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What is Escrow and How Does it Relate to Real Estate in Pakistan

Escrow Payments

Escrow is a legal terms which refers to an authorized third party which holds the payment or asset while two transacting parties fulfill their terms of agreement. Once the terms are fulfilled, both parties consent the escrow to release the payment or asset.

The concept of an escrow body is more relevant in Pakistan today than ever due to increasing risk of fraud in various types of transactions. For example, you buy a smart phone from an online store and pay for it using your credit card. When the smart phone arrives at your address, you open the box and observe that it has scratches on screen or it is damaged. The online store would not take responsibility of the damage and you end up losing your money. You could avoid that damage if any third party would be holding your payment, and would release only after your consent.

Following image shows how escrow works:

Escrow Procedure

As you can see in the image above, the procedure is explained in a very simple manner. The buyer pays to the escrow agent, which informs the supplier to ship goods to buyer. The supplier ships the goods to the buyer, the buyer confirm the delivery to Escrow agent, and escrow agent releases payment to the supplier.

Telenor Easypaisa has recently launched its escrow service in Pakistan which is being offered by a few online merchants. The escrow is responsible to protect the buyer against any potential fraud. In case of any complaint from the buyer, the escrow is authorized to resolve the dispute through its relevant body whose decision is binding on both transacting parties.

When it comes to real estate, there are numerous housing and commercial projects in Pakistan where people invested their hard-earned money but they ended up losing everything. The developers sell worthless piece of papers called “files”, and run away with all the money in their bank accounts. There are various examples of such property frauds in the real estate market of Pakistan, but their are no stringent systems in place to prevent such malpractices.

There are hundreds of illegal projects operating under the nose of development authorities but no action is taken against them except for a newspaper advertisement declaring them illegal. Therefore we suggest that the government should introduce Escrow Service for real estate transactions in order to protect buyers against property frauds.

It is a very simple and effective concept and already applicable in various countries including gulf states. Since real estate involves large and recurring payments, the government must set up a third party to protect the buyer. The civic development bodies like CDA, KDA, RDA, LDA etc may also play the role of an escrow agent, as they are directly responsible for real estate activities under their jurisdiction.

As an escrow agent, the civic bodies can either hold the property or the payment while buyer and seller fulfill their terms of agreement. For example, you buy a plot on installments in a new housing project in Islamabad. CDA takes up charge of an escrow agent, and holds that asset for you while you pay your installments. After your installments are complete, CDA gets confirmation from the housing scheme, and transfers the plot to your name. Alternatively, CDA can receive all payments from buyer, and releases to the seller only after the property is transferred to buyer.

This procedure makes a lot of sense in the real estate market of Pakistan, where property fraud is very common due to non-regularization of this affluent sector. We hope that concerned government bodies will pay attention to this issue and devise a proper mechanism of Escrow Payments to minimize the risk of property frauds in Pakistan.

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