Pros and Cons of Buying “On Paper”
Updated: Jun 2, 2021
Revised June, 2021
When choosing between buying an existing apartment and buying in a project under construction — known as buying “on paper” — most purchasers would initially prefer an already-built home. First of all, there is less guesswork, as you can see the actual apartment for yourself. In addition, when buying an existing unit, there is no waiting period: you receive the keys to the property within a few months of contract signing, as opposed to waiting up to three years when buying on paper.
Upon further reflection, however, many clients 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 more options - such as choosing what floor to live on and what direction you want your apartment to face. (3) You can spread your payments over a few years, which works particularly well for people planning aliyah (please keep in mind that all unpaid portions of the purchase price will be subject to the building construction index). (4) Demand exceeds supply, therefore there are not enough existing homes for sale to satisfy the voracious market appetite. (5) In a new project, you can sometimes receive a discount to market value.
Let me mention an important law which protects people buying on paper: Your investment is protected by a bank guarantee. It is an insurance policy guaranteeing the completion of your apartment should the builder go bankrupt.
There are a number of positives to buying an existing unit, compared to buying on paper. For example, older buildings tend to have larger rooms. The flip side, however, is that older apartments usually have fewer rooms. In addition, older buildings in large population centers are likely to be well located, as they were built when the cities were smaller and less spread out. In comparison, new construction projects tend to be located farther away from the center of town, as few vacant plots of land in the middle of existing neighborhoods 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. (2) Many older buildings lack amenities such as elevators, parking, sukkah balconies and storage rooms. (3) Construction technology has soared over the past decade and therefore new buildings are generally built to higher standards. (4) New buildings have various health-related systems that weren’t incorporated into older buildings, such as pollution control systems, fire escapes, and carbon dioxide ventilation for parking garages. (5) Lastly, 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.
During the past 1+ years of COVID-19, the majority of our foreign clients have shied away from buying existing homes – and yet many of them have been comfortable purchasing on paper. In contrast to buying an existing apartment, they did not feel obligated to be in Israel to inspect the property under construction, as there was no finished product to see.
Nevertheless, buying on paper is not for everyone. Know yourself: if you will be agitated for three years, worrying incessantly about your apartment under construction, please resist the urge to buy. If, however, you will be able to sleep at night, then buying on paper – in the right project with a strong developer – can be an excellent home-purchasing opportunity.
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.