Purchasing a new apartment from a contractor

10 Jun

When a foreign resident purchases an investment property in Israel, there are certain factors to take into consideration that may differ from those of local Israeli residents.

One important factor is that many real estate investors purchase the property “on paper” and without physical access to the area.

The long-distance purchase can be practicable when there is a relative or representative in Israel who may assist with the physical impression. Otherwise, it is advisable to get as much information as you can from the contractor or its representatives, if possible, in writing or via e-mail.

For instance, those are some questions to consider before deciding to purchase the investment property:

The neighborhood – ask a relative, a friend or consult with a real estate agent or a real estate lawyer – how is the area? How easy it is to get tenants in this area? How much approximately is the rent for an apartment in this area?

City plans – the city plans are accessible to the general public in the Engineering Department of each municipality. If there are open grounds in the area, it may be interesting to know if there is an existing plan to build on it in the future and what are the zoning definitions for those lands. Some contractors may provide you with this information as well.

Exposures – to which directions will the apartment and/or building be exposed?

Attached rights – the rights in the apartment include certain attachments. It includes a relative portion of the common property, and it may include other attachments such as parking, roof, garden and storeroom. Clarify those issues with the contractor company in the negotiation stage.

Construction permit – get information from the contractor about the construction permit from the city council or other municipality.

Municipal services – are there schools or universities in the area? What other services are nearby (health services, culture centers, mall, transportation, etc.).

Municipal costs – how much are the city taxes in the area (in Israel it is known as “Arnona“). An important note for investors is that in Israel it is common that the tenant pays the property costs, including municipal taxes.

Mortgage – foreign residents may apply for a loan in Israel. They are usually required to provide the bank with financial documents from their country. The approximate loan is generally up to 70% of the property. It is important to check with your local accountant the possibility of deduction of the mortgage in Israel from your overall income.

The contractor company – you may ask the contractor to provide you with their license and with details about past experience and reputation, such as pictures of other projects they were involved with.

Legal representation

When you have decided to purchase the property, the next stage is to employ an Israeli lawyer to represent you in the purchasing procedures. It is important to understand two important factors with regards to the legal representation in this matter:

One, the contractor’s lawyers do not represent the purchaser and are legally prevented from providing such representation. However, it is common that the purchaser is required to pay legal fees for the contractor’s lawyer (usually 1 – 1.5% of the property price). This custom is rooted in the agreement between the contractor and its lawyers and it merely covers the procedure of registering the rights on your name at the end of the deal.

Second, when you employ a lawyer to represent you in the deal with the contractor and its lawyers, it is important to understand, that the lawyers in Israel have vast responsibilities. They practically function like an escrow: they are responsible to receive and examine the real estate documents; to retrieve further documents from the seller or the authorities; to ensure that the seller has the right to sell the property. Moreover, the lawyers draft the real estate contract and negotiate its stipulations.
After both sides agree upon the terms and conditions of the contract, your lawyers will usually attend the signing meeting with the contractor’s lawyers or otherwise, will instruct you prior to the final signing stage.

Real estate rights

Your lawyers are responsible to examine the real estate rights. They will also check if there are liens or other obstacles that can prevent transfer of ownership and registration of the property under your name.

Sometimes there is a “combination deal” between the contractor and the owner of the land. In those cases it is important to make sure that the buyer’s rights are protected and that the owner of the land is obligated by it as well.

The real estate rights will be registered on the purchaser’s name in the “Tabo” or “Minhal” usually after the purchaser received possession, and sometimes it involves a long procedure. The purchaser may try to stipulate in the contract a certain time limit during which the registration must occur.

Sureties and securities

The law that governs real estate transactions with contractors – the Sales Law (Securities for Investment of Apartment Purchasers) (hereafter: “the sales law”) – explicitly specifies the ways to ensure the purchaser’s rights.
The contractor is obligated by law to grant one of several legal securities.
One of the strong and common securities is the bank note, knows as “the sales law security”. It is very important to make sure that your lawyer examines the security notes granted by the contractor or its lawyers. It is also recommended to ensure that the security note is valid and that it is issued by the bank for the correct amount.

Your lawyer may negotiate the securities granted by the contractor, to make sure your investment is strongly protected in case the contractor is unable to transfer the rights in the apartment due to liens, receiving orders or winding up orders.

Section 2 of the sales law stipulates that the seller shall not receive from the purchaser an amount greater than 15% of the apartment price, unless he provided one of the following securities:

1. A bank note security to ensure every payment;

2. Insurance for all received payments, while the purchaser is a beneficiary by the policy and insurance fees are paid in advance;

3. Mortgage on the apartment or a relative portion of the land on which it is built as a first mortgage for the benefit of the purchaser or a trust fund company approved by the Israeli housing minister;

4. Warning note – a warning note on the apartment or a relative portion of the land on which it is built, on condition that there is no mortgage, lien , confiscation or any third party’s right that can prevail this note;

5. Ownership – transfer of ownership or other rights of the apartment or a relative portion of the land on the purchaser’s name.

The security will be returned to the contractor’s agents upon receiving of possession in the property. It is usually advisable to consult with your lawyer and receive an alternative security, such as a real estate warning note and an “exclusion letter” from the accompanier bank (a letter whereby the bank releases the specific apartment from the overall project’s mortgage).

Purchasing tax

Any real estate purchaser is required to pay tax, commonly known as “the purchasing tax”.
The relevant law, the “Real Estate Taxing” law (real estate capital gains and real estate purchasing tax), 1963, defines, in section 9, two routes:
In “the regular route”, the tax is calculated, as follows:
The apartment worth (purchased after 01.01.00):
3.5% tax on the amount of 772,310 NIS;
5% tax on the rest of the amount beyond 772,310 NIS.

The “single apartment route”:

If the purchased apartment is the only apartment of the purchaser in Israel, the tax will be calculated as follows:
0 tax up to an amount of 907,700 NIS;
3.5% tax on 907,700 – 1,275,690 NIS;
5% tax on the rest of the amount beyond 1,275,690 NIS.

The entitlement to the single apartment route is examined by the “family cell” – the purchaser, spouse and children under 18 – are all considered as one unit, and it must be a single apartment of that whole family cell.
Another note: if the purchaser has another apartment, which is sold within 24 months from the day of purchase of the new apartment – it can be considered as a “single apartment route”. When the new apartment is purchased from a contractor, the first apartment must be sold within 12 months of the contracted date of possession, in order for it to be considered a “single apartment”.

Real estate rights registration

The administrative process of registration may take a few years, and it signals the culmination of the deal.
It is advisable to be in touch with the contractor’s lawyers and track the registration process. The apartment can be sold to a third party even when it is not registered under your name, by getting the consent of the contractor company.

Good Luck!

Artilcle updated May 7, 2008

Dganit Toren, Adv. (Israel), L.L.M

D. Toren Law Offices A civil and commercial Israeli law firm providing comprehensive business and legal solutions, tailored to meet the needs of clients in the United States and in Israel. Call us with any question: Tel:  1-818-986-7800 http://www.torenlaw.com

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