Illegal schemes

Experts believe that despite the fact that financing market is becoming more civilized illegal schemes still remain.

Dmitry Gusev, Managing Partner at Glubina Group, says that the vast majority of such schemes – bill substitutes, preliminary sale and purchase agreements, etc. – refer to illegal developers, small half-fraudulent companies, and private developers, engaged in the development of parcel of lands, originally designated for residential construction or even country house construction.
"Sometimes instead of an apartment (or apartments) as an independent legal object the so-called “share” in the building is sold... Such schemes in most cases indicate that the developer lacks even minimum of resources required to organize the project in accordance with the Federal Law No. 214-FZ. The result, as a rule, is also evident," says Mr. Gusev.
He notes, though, that exception to this rule applies where similar tools (i.e., preliminary agreements) are contributor to a more complex structure: for example, if a developer is financed by bank project financing, having made the pledge of proprietary rights for apartments under construction (and therefore on sale) in the financing bank.
"Often, in order to sell the mortgaged apartment, a developer enters into a preliminary agreement with a buyer (agreement of participation in equity construction), according to which a buyer pays a small security deposit (5-10%), following which a developer at its own expense redeems an apartment from the pledge and draws full agreement of participation in equity construction," says Mr. Gusev.
Domus Finance expert says that in Russia the proportion of building and housing cooperatives in the total volume of the primary housing market is about 15%.
“Along with this the proportion is much lower in the capital cities. Purely theoretically buying an apartment by joining building and housing cooperative carries more risks than purchasing the real-estate unit in accordance with the Federal Law No. 214-FZ. Firstly, an agreement with a shareholder is not registered with the state. Secondly, an introduction of additional construction costs as well as an increase in the cost for the building and housing cooperative’s maintenance must be compensated by all shareholders together. Third, if a shareholder needs to sell an apartment, he/she can do so only with the permission of the Board.
In other words, purchasing an apartment by joining building and housing cooperative has the flaws that have been eliminated by the introduction of the Federal Law No. 214-FZ," Domus Finance experts say.
The have also noted that, in fact, all schemes of purchasing an apartment, except of entering into agreement of participation in equity construction, are risky (although allowed by the Federal Law No. 214-FZ) including building and housing cooperative scheme, as long as all schemes may imply “double” sales or may involve additional financial costs for a buyer and do not fix the period of housing construction.
Sales Director at O2 Development Besedina Elena says: "Transition of developers (including large ones) to the scheme of apartments implementation through building and housing cooperatives is associated with its convenience: in particular, with the possibility of getting money from customers immediately after the conclusion of the contract, rather than after its registration in Russian State Register, as it happens when the agreement of participation in equity construction is concluded. The latter circumstance, however, doesn’t burden all developers that use agreement of participation in equity construction. Some of them eliminate “the defect” of the scheme by offering shareholders to make payment immediately after the conclusion of the contract. Thus, it means using a legal loophole. Meanwhile, when developers use building and housing cooperative scheme everything is transparent."

Opinion:

Irina Onishchenko, Sales Director in Etalon Group
"In addition to sales made in accordance with the Federal Law No. 214-FZ, we also sell our apartments using the building and housing scheme. Just like many other large Russian developers we tend to move away from using the latter scheme. This is happening due to the changes in legislation (amendments to Housing Code of the Russian Federation – the Federal Law from November 30, 2011 of No. 214-FZ) taking effect on 01 January 2012. Thus, the majority of building and housing cooperatives (represented now in real estate market and used to attract funds of citizens for housing construction) are the building and housing cooperatives, established before January 1, 2012. At the moment, it is more comfortable to implement an investment and construction project through the scheme of equity construction."