The tiny Emirate of Dubai, part of the seven-state federation called the United Arab Emirates, has seen an unprecedented boom in the last 10 years in its real estate market. What caused this increase were new laws that allow expats to own property in certain areas and developments. What almost killed him was the lack of regulation in the market.

In any booming economy, especially a relatively immature one like Dubai, there will always be cracks and loopholes in laws and government ministries. However, the loopholes in property laws were significant: prior to the introduction of RERA there was no standard sales agreement, no training was required to be a property broker, and there was no authority to oversee the property industry. Considering how important the real estate industry has been and continues to be for Dubai’s growth, regulation in this sector was paramount.

To understand why trust was deteriorating and why RERA’s impact remains so great, it is important to understand the process of buying a property in Dubai.

To sell or buy a home, the buyer and seller would sign an agreement, called a Sales Agreement, or MoU (Memorandum of Understanding). In most cases, the MoU would be written by one of the brokers and could be anywhere from 2 paragraphs to a 20 page document. There was no standard form, no standard terms, and no legal requirement for an attorney to assist or supervise the process. The brokers did not have government-required training or documentation to show that they were licensed brokers (in fact, there was no system to certify a broker). An individual could join a business on Sunday and sell on Monday without having knowledge of the market or how a real estate transaction works. This is scary considering that for most people their home is their biggest investment.

The buyer would pay a deposit to the seller, normally 5% to 10% of the property’s value, as a commitment by the buyer to purchase the property. The seller made no reciprocal commitment other than a clause in most MOUs stating that it would return the deposit, plus an additional penalty, should it withdraw from the deal. In most cases, the buyer would lose their deposit, or a substantial portion of it, if they backed out of the deal.

Once the MOU was signed, there would normally be a 4-8 week wait while financial documents and other paraphernalia were arranged. After that, both parties would go down to the developers office to affect the transfer. The buyer would pay a transfer fee to the developer, normally 2%, and in most cases an agent fee of 2% to the agent, and the property would be transferred.

It doesn’t take long to see the problems in this deal – how does a buyer get their deposit back if the seller backs out? What if an agent doesn’t know what they are doing, or “snaps away” at an unsuspecting buyer or seller? Who do you complain to or ask to investigate if something goes wrong?

The answer to all these questions was the introduction of the Real Estate Regulatory Agency, also known as RERA.

RERA was essentially created with the introduction of Dubai Ordinance No. 85 of 2006. Its role is to serve as the regulatory authority for real estate in Dubai. RERA’s mandate includes many diverse requirements, including:

– Certifying agencies, agents and developers
– Arbitration of disputes between parties
– Recommend new property laws to the government.
– Process configuration and documentation for standardized procedures related to property.
– Provide information and statistics on the Dubai real estate market to both the government and the public.
– Monitoring and authentication of real estate contracts, including rental contracts.

In short, the purpose of RERA is to professionalize the Dubai property market. So how are you doing this?

RERA has engineered several changes in the Dubai property market:

– Ensured that all companies involved in real estate were registered with the Department of Lands.
– Ensured that all developers used escrow accounts to hold clients’ money.
– I introduced the training and certification of both real estate agents and agencies. This ensures that an agent with a broker card knows Dubai property law and how to make a transfer. It also ensures that the agent knows how to use the specific RERA forms.
– Introduced standard forms for sellers (Form A), buyers (Form B) and the contract of sale (Form F). It has also introduced several other ways to handle common processes.
– It changed the way agents and agencies work. We will go into this in more detail in the next few paragraphs, as it deserves significant attention.
– Introduction of developer accreditation.
– Prevented developers from charging a transfer fee. In most cases, this was 2%, and it is now illegal for a developer to charge this; in fact, it is only legal for the Dubai Land Department to charge a transfer fee. However, it should be noted that many developers will exchange this for an “administration” fee to ensure that they can continue to charge.

The work that RERA has done to professionalize the way agents and agencies work has been considerable. To sell your property, the agent must have a Form A signed by you and must present it on the transfer, otherwise the transfer will not take place. Also, if an agent is acting on behalf of a buyer, they must have a signed Form B. Again, the transfer will not be processed if you do not show up. Form F, the purchase / sale agreement between the two parties, must also be signed and submitted at the time of transfer. Finally, the agent must have a RERA broker card; Without this, you cannot sign the RERA forms nor can you make the transfer.

Another interesting change has occurred in the area of ​​remuneration. Previously, the agent fee was generally 2%, and in a transaction involving 2 or more agents, that fee was divided among the agents. With the new RERA system, each agent works on their behalf (be it the seller or the buyer) and can charge them individually, rather than a single charge to the buyer. This is to ensure that the broker works solely for his own client (seller or buyer). The amount charged to the buyer or seller can vary, however it is generally in the 2% range for each party.

Under the RERA system, the buyer’s deposits are now also held by the real estate agency instead of the seller. This is significantly more secure than the previous system in which the seller held the deposit. However, it is still not perfect and many real estate agencies expect RERA to introduce fiduciary accounts for the agencies to use. This will again help to take confidence in the real estate market to a higher level, and many real estate agencies recognize that confidence is a key factor in keeping the Dubai market buoyant.

Finally, on the agent side of RERA’s activities, if an agent or agency mishandles a transaction or simply does something that is illegal or unethical, a complaint can be made to RERA. If the complaint is confirmed, there are several actions that RERA can take, from adding a black mark against the agent / agency’s name to canceling the agent / agency’s license, thus preventing them from doing business altogether.

It is worth noting that, at the time of writing, many of RERA’s new processes and procedures are still voluntary and not mandatory. Many of them would become mandatory on June 1, 2008; however, this date was pushed back to the end of 2008. Again, at the time or at the time of writing this document, only about 30% of agents in Dubai are RERA certified, further increasing the possibility that the mandatory use of RERA processes and procedures is further delayed, perhaps as already in 2009. In some areas, this has caused significant disruption and confusion in the market, both at the promoter / agency / agent level and buyer / seller level. However, this kind of shock is expected as RERA presents its policies and modifies them according to reality, with the end result of a professional real estate market in Dubai that overcomes short-term pain to achieve that goal.

Despite the difficulties, many forward-thinking real estate agencies in Dubai have adopted RERA’s new policies and procedures, and in some cases this is already paying off. There have been several cases of agents and agencies that have appeared before RERA due to complaints from buyers or sellers or even from other agencies. There have also been several buyers and sellers reported to RERA for breaching contracts, and the respective clients and agents receive their deposits / fines / commissions in accordance with the new regulations.

The Real Estate Regulatory Agency has proven to be a positive step for the Dubai property market. Once its rules and processes become mandatory, many of the unethical real estate agents, developers and agencies will be forced out of the market, leaving behind a professional market with a set of checks and balances that will allow real estate investors to buy in. Dubai with continued confidence. If you are going to buy or sell in Dubai, be sure to use a fully RERA certified broker to handle the transaction.

Helpful Links:
RERA.ae – Dubai Real Estate Regulatory Authority
dnrd.gov.ae/DNRD?lang=en-GB – English version website of the Dubai Department of Naturalization and Residency. You can find information on all types of visas and requirements, including investor visas, here.

(c) Copyright – Paul J. Allen. All rights reserved throughout the world.