Pros and Cons of Buying “On Paper”
Updated: Feb 5
An issue that resonates with many of my clients is: the pros and cons of buying an apartment in Israel “on paper” – which means buying a not-yet-built apartment – versus buying an existing apartment. Let’s divide this discussion into two segments.
Buying a New Unit vs. Buying on Paper
If one would choose between buying an apartment in a newly constructed building and buying on paper, one would initially prefer the newly constructed unit for a number of reasons: (1) The guesswork is taken out of the equation, as you can see the apartment for yourself, and (2) when buying an existing unit, there is no waiting period, as you immediately receive the keys to the apartment, as opposed to waiting up to three years when you buy an apartment on paper.
Upon further reflection, however, many buyers often elect to buy on paper for the following reasons: (1) You can customize and design the unit to fit your particular needs and tastes. (2) You have many more options - such as choosing what floor to live on and what direction you want your apartment to face. (3) In fact, the best units in every project are always sold on paper, as the first buyers select the choicest units. By the time a project is completed, the remaining unsold units tend to have some warts – a less than optimal layout, inferior views, etc. (4) Most important: in a new project, you can receive a significant price discount - sometimes as much as 20% or more - as opposed to purchasing the newly completed apartment which will command a full market price.
One negative to keep in mind: When buying on paper, there is an additional cost to consider, which is the building construction index. Over the past decade, the index has fluctuated from as low as under 1% to as high as 4% per year. All unpaid portions of the price are linked to the index, so if one paid 30% on contract, the remaining 70% would be subject to the building construction index.
Let me mention an important law which protects people who buy apartments on paper: Your investment is protected by a full bank guarantee. It is an insurance policy guaranteeing the completion of your apartment should the builder go bankrupt.
Buying a “Second Hand” Unit vs. Buying on Paper
One can point to a number of positives and negatives of buying an older unit - sometimes called a “second hand” unit - compared to buying on paper. First, the positives: (1) Older buildings tend to have larger rooms. The flip side, however, is that older apartments usually have fewer rooms. (2) Older buildings are likely to be well located, as they were built when Jerusalem was smaller and less spread out. In comparison, new construction projects are usually located farther away from the center of town, as few vacant plots of land in the middle of Jerusalem are available for new development.
Some of the negatives associated with buying an older second-hand apartment are:
(1) Apartments constructed before 1992 do not have a “mamad,” or a safe room made of reinforced concrete, which protects the residents from physical shock and chemical gases.
(2) Buildings constructed prior to 1980 are not earthquake-resistant. Israel is located in an active seismic region on the Syrian-African fault and, in 1980, the government instituted architectural and construction standards to ensure that new buildings can properly withstand earthquakes.
(3) In addition, many older buildings have no elevator or only one elevator, which can only be converted into a Shabbat elevator if a majority of the tenants agree to this change. In new buildings, however, the law requires two elevators, one of which must be a Shabbat elevator.
(4) Furthermore, new buildings have various health-related systems that weren’t incorporated into older buildings, including pollution control systems, fire escapes, and carbon dioxide ventilation for parking garages.
(5) Finally, older apartments are vulnerable to the defects of neighboring apartments. For example, even if one’s apartment has been completely gut renovated, a leak stemming from an upper floor unit will obviously cause damage to your apartment. This issue is understandably not common in new projects, as all of the units are in new condition.
What type of apartment should you purchase? It all depends on your timing, your budget and your location requirements.
Gedaliah Borvick is the founder of My Israel Home, a real estate agency focused on helping people from abroad buy homes in Israel. Gedaliah can be reached at email@example.com.