Buying On Paper: When to “Just Say No”
I recently wrote an article called "Buying on Paper: A Success Story" explaining the pros and cons of purchasing an apartment “on paper” or, as the British say, “off plan.” Let’s discuss when one should steer clear of not-yet-built apartment projects.
Do not purchase on paper if the property is not currently zoned for residential usage. The rezoning process is fraught with potential pitfalls; here are just two of many issues that can delay or even sink a residential project:
(1) Timing – Rezoning a property, which in a best case scenario takes a couple of years to accomplish, can sometimes get entwined in bureaucratic purgatory for literally decades.
(2) Politics – Political decision makers are fickle, and even a well-intentioned promise from a politician should be taken with a grain of salt.
For example, a number of years ago, the Israeli government pushed a “go north” agenda, pledging expedited residential rezoning in that region. Just a few years later, the government did an abrupt about-face and decided that it made better sense build up the Negev. Imagine how betrayed people who purchased farmland in the north, based on assurances of an easy residential rezoning process, felt when the government abruptly changed its mantra to “go south”.
Buying a home through an Acquisition Group – or “Kevutzat Rechisha” – is the latest trend in Israel, and there are hundreds of these groups across the country. When buying a home through an Acquisition Group, the members join together and purchase the land and hire a project manager to run the construction.
The lure is the ability to buy an apartment at a below market price. As there is no developer’s profit added to the cost, one can theoretically save up to 20% of the purchase price. However, there are a number of drawbacks. For the sake of brevity, let’s just discuss two.
The first challenge is that members of an Acquisition Group often have to pay a significant amount of money at the outset to purchase the land. In one recent deal, the land cost equaled 2/3 of the apartment price; accordingly, my clients had to pay 65% of the total price within a few months of joining the group. Compare that to buying on paper from a developer, where one puts down 15% or so on contract, and only pays additional funds once the project achieves various construction milestones.
The second adverse element is financial protection: When buying an apartment from a developer, one receives a “bank guarantee” which ensures that if the developer goes bankrupt, the bank will bring in another builder to complete the construction at no additional cost to the purchaser. In an Acquisition Group, there are no bank guarantees, as the group is the developer. There are ways to limit financial liability, but none of them are foolproof. Therefore, my general rule for overseas buyers is that, unless the construction project is run by a superior builder, I discourage clients from buying in an Acquisition Group due to the inherent risks involved.
Invariably, in every construction project, problems arise and issues need to be addressed and resolved. Therefore, it is imperative that you purchase a home from a developer who has a strong reputation. When the surprises occur, an honest developer will own up to the mistake and invest the time and funds to ensure that the problem is resolved properly.
Hire a Good Lawyer
Buying “on paper” offers tremendous upside potential. In the two projects that I have been involved in, apartments that were purchased during the initial “pre-sale” period have increased tremendously in value. However, the list of issues discussed above is far from exhaustive and the road to buying “on paper” is fraught with many potential pitfalls.
Therefore, I encourage you to retain a first-rate lawyer. A seasoned attorney with strong transactional real estate experience is the best guarantee that your financial and legal interests will be protected throughout the construction process.
Gedaliah Borvick is the founder of My Israel Home (www.myisraelhome.com), a real estate agency focused on helping people from abroad buy and sell homes in Israel. To sign up for his monthly market updates, contact him at firstname.lastname@example.org.