Nowhere could the saying “buyer beware” be more appropriate than it is for foreigners looking to invest in Israeli real estate. For, no matter how experienced a real estate investor may be, buying in Israel is a whole new ballgame.
In nearly 10 years as a real estate attorney in Jerusalem, I can’t tell you how many times clients have approached me with stories like these:
• “I shook the seller’s hand and was assured we had a deal, then he sold the property to someone else for a higher price.” Or, in the alternative, “I was told that I should sign a ‘binder’ and when I wanted to back out I was told that I had signed a contract and would have to pay damages if I tried to cancel the deal.”
• “I didn’t realize that I could not rescind the contract after I signed it.”
• “He quoted me the price in dollars, but wants me to pay in shekels according to a different rate.”
• “I didn’t know the apartment had to be registered in the name of the seller in order for him to sell me the apartment.”
• “I didn’t know that I had to pay purchase tax.”
• “I didn’t realize that the seller’s taxes go with the land and that if he fails to pay them it becomes my problem.”
• “They told me that the garden was mine and it turns out that it belongs to the building and I don’t have any right to it.”
These issues just scratch the surface of the volumes of legal issues involved with the topic of real estate in Israel and those considering purchasing a property should always consult with an attorney first.
In order to avoid these and other issues and become an intelligent purchaser or investor, due diligence is the name of the game.
As a rule, most real estate purchases, especially in the residential area,
Are not contingent upon anything. Therefore, one must perform all due diligence prior to signing the contract. Unlike in most western countries where the closing is at the end of the transaction when the final payment is made against delivery of possession and the transfer of the title, in Israel the “closing” is when the contract is signed.
Therefore, prior to signing any binding commitment, one should hire the necessary professionals to carry out the various checks they may have been used to doing afterwards, such as an engineer to inspect the physical state of the property; attorney; architect; and appraiser. If financing the property, one also should have received a mortgage commitment.
Only after having made all these checks and having been explained the pros and cons of the transaction and the expenses involved, should one proceed with the actual purchase.
EXPENSES AND COSTS
Expenses involved in the transaction are not just the purchase price so one must know, and take into account, the hidden, or extra, costs when calculating his or her wherewithal to handle a particular transaction. Costs that buyers making their first purchase in Israel may not be aware of include purchase tax, legal fees, brokerage commissions, exchange rate differentials (i.e. the cost of converting money from foreign currency to NIS), mortgage initiation charges, engineer, appraiser, etc. These costs can add between 7% and 10% to the price.
In Israel, a foreign resident can apply for a mortgage and receive financing, typically ranging between 50% and 70% of the appraised value of the apartment and no more than 50% and 70% of the purchase price. Since most transactions are not contingent on financing, it is crucial to have a financing commitment in place prior to signing a purchase contract. This is especially important for an individual who cannot carry out the transaction without the mortgage, or for one who is dependent on a certain amount of financing. To reduce this risk, one may hire an appraiser who is on the approved list of the bank from which the mortgage will be procured to appraise the property to determine in advance the amount of financing that will be provided. Buyers should also investigate with their local accountant the ability to deduct interest from income taxes in their country of origin since, in many countries, the interest paid on a mortgage on a second home is deductible.
Under current law, the general rule is that an individual may sell a residential property once every four years (there are some rules that allow for shorter time periods and special exemptions under the tax law) exempt from capital gains tax in Israel. These exemptions, however, do not exempt foreign residents from paying taxes on the gain from a sale in their country of origin. Therefore, one must take into consideration the tax implication in his or her country of origin when investing in Israeli real estate.
In Israel, under the current law, there is no estate tax. However, property located in Israel can be subject to estate tax in the country of residency of the purchaser. Proper planning for probate also should be carried out prior to signing a contract.
The bottom line, however, is the same whether purchasing property in or outside of Israel – there is no substitute to hiring the appropriate professionals to advise you on the ramifications of any transaction. The buyer must always beware.
From the Succot 2005 real estate supplement of the Jerusalem Post. By permission of the author.