UAE, particularly Dubai, the Real Estate Regulatory Agency (RERA) mandates the use of Escrow Accounts for all off-plan property sales.

This regulation is meant to protect buyers and ensure that developers use the funds specifically for the construction of the project.

A common mistake is not understanding the role and implications of these Escrow Accounts.

As a buyer, you should verify that the developer has an Escrow Account for the project and that your payments are deposited into this account. This ensures that your funds are protected and used solely for the intended construction.

Failing to ensure that your payments are made into a properly regulated Escrow Account can lead to significant risks.

There have been instances where developers mismanage funds or projects get delayed indefinitely, impacting buyers who have not secured their investment through an Escrow Account.

This aspect is specific to the UAE's real estate market, particularly post the introduction of stricter regulations by RERA in Dubai. As a foreign investor or buyer, it's crucial to understand the role of these Escrow Accounts and ensure compliance to protect your investment.

The developer's reputation and track record risk in UAE

In the United Arab Emirates, particularly in Dubai and Abu Dhabi, a specific pitfall often overlooked by foreigners when buying residential property is related to the nuances of "Developer Reputation and Track Record."

In the UAE's fast-growing real estate market, numerous developers range from well-established companies with a strong track record to new entrants. The mistake often made by foreign buyers is not thoroughly researching the developer's background, financial health, and history of project completion.

This research is crucial because the real estate market in the UAE has seen instances of developers delaying projects, halting construction, or even going bankrupt, which can significantly impact your investment.

You should conduct in-depth research into the developer's past projects, their completion rates, and the overall quality of their work. This can include visiting completed projects, talking to current residents, and reading through reports or reviews about the developer's performance.

Additionally, understanding the financial stability of the developer is critical, as it can affect their ability to complete ongoing projects.

This aspect of due diligence is particularly specific to the UAE real estate market, where rapid development and high competition among developers can lead to variability in reliability and quality.

Foreign buyers, who may not be familiar with the local market dynamics and developer reputations, are particularly at risk of overlooking this factor.

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The concept of the "Ejari" risk

A highly specific pitfall for foreign property buyers in the United Arab Emirates (UAE), particularly in Dubai, involves the regulation and status of "Ejari".

Ejari, which means 'my rent' in Arabic, is a system implemented by the Real Estate Regulatory Agency (RERA) in Dubai for the registration of rental contracts.

The pitfall is not directly related to the purchase of property but to the subsequent leasing of it. As a foreign property owner, if you plan to rent out your property, you are required to register the rental agreement with Ejari.

This registration is mandatory and ensures that the rental contract is legally recognized, which is crucial for enforcing terms and resolving disputes.

The mistake many foreign landlords make is either being unaware of the Ejari system or failing to register their rental contracts with it. This oversight can lead to various legal and administrative complications. Without an Ejari-registered contract, it's challenging to legally enforce the terms of the rental agreement.

Moreover, tenants may face difficulties in accessing services like getting a residential visa, as an Ejari certificate is often required for these processes.

This issue is specific to Dubai and can be particularly perplexing for foreign landlords not familiar with local real estate regulations.

The frequency of this mistake has decreased with better awareness and stricter enforcement by authorities, but it remains a potential pitfall.

The potential risk of the "RERA Rental Increase Calculator"

A highly specific pitfall that foreign buyers might encounter when purchasing residential property in the United Arab Emirates (UAE) is related to the "RERA Rental Increase Calculator" in Dubai, particularly for those considering investment properties.

RERA, or the Real Estate Regulatory Agency, has a rental increase calculator that dictates how much landlords can increase rent each year in Dubai. This tool is designed to regulate rental increases and protect tenants from arbitrary or excessive hikes in rent.

However, many foreign investors are not aware of or misunderstand the implications of this calculator.

The mistake lies in assuming rental income will steadily increase at a desired rate year-on-year. As a foreign investor, you might purchase a property with the expectation of significant rental yield growth. However, the RERA rental increase calculator may limit this growth, as it is based on a set formula considering the average rent of similar properties in the same area.

This could potentially lead to lower-than-expected returns on your investment.

This issue is quite specific to Dubai and not widely known among foreign buyers, especially those new to the UAE property market.

While it does not affect every property transaction, it is particularly relevant if you are purchasing with the intent of generating rental income.

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The "Tanazul" clause risk

Another specific pitfall in the United Arab Emirates property market, particularly for foreign buyers, relates to the "Tanazul" clause in property transactions.

This is a unique aspect of the UAE's real estate practices, often encountered in Abu Dhabi.

Tanazul, which translates to 'waiver' in Arabic, is a legal clause that can be included in property sale agreements. Essentially, it implies that the buyer waives certain rights, which can include the right to legal recourse in case of disputes with the developer or seller.

In the context of Abu Dhabi's real estate market, this clause can be particularly impactful.

Foreign buyers often overlook or misunderstand the implications of the Tanazul clause. Signing a contract with a Tanazul clause might seem innocuous, but it can significantly limit your legal options if something goes wrong, such as construction delays, quality issues, or discrepancies in the final property delivered versus what was promised.

This mistake is not overly common, but when it does occur, the repercussions can be severe, potentially leaving you without legal recourse against the developer or seller.

The issue is specific to the UAE due to the particular legal frameworks and contract practices in place.

To avoid this pitfall, you should carefully review all contractual documents and seek the assistance of a legal professional, preferably one well-versed in UAE property law, before finalizing any property transaction.

The related risks of the "Unit Handover Process"

Another specific pitfall for foreign buyers in the United Arab Emirates (UAE), particularly in Dubai, is related to the regulation and implications of the "Unit Handover Process" in off-plan property purchases.

The Unit Handover Process is the final step in acquiring an off-plan property, where the developer hands over the unit to the buyer after construction is completed.

This process involves a series of inspections and documentation to ensure that the property is built to the agreed specifications and standards.

The pitfall lies in the foreign buyer's potential lack of familiarity with the detailed requirements and procedures of this process in Dubai. Some buyers assume that the handover is simply a formality and do not conduct thorough inspections or push for the rectification of issues before taking possession.

This can lead to problems such as finding construction defects, discrepancies in fittings and finishes, or amenities not being as per the agreed specifications.

Addressing these issues post-handover can be challenging and sometimes involves legal disputes.

The frequency of this issue is not high due to increasing awareness and the developer's adherence to regulations, but when it occurs, it can be a significant headache for the buyer.

The issue is particularly relevant in Dubai's rapidly evolving real estate market, where many properties are sold off-plan.

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buying property foreigner The United Arab Emirates