'Buyer Beware' Applies but a Policy May Help

ST. PETERSBURG -- Until recently, risks taken on the real-estate market have gone largely uninsured. Now the situation is changing radically and recent months have seen growth in the number of local insurance companies offering products aimed specifically at those venturing out into the real estate market.

Different risks apply to different parts of the market. For new apartments in new housing blocks, often sold prior to completion of the building, there is a danger that the developer or the construction firm may go bankrupt. Needless to say, there's also a danger that either or both may simply skip town, having collected enough deposits.

For some, the temptations of a quick buck have proved overwhelming, with typical scams involving one apartment being sold to a multitude of buyers, the development firm simply vanishing or firms put back deadlines for the completion of buildings in order to get buyers to make additional payments.

Risks in the secondary market, on the other hand, are generated by mistakes made by real-estate agents or by the behavior of the apartment's former inhabitants. Russian law stipulates that the rights of children registered in apartments and absentees (whether they are in the hospital or in prison) have precedence over the rights of those registered and living at the abode. Legal cases arise when former inhabitants claim a right to an apartment, with purchasers running the risk of losing both their new apartment and the money that they paid for it. For example, according to the St. Petersburg Real Estate Association, one out of every 200 sales of an apartment is contested, while one out of every 500 contracts is eventually broken on some legal grounds.

Now, apartment buyers are protecting themselves by purchasing policies that would cover them for three, five or 10 years. In the event of a court ruling that the contract could be broken, the buyer would either receive financial compensation or a new apartment.

A number of insurance companies have launched programs aimed at the real estate market, though many are limited to coverage of deals concluded with specific construction companies.

"In 2000, our company, in cooperation with Pomoshch Insurance, began insuring private investors in buildings being built by the Rosstro construction company, and now, we'll insure investors in almost every construction company in St. Petersburg," said Valentin Loginov, general director of First Title Insurance. The policy costs 1.5 percent to 3 percent of the total cost of the apartment. "We're now also holding talks with the Military Insurance Company and Spasskiye Vorota on the organization of a joint real estate-insurance program."

Spasskiye Vorota runs a similar program with the Severny Gorod construction company. Tatyana Gitina, head of Severny Gorod's property-insurance department, said investors would have their money returned if a building is not completed for a variety of reasons, such as bankruptcy or the financing for the project breaking down, if the apartment is not given to the investor on completion, if the investor's property rights are not registered or if the apartment being constructed has been sold more than once. The insurance policy costs 3.5 percent of the total cost of the apartment.