B’Sha’ah Tova U’Mutzlachat! You have decided to buy your first apartment (new or previously-owned) in Eretz Yisrael. Here are a few important things to know about buying your first apartment in Israel. Much of the information contained in this article is equally applicable for both new and previously-owned apartments. While every apartment purchase has its own identity and unique circumstances, there are certain general issues which you will almost certainly encounter. The following is meant only as a guide to answer some of the most common questions that new buyers in Israel ask. The purpose of this article is so that you will know, if not all the answers, at least the right questions to ask. If you understand the process, getting through it is much less traumatic. Of course, you should always check with your attorney if in any doubt whatsoever on any issue.

THE ADVENTURE BEGINS
In general, your journey begins when you find an apartment and eventually strike a deal with the seller (either directly or through a real estate broker). The key items on which to reach clear agreement are:
  1)Total purchase price (and how it is calculated; dollars or shekels);
  2)Payment schedule (how much and on what dates);
  3)Date of the physical transfer of the apartment (getting the keys and actual physical possession - as opposed to legal title);
  4)Date of transfer of legal title;
  5)The nature of the title you are getting –i.e., what rights in the property you are getting (fee simple / freehold interest, long-term ground lease, etc.);
  6)What comes (and what does not come) with the apartment (cabinets, fixtures, security door, solar water heater, etc);
  7)Anything else important to you.
I recommend strongly that, if possible, before the contract is signed (you can always begin the drafting of the contract to get it ready in the meantime), and before any money is paid over to the seller, that you have a complete physical inspection of the property done by a professional home inspector/engineer. It’s a good investment (usually between $300-$600, depending on the size of the home), and will possibly save you money and heartache later.

Your lawyer should also check out the state of the title on the property to:
  a) find out what rights you are buying (e.g., ownership, long-term lease rights, or something else),
  b) make sure no liens or other problems exist regarding title to the property, and
  c) make sure the local building department has no action proposed or pending against the unit for illegal construction, etc.
The lawyers for the two sides will draft the agreement, and the signing usually occurs with everyone (lawyers, buyer, seller, and often even the brokers) in the same office. At the signing, you will usually pay to the seller a substantial portion (10-25%) of the total purchase price. Sometimes, the first payment is held in trust pending the recordation of a Caution Notice or similar device so that there will be formal notice to other potential buyers that you have first claim on the apartment.

Generally, when you find an apartment, the lawyers for the two sides will arrange between themselves to draft the purchase contract, based upon the terms to which you and the seller have agreed. With new construction, the contract is usually a “standard contract” prepared by the seller’s attorneys, and your attorney can attempt to effect changes. Your ability to get changes made usually depends upon your bargaining strength and market conditions.

Sometimes, the seller will suggest you use his lawyer (and pay a reduced legal fee (usually 1/4 - 1/2%, plus V.A.T.), which is less expensive than hiring your own lawyer. In effect, all the lawyer will be doing for you is submitting the various forms to the appropriate government agencies. While this is a legal and accepted practice among Israelis, I strongly discourage you from doing this. The seller’s lawyer is representing whom? Whose interests will the seller’s lawyer push in the event of a conflict or a simple disagreement? The answer to this question spells out the potential for conflict.

Once the terms are agreed upon, and the contract is signed, the first payment is paid to the seller, and the report to the tax authorities is made. Soon, you will be asked to pay the Mas Rechisha (Acquisition Tax - more about this later).

One surprise for Anglo-Saxon buyers is that in apartment sales in Israel, the purchase price, as paid out by you in installments, is paid directly to the seller, and is not held “in escrow” until final transfer of the property. The full price is paid in stages, often as against receipt of required documents from the seller, and usually only a small amount is held back pending actual physical possession and transfer of legal title.

Thereafter, you will pay Mas Rechisha (be patient, it’s coming) and the rest of the purchase price, against receipt of certain confirmations from the seller (e.g., that no capital gains tax (Mas Shevach), Arnona or other obligations exist on the property). These are the things you have paid your attorney to protect you from. The sale will proceed in stages, the taxes will be paid, clearances issued, and then at some point, you will get the keys and title will be transferred, though not necessarily at the same time.

RIGHTS IN THE APARTMENT
One of the key items to determine is the nature of your rights in and to the apartment; i.e., just what you are buying. Most apartments (or even single-family units) in Israel are not owned outright by the “owner”. Israel has a complex land-title system. What is known as “fee-simple” in the U. S., or “freehold” in Commonwealth countries, where you own outright the home and the land it is built upon, with perhaps a lien on it in favor of your bank (the mortgage), is less common here. The closest approximation here is “Ba’alut” (where the apartment is registered in TABU the old Ottoman term for the Land Registry Office, still used today as the slang term for it).

If the apartment is registered in TABU, and the “ownership” is Ba’alut, then you own the unit outright (along with a proportional interest in the common areas), subject to whatever liens, mortgages, easements, etc. come with, or are added by you, to the property. These must be carefully checked out by pulling a title abstract. Even Ba’alut in TABU, however, is not the end. The apartment is likely registered as a Bayit Meshutaf  (common ownership house), essentially like a condominium, wherein all of the owners proportionately own the common areas, and where there are definite rules restricting what you can and cannot do with your own unit.

Even though the property is registered in TABU, it might be “Chachira”  (long-term lease rights) and not outright ownership. In essence, the rights are those of a long-term lease holder. Chachira means that the Israeli government, through the Israel Lands Administration ( Minhal), Keren Kayemet, or one of several other quasi-governmental agencies (or even a private owner such as the Greek Orthodox Church), still owns the land upon which the building stands, and you have anywhere between 0-49 years left on a ground lease. These are invariably renewed, it is an accepted practice in Israel, and it is not as scary as it sounds. You will pay an annual lease fee unless the property is “Mehuvahn” (capitalized, where the entire term is already prepaid). If the property is controlled by the ILA, whether registered in TABU or not, you often need to transfer title through the ILA before registration in TABU, sometimes with a transfer fee, unless it is Mehuvahn. (Who pays this transfer fee? That’s one of those questions where if you use the seller’s attorney, he may answer that question for you, without asking you and in favor of the seller.)

The third common “registration” is that of a “Chevrah Meshakenet” , essentially a private development company which has received development rights to government-owned land, which is what you usually run into when you buy new units or not-yet-registered units. In that case, your “ownership” is kept on the company books, and at some point in the future (please G-d!) you will eventually be registered formally as the owner in the government records. If the company is a recognized one, you should not be scared off from buying from them simply because of this unfamiliar title situation.

Another situation, for those who buy in Judea and Samaria, is that the “owner” of the land may be the “Supervisor of Government and Abandoned Enemy Property” since most of this land is deemed abandoned by its former Arab “owners”. In those situations where there is a competing claim for the land, the government usually settles it out without you losing anything. Also, there are some banks that will not lend over the Green Line, or will lend a lower percentage (loan to value ratio) than on a similar unit within the Green Line. Again, that is not normally a problem, but you should be aware of the issue.

What’s the point of all this? Know what you are getting. Know what rights you will have, and to what those rights are subject. Ask your lawyer to check out the legal aspects of the potential home and explain to you in detail what you are buying. Ask questions. Don’t be afraid to look foolish. There are no stupid questions, only stupid mistakes.

MAS RECHISHA
As further tangible evidence of your loyal support for your new homeland, you will have the opportunity to contribute to the Treasury and pay Mas Rechisha (Acquisition Tax). This is the tax paid by the purchasers of real property. The Acquisition tax is due and payable not later than 50 days from the date of the creation of an agreement to purchase. Remember, even a Memorandum of Understanding (Zichron Devarim) is considered a contract. So if you sign a Memorandum of Understanding, and later a “formal” contract, it is the earlier document’s date that starts the “50-day clock” ticking.

To calculate the Mas Rechisha rate, you multiply the purchase price in dollars by the shekel Sha’ar Yatzig (Representative rate) on the date the contract was signed. That shekel amount is your purchase price for Mas Rechisha purposes. In order to stimulate the purchase of homes (thereby boosting new home construction, thereby lowering unemployment, etc.), the government recently changed the rate structure on Mas Rechisha. Please check with your lawyer regarding particular rates as applied to your status.

ZICHRON DEVARIM
A Zichron Devarim is a Memorandum of Understanding, or “binder”. The idea is to lock up the sale even before the formal contract is prepared.

The problem is that it does, indeed, lock up the deal. A zichron devarim is a legally-binding contract for all purposes. All it needs is the names of the parties, a description of the property, the date and the purchase price. All the important things a buyer wants in the agreement (e.g., inspection, when and against what certifications are payments due, etc.) are not there.

If the seller later refuses to add them to the “formal” contract, you are in big trouble. For that reason, and because a contract can be done so quickly, I generally oppose the use of a zichron devarim.

LEGAL FEES
It is far more important for the buyer to have his own lawyer than it is for the seller. The seller is ordinarily concerned only with how much he is getting and when he will get it. The buyer, on the other hand, needs to be sure his money is protected, that he will get marketable title, that the legal status of the construction is in not at risk, that he will get what he is paying for when he expects to, etc. While I am slightly less than objective in the matter, for the same reason that I strongly suggest a professional inspection of the property, I also believe that if you are paying so much for an apartment, usually your single biggest investment, it is simply foolish to risk it in order to save the 1% - 1.5% additional cost of legal fees. Get your own lawyer.

Each side pays their own lawyer’s fees, except that in the purchase of a new apartment directly from the builder, you will be required to pay the builder’s lawyer a sum ranging between 1.25% and 1.75% (plus V.A.T.) for the builder’s lawyer’s fees. This sum is intended to cover the builder’s lawyer’s work in eventually registering the apartment in your name when the time comes to do so. Yes, it is a big rip-off, and no, there is nothing you can do about it, although sometimes it is possible to slightly reduce the amount of the fees by negotiation. The fees you pay your own lawyer range between 1% and 1.5%, (plus V.A.T.) because he does all the real work, including what your bank will require in order to give you a loan. Legal fees, as well, are payable at the time of the signing of the contract, unless otherwise agreed.

OTHER FEES
You should also expect to pay between NIS 200 - NIS 1,000 in additional miscellaneous expenses (usually related to title documents pulled from the land registry offices, or as filing fees to file title documents, plus notarizations of various documents). Fees and costs to the bank for opening a loan file for your mortgage are extra.

At times, there is a “handling fee” or “transfer fee” to pay to the development company or to the Minhal for agreeing to the transfer. Ordinarily, those fees are borne solely by the seller or split among the parties, according to agreement, and that decision should be written into the contract.

INSPECTIONS
As I noted earlier, it is strongly advised that you invest money in a professional inspection of the apartment. This way, you will know what problems exist and you may be able to lower the price of the apartment if you can produce a professional, written report showing the problems and the estimated cost of repairs. At the least, you will know what you are getting into.

I advise this even for new construction, both at the time of purchase (before signing) if it is in an advanced enough stage of construction, and again before final delivery, during the final walk-through (known as the Protocol). Even if the project is in very early stages of construction, I advise having someone knowledgeable review the Mifrat Techni (the Technical Specifications) so you know what items are included, and what level of quality you are getting. Knowledge is Power, and if not, Knowledge is at least Knowledge and has its own intrinsic value.

While inspection fees, lawyer’s fees, etc. can add up, and you are probably stretching to buy this apartment, remember that you are making what is likely your biggest economic investment in this country. Make sure you are getting what you are expecting.

BANK LOANS
Bank loans, rates, limits, etc. vary. Check out several banks. Unlike the practice in the U.S., etc., banks here will often refuse to give you an answer as to whether you can qualify, and certainly will not negotiate terms, without your filling out an application in some detail, and supplying at least some of the supporting documents.

The zaka’ut portion of the loan (that part to which an oleh chadash is entitled) is the same no matter which bank issues it, and will vary according to your family status and location of the apartment. The more critical issue is the mashleima portion (essentially, a regular mortgage, over and above your zaka’ut portion), which varies between banks, and should be carefully shopped.

NEW APARTMENTS
For those buying a new apartment directly from the builder (kablan), it is an adventure totally unlike anything you have ever experienced. This entire topic is very complex and there is a lot to know. It cannot be fully treated in this article, and I suggest you sit with your lawyer and go into detail if you plan to purchase “on paper”. I have tried to cover some basic items in this article. Once you find your dream apartment you may negotiate your deal, but sign and commit to nothing without a full review of the paperwork. The sole exception is that with brand new construction, you may have to sign a “reservation” for the apartment, where you put down about NIS10,000.00 to hold the apartment until a certain date, by which time a contract must be signed. My advice is to sign it only if it has a written clause that says that you get your money back if you do not go forward with the purchase by a certain date. Oral promises are not worth the paper they are written on. Your lawyer’s job will then be to fine tune or even renegotiate the deal to save you money. Never accept the statement, “The contract is fixed and we will allow no changes.”

The first step for the lawyer is to make sure that the builder actually owns the rights to build on the land in question. Next, he will determine the nature of those rights and what rights you will acquire in the future.

What you can negotiate will depend on many factors, including how far along the construction has gone, what financing the builder is relying upon, how many units have been sold, etc.

Since you will generally be paying as the construction proceeds, and often even beforehand, you must also make sure the builder complies with the law requiring that the builder give you a guarantee for the money you have paid in, so that in the event of a default, you are assured that the construction will be finished or that you will get your money back.

The usual (though not required) method of this guarantee is a bank guarantee, wherein the bank guarantees that they will finish construction, or refund your money. For many reasons, this is not a perfect guarantee, but it better than the risk of total loss.

Remember, you generally are buying a shell, with predetermined fixtures, number of outlets, etc., all set out in the Mifrat Techni  (Technical Specifications). I also strongly recommend an expert physical inspection if the building construction has already begun, and that the inspector review the Technical Specifications in either case, to advise you as to the quality of the construction, what changes are suggested, etc. Anything else you want is - surprise - at your additional expense! You will have to work with the actual builder (sometimes you are buying from a promoter, who hires the builder) to discuss and arrange those additions, some of which may not be available. It is always best, though not always possible, to plan the changes, etc. before you sign the contract, so you will know what can be changed, and what it will cost you.

Try to deal only with reputable builders with solid reputations for timely and quality construction. Also, ascertain whether the purchase price you are quoted already includes the V.A.T. or not (it’s an additional 17%).

Remember, the more you know, the better off you will be. Feel free to ask your lawyer questions. That is what you are paying for.

I wish you much success in finding and buying your own Bayit Ne’eman B’Yisrael. Klita Kala.

Please address all mail to:

Avery Einhorn, Advocate and Notary
P.O.B. 8231, Jerusalem 91081
1/8 Shama’a Street, Mamilla, Jerusalem 94108
Fax: 02-625-1391
Tel: 02-623-5152
e-mail: drucklaw@actcom.co.il