MOSCOW — Elena Kotova’s one-room apartment on the outskirts of Moscow had started to feel cramped. Her son was almost 4 years old. She and her husband had solid jobs, she as an economist and he as a manager of a construction company. It was time to buy a new home.
“We just need the space,’’ she said. They found a two-bedroom apartment and secured a mortgage as well as a buyer for their former home. As closing day approached, the couple had one task to complete. Each would need a certificate of sanity from a psychologist.
“They will look at our psychological state,’’ she explained. “If everything is normal, they will give us the document.’’
Kotova, and tens of thousands of other Russians who are required to produce such a document to sell property, have no history of mental illness. The certificate, which must be signed and stamped by a doctor, is a legal defense against a pervasive problem in Moscow real estate deals: rampant fraud and weak courts.
This is the state of a real estate market plagued by “black realtors,’’ unscrupulous sales agents who use a variety of ploys to separate Muscovites from their money or property in the largest city in Europe. Russian media coined the phrase and described the agents as akin to criminals working a real estate black market, in a city where $29 billion in residential property is sold every year.
In one common scheme, agents collude with property owners to sell homes and then race to petition judges that the sale should be invalidated because the seller was temporarily insane. Buyers lose their cash, sellers keep the homes, and sales agents — and judges who may be in on the scheme — pocket millions of rubles. Buyers may sue to reclaim their money, but the asset that may be the most lucrative for recompense is the apartment, and that is out of reach. Laws routinely protect homeowners in these kind of disputes.
This fraud is prevalent enough that nearly all of the about 140,000 transactions annually in Moscow have required sellers to show certificates of sanity in recent years, real estate agents say.
Most fraud involves buildings that are still under construction, where builders offer discounts for prepurchases but often steal the money and declare bankruptcy. The Ministry of Construction reported in August that it had 34,085 open complaints from such transactions.
If home buying is stressful in most major cities, residents of Moscow, a city of leafy historical neighborhoods and expanses of concrete apartment blocks on the outskirts, grapple with a dizzying range of potential missteps. Legal uncertainties abound. Russians who may want to move for job opportunities hesitate because of the difficulties in buying and selling homes. Banks struggle to estimate the risk in a market with weak property rights. The International Monetary Fund, for example, has cited improper risk assessment of mortgages as a threat to the banking system.
Sanctions are roundly blamed in the media for Russia’s economic woes, but economists point to corruption and bureaucracy — with demand for sanity certificates for what should be routine home sales one example — as a notable drag. “The price of oil and sanctions are not the main reasons for lack of growth,’’ Yevgeny Gontmakher, a professor at the Higher School of Economics, said. “For economic growth, we need to reform the courts, the state companies, and regulatory agencies.’’
This fall, one group of real estate agents, as all agents do, followed a cardinal rule of the property market: location, location, location. They were looking for a quiet spot with few neighbors and good waterfront access — to dispose of the bodies of customers who had gotten in the way of their making, well, a killing in the market.
Over a span of five years ending this August, the group killed nine customers and dumped some bodies in a picturesque lake in the woods outside Moscow, Russian police said in a statement.
The murderous sales agents found older or alcoholic customers who wanted to sell their apartments and move to small towns in the Tver region north of Moscow, where real estate is less expensive. The sellers planned to pocket the profit from their Moscow homes and live in communities described as quiet retreats.
After the Moscow apartments sold, the agents deposited the proceeds in a type of escrow account they controlled. They then invited the customers on house-hunting trips near the lake, an old rock quarry.
The gang drowned customers in the lake or smothered them with plastic bags while driving around the countryside, to prevent them from complaining to police that there were no new homes for sale in the small towns.
“I waited about 10 minutes, and if there were no signs of life, I left,’’ the ringleader, Roman Shugaibev, who was a licensed real estate agent, said in a videotaped confession released by the police that explained how he drowned his clients. There are people who lived to tell of harrowing Moscow real estate transactions. Last year, state television reported that a gang of brokers kidnapped about 30 Moscow apartment sellers over eight years and then kept their properties. The former owners, mostly alcoholic single men, were put to work as slave laborers on a remote farm.
While sellers are indeed often cheated, Russian courts, in a holdover from Soviet practices that guaranteed housing to all citizens, tend to rule in their favor if they survive to make their cases before a judge. A seller can claim fraud and that the deal wrongly left them homeless.
To unwind a sale, it is often enough for sellers to argue they were drunk or temporarily insane at the time of signing.
These rulings are seen as a bulwark against homelessness but have spawned another vast enterprise of fraud. So, reputable real estate agents require a certificate of sanity and sometimes a nurse at a closing to take a breath sample to detect alcohol.
Kotova and her husband were asked to obtain the certificates before trading their one-bedroom apartment for a two-bedroom home — although both work full time, and neither shows visible signs of mental disturbance.
Sellers turn up at hospitals, including Moscow’s Psychiatric Clinical Hospital No. 1, in the Clear Ponds neighborhood, home to some of the city’s most expensive real estate. Psychologists escort those who are planning real estate deals down a corridor to an examination room. The test lasts about 20 minutes.
Antonina Parivova, a psychologist, said the test does not yield a medical diagnosis, but gauges whether a person is thinking rationally or has suffered brain damage.
“Tell me three things you appreciate about yourself, and three things you dislike about yourself,’’ she asks as part of the exam. Applicants must perform simple tasks like drawing a clock with its hands indicating a certain time. They answer questions of logic, such as what a chair and a table have in common. (An acceptable answer: Both are furniture.)
Doctors do not, Parivova said, assess whether the person is crazy for wanting to get into Moscow’s apartment market in the first place.
A negative assessment results in a document saying the “real estate trade is contraindicated,’’ Parivova said.
“This is self-defense,’’ said Mikhail Pak, a real estate agent working with Metrium, a Moscow realty company. “In Russia, fraud happens.’’