Frequently Asked Questions: Buying on Paper (June '20)
Updated: Aug 27, 2020
REVISED: JUNE 2020
Q1: What does it mean to buy “on paper” or “off plan”?
A1: Buying on paper is the term for purchasing not-yet-completed apartments.
Q2: Why would one buy on paper, versus buying an existing home?
A2: Demand for quality housing greatly outstrips supply, and therefore hundreds of our clients have purchased “on paper.” There are many reasons to buy on paper, here are but a few: You (1) can customize the unit to fit your particular needs and tastes (see Q12, below), (2) have a better choice of units (in terms of size, floor, direction), (3) can spread the payments over an extended period, and (4) often receive a significant price discount, as compared to purchasing a newly completed apartment. For more information, read our articles “Pros and Cons of Buying on Paper,” “Buying on Paper: A Success Story” and the flip side, “Buying on Paper: When to Just Say No.”
Q3: How do I know that the project will be completed properly and in a timely manner?
A3: Your investment is protected by a full bank guarantee, an insurance policy guaranteeing the completion of your apartment at no additional cost to you, should the builder go bankrupt. In addition, developers are contractually obligated to pay rent should the occupancy date be postponed. Second, you receive a seven-year warranty that covers issues in construction: one full year for everything in the home, two years for issues such as plumbing and electricity, and up to seven years for moisture issues.
Q4: What is included in the purchase price? What is not included?
A4: The price includes the 17% Value Added Tax. If VAT goes up or down, the unpaid balance is automatically adjusted accordingly. The price includes all items listed in the technical specifications, which is addended to the contract. Additional expenses that you will incur are:
i. “Mas Rechisha” is the acquisition tax.
Israelis buying a primary residence pay 0% for the first ~1,750,000 NIS, then 3.5% for the next ~300,000 NIS, and then 5% above.
The acquisition tax for overseas buyers (and Israelis buying an investment property) is as follows: 5% up to 1,292,280 NIS, 6% above 1,292,280 and up to 3,876,835 NIS, 7% above 3,876,835 and up to 5,338,290 NIS, 8% above 5,338,290 and up to 17,794,305 NIS, and 9% above 17,794,305 NIS.
The acquisition tax is payable within 60 days of contract signing (there are exceptions to this rule; please discuss with your lawyer).
ii. Brokerage fee: 2%+VAT. The brokerage and legal fees are due on contract signing.
iii. Your attorney: approximately 1%+VAT.
iv. Project registration charge: 5,000 NIS+VAT for the developer’s attorney.
v. Mortgage broker: Mortgage brokers charge approximately 1 to 1.25%+VAT (their fee is obviously based on the size of the loan). We can recommend honest, seasoned mortgage brokers.
vi. Cost to convert foreign currency to shekels: reputable forex companies charge .5%+VAT.
vii. When buying on paper, an additional cost to consider is the building construction index, which over the past half dozen years has fluctuated from as low as under 1% to as high as 2%. Understand that only the unpaid portion of the price is linked to the index. Click here to read an article explaining the construction index.
viii. Deposits on utility meters (water, gas and electric): This amount should not exceed 3,000 NIS.
For more details on this issue, please take a look at, “How To: Budget Properly.”
Q5: What other expenses will I incur?
A5: Additional expenses include furnishing the apartment, adding wall closets in the bedrooms, installing light fixtures, and buying appliances (refrigerator, washer, dryer, stovetop, oven, etc.). If you decide to upgrade the kitchen cabinets and/or counters, you will incur extra costs. Often, air conditioning is not included and will have to be paid by you. The estimated additional costs for a 3-bedroom unit are: appliances - 20,000 NIS, wall closets - 15,000 NIS, and A/C: 35,000 NIS including upgrade of electrical connections.
Q6: What is the procedure for purchasing a unit?
A6: Once you choose the unit, you sign a "letter of intent" which includes the unit number, price, and payment plan. The unit is officially reserved when a 20,000 NIS non-refundable deposit is received with the signed request to purchase form. Your attorney will receive a draft contract and negotiate revisions to the document. To understand the importance of a good lawyer when buying real estate in Israel, read “Before Signing on the Dotted Line…”. When the final draft is ready, the contract gets executed.
Q7: What else does my attorney do?
A7: If you are purchasing from abroad, you will give your lawyer a Power of Attorney. If you are obtaining a mortgage and you live abroad, often your attorney will assist in this process. To avoid miscommunication, you should clarify from the outset what your lawyer’s non-legal role will be in the transaction. You may want to peruse this article – “Have I Really Bought Only Half An Apartment?” – to appreciate that a good lawyer is worth his/her weight in gold.
Q8: What is the standard payment plan?
A8: If the building permit is already received, minimally 15% of the price will be paid upon contract signing. The rest of the payments will be paid upon construction milestones being achieved, and the final payment is 5% at completion. Payment schedules are usually somewhat flexible and can be negotiated by your attorney. As discussed in Q4, your payments are protected by the bank guarantee. The purchaser deposits each payment into the special project account administered by the bank financing the project. Upon receipt of each payment, the bank instructs the project to issue a policy guaranteeing the payment in the case of insolvency or bankruptcy of the builder.
Q9: Can I buy in dollars?
A9: The prices are quoted in shekels and are not linked to the dollar-shekel exchange rate. We recommend that your lawyer inserts a clause in the contract permitting you to make prepayments. This will allow you to prepay a portion of the purchase price when there are advantageous fluctuations in the dollar/shekel rate.
Q10: What are my financing options?
A10: Banks will usually loan Israelis up to 70% of the value of the unit, subject to their creditworthiness. Non-Israelis can borrow up to 50% and sometimes another 10% at a slightly higher rate to cover closing costs. There are a variety of financing options available, such as fixed rate, variable rate, and hybrid fixed-variable rate mortgages, wherein the rate re-sets every few years. Foreign purchasers often prefer linking their mortgages to the currency in which they receive their income. Purchasers can go to banks to collect and compare quotes, but we recommend that you retain a mortgage broker who will obtain quotes and negotiate best rates on your behalf. We are happy to recommend seasoned, honest mortgage brokers.
Q11: What changes can I make to my apartment?
A11: The developer will try to accommodate your requests for changes and additions. There are no standard rules, but some of the limitations are as follows: (1) Changes will usually delay the completion of your apartment. (2) Changes and additions which require an updated building permit will not be approved. (3) Changes which may delay the completion of other units in the project will not be approved. (4) Changes which violate Israel’s building code will not be approved. (5) Changes and additions often incur additional cost. For more information on this topic, you may want to read my article, “How To: Buy on Paper.”
Disclaimer: The material above is for informational purposes only, and should not be construed to come in place of using legal counsel and hiring professionals to carry out all due diligence, including reviewing all legal and planning issues, prior to purchasing an apartment.
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.