Let's Make a Deal

By Advocate Dr. Chaim Katz (reprinted from Jerusalem Post )

At last you have found the right property at the right price. The seller is anxious to make the sale. Your real-estate agent is telling you that it is a fair deal. The purchase looks as easy as ABC. Yet somehow, as the sale progresses from negotiations through contract, life begins to get more complicated. You gradually realize that the sale price is only a part of your actual cost. You are faced with taxes of which you've never heard and expenses on which you had not counted. You are asked to sign all sorts of forms that you don't understand. Things are not as they seem. For example, when you measure the apartment you find that you are getting fewer meters than the number quoted in the technical specifications provided by your contractor. And this is legal, too! (See Apartment Area, below). If you are buying a second-hand apartment, you discover at city hall that you have been awarded extra building rights that you don't need, but for which you have to pay an inordinate amount in taxes (see Enhancement Levy, below). Things seem to take much longer than they should. The challenge of owning a piece of the Holy Land becomes mired in a swamp of Byzantine intricacies. Although the route differs somewhat in each transaction, every purchase has a number of steps: First, take a look at the property, although in the case of a new apartment, there may be few physical items open for inspection. If the apartment is still on the drawing board or almost ready for occupancy, go over the technical specifications, which must be, by law, attached to every contract. In the case of a second-hand apartment, you might want to have an expert examine the property; there are engineers who specialize in this. While the law has special provisions to protect the buyer of a new apartment, with a second-hand flat it's more a matter of "what you see is what you get." When you are convinced that the apartment is right for you, it is time to think about a contract. At this point you need independent confirmation of the property's legal status. In general, this is also where your attorney enters the picture. As the contract is being prepared, this is also the time to reflect on potential hidden costs: acquisition tax, Value Added Tax (in some cases), other taxes, legal fees and agency fees. Of course, you need sound legal advice to help you navigate past the pitfalls. But this guide to the ABC's of Buying an Apartment can help you come face to face with some of those big, scary new terms. Acquisition tax (Mas Rechisha): Often, the most significant payment involved in purchasing an apartment. This graduated tax, which goes from 0.5% to 4.75% of the purchase price must be paid within 50 days of the signing of the contract. The percentages are adjusted every four months and it is imperative to check the rates. There is a concessionary rate for new immigrants, who pay a mere 0.5% if they purchase within the first five years of their arrival. This concessionary rate also applies to couples in which one spouse is a new immigrant. Agreement Payments (Demei Haskama): This is the payment demanded by the Israel Lands Administration (see below) – Israel's largest landowner – for its consent to transfer a leasehold property from seller to buyer. In older and more valuable areas, the agreement payment may come to a substantial sum. Make sure that the contract clearly states that the seller pays the Agreement Payment. The ILA gives the buyer an option to make a one-time payment, which exempts the owner from Agreement Payments when he sells the property (see also Lease Fees) (Today, most new properties have this fee paid in advance by the first owner. Pps). Apartment Area: The size presented by the contractor is not always the actual size of internal floor space. The area of an apartment is measured in square meters. One square meter equals 10.76 sq ft. The figure appearing in Technical Specifications (Mifrat) (see below) is the gross area and includes unusable spaces such as the area under the external walls (which can add up), half the area under the internal partitions and a relative section of the area of Common Property (see below), which includes stairways, elevator, boiler room and so on. Moreover, if you have an allocated parking area, storage room or covered balcony, these areas are also included in the designated apartment size. Measure the apartment yourself to figure out how much living space you are buying. A deviation of 2% from the Mifrat figure is allowed by law. Arnona: Municipal tax, often overlooked by the buyer, can add up to a significant annual expense. Rates are based on location and size. Some municipalities offer partial or full exemptions for new immigrants. Check these rates before buying. (There are other categories of people who also get partial exemptions: women over 60, men over 65, etc. pps.) Building License (Rishayon Beniya): This details the placement of the house, floor plans and joint property. Have an architect examine this document, which is held by the municipality. Cautionary Note (He'arat Azhara): A simple, but effective, device for protecting the buyer. Immediately after the seller has committed to the sale in a written document, the purchaser may go to the Tabu (Land Registry) (see below) and register a Cautionary Note. This note will prevent any deal that is inconsistent with the purchaser's rights, unless agreed to in writing by the purchaser. Take advantage of this right and register a Cautionary Note soon after the contract is signed. Unfortunately, such a note is not registerable unless the property itself is registered in Tabu. Certificate of Registration or Deed of Title (Nesah Rishum): This document confirms valuable information regarding the owner of the property and the property itself, for example, whether there are any liens or mortgages. This certificate can be obtained quite easily from the Tabu (for a fee, of course). You should never agree to purchase property until either you or your attorney has examined a recently issued Certificate of Registration. To obtain such a certificate, you need the exact Bloc, Parcel and Sub-parcel Number of the property – an address alone is not sufficient. Unfortunately, there is no such certificate for properties that have not yet been registered. Ask the seller to examine the files with the Building Company and/or the Israel Lands Administration. Cooperative House (Bayit m'shutaf): Almost all of the apartment houses in Israel are governed by the laws relating to Cooperative Houses. The Cooperative House has two very significant characteristics: First, all areas that are not part of the apartment, such as the hallways, entrance ways, roofs, shelters, elevators and heating system are common property (see below), owned in common by all apartment owners in the building. (In the last few years, new apartments were built with private heating systems. Pps) Second, the Common Property is run in a democratic fashion by an elected House Committee (see below). The law states that the owner must share in the expenses of running the Common Property according to his or her portion of the Common Property. The law also provides for special regulations dealing with major issues of contention that often arise among owners, including: installation of solar water heaters, disconnection from the central heating system, special elevators for the handicapped, installations for cooking gas. You can learn a great deal about the property you plan to buy by speaking with those involved in running the Cooperative House. Common Property (Rechush Meshutaf): Attached to every apartment in a cooperative house is a portion of the Common Property. The size of your section of the Common Property is determined by the floor area of your apartment in relation to the size of the other apartments in the building. Every apartment is by law sold with its Common Property. Defining what is Common Property can sometimes by problematic. Basically, everything but the apartments is part of the Common Property. This definition includes the roof, foundations, shelters, heating system, hallways, gardens and entrance. If a piece of the Common Property, such as a roof or a garden, is of particular value to a certain apartment, that area may be attached to the apartment and removed from the regime governing the Common Property. This is not a simple procedure, however, and requires the consent of all apartment owners. Remember, just because you have sole access to a piece of garden does not necessarily mean that it is yours. It could be part of the Common Property. Contracts: Buying property requires a written document. A verbal commitment is ineffectual. Conversely, any written undertaking, howsoever termed, may be considered a binding contract. Do not rely on any oral promises. All understandings and agreements should be detailed in the written contract, which must also include the following: a plan of the apartment, a plan of a typical floor, and the plan of the ground floor showing parking spaces, air-raid shelter (if there is one), and so on. All of these must be 1:100 scale and should be signed by the contractor and the buyer. Contractors: Contractors must be licensed and registered. Make certain that your prospective contractor is licensed, particularly if he is not well-known. Enhancement Levy (Heytel Hashbaha): If there is a zoning change, or if the city grants a building license that enhances the value of the property, the municipality is entitled to levy an enhancement fee. This fee can be quite significant. The municipality can also block the transfer of rights if this levy is not paid. Often, the contract price will reflect building rights or zoning changes that enhance the property's value. In any event, it is customary for the person who benefits directly from the enhancement to pay the levy. In most cases, this will be the seller and this obligation should be stated clearly in the contract. Foreign Residents: There are very few restrictions on foreigners buying real estate here. Foreigners who own property are eligible for the same exemptions from Land Appreciation Tax (see below) as all Israeli citizens. A foreigner should liaise with the bank and keep careful records of all money transfers from his purchase. Then, if he sells the property, he can send out both capital and profits from the sale, in foreign currency, without having to pay any Israeli taxes. Foreign residents can use certain types of Israel bonds to buy property. Purchasing bonds at below-par value can result in substantial savings. Obtain legal or financial advice to avoid buying the wrong type of bonds, some of which are not redeemable for 15 years. If you buy the wrong bonds you will, of course, have the consolation of supporting the State of Israel. Hidden Costs: There are certain costs that buyers often ignore – at their peril. It is a mistake to base your calculations solely on the sale price. All related payments need to be taken into account. These include the acquisition tax, realtor fees, lawyer's fees, development costs and transfer fees, among others. House Committee (va'ad bayit): This committee is elected periodically by the apartment owners. It is an honor that people often try to avoid. However, a functioning committee is essential to a well-run apartment house. In most cases, the quality of the House Committee is reflected in the general upkeep of the building. The House Committee collects a monthly payment (misei va'ad), which varies according to expenses shared by all residents: heating, elevator, cleaning, gardening, electricity in public areas of the building, and repairs. Find out what these monthly payments are. Housing Company (Hevra Meshakenet): Some properties are not registered in Tabu (Land Registry) (see below), and the deed records are kept with the building company, usually a large concern such as Shikun Ovdim. Generally, you can check the company's records to see if there are liens or mortgages. Some areas have been waiting over 30 years to be registered in Tabu. Israel Lands Administration (ILA) (Minhal Mikarke'ei Yisrael): Ninety percent of land in Israel belongs to either the government or the Jewish National Fund. These lands are administered by the ILA. An apartment built on ILA land is only sold as a leasehold. A lease premium to the ILA must be paid at the outset, followed by subsequent payments, determined by the contract with the ILA. These include yearly leasehold payments (ask the seller what he pays) and Agreement Payments (see above), which have to be paid when the apartment is sold. (For a number of years these payments have been paid in advance, so often are not relevant to today's buyers. Pps.) Land Appreciation Tax (mas shevah): This tax can be costly – up to 50% of the property's appreciation. The purchaser must ensure that the seller pays it. To be on the safe side, the buyer should set aside an amount equivalent to this tax, in the event that the seller is not able to pay it. This is important. Proof of payment is necessary for the title to be transferred to the purchaser. Vendors are often exempt from paying the tax and must show proof of this exemption. Until this year a total exemption was granted on the sale of your only apartment or on the sale of any apartment every four years. A recent change in the law has widened the exemption to include the sale of a second apartment within the four-year period, in many cases. (check with your lawyer about recent changes in the law. Pps.) Lawyers: Remember that in any situation, either with a building company or individual seller, you are entitled to your own lawyer. The building company usually employs a lawyer, whom you are required to pay for, usually at a rate of 1.5%, even if you have your own lawyer. In any case, when dealing with a contractor it is advisable to have your own lawyer involved in the contract. Sometimes both sides will agree to use only one lawyer, for the purposes of saving on fees. There has been, and still is, much debate in the Israel Bar Association on this situation. The Bar Association's ethical rules permit this situation only if both sides have given their explicit consent in writing. Although most transactions go through smoothly, it is extremely important to have someone you can trust representing you. If you have any doubts at all, use your own lawyer. Leave fees (demei hachira): An annual payment made to the Israel Lands Administration on property that is not freehold (absolute ownership). The ILA gives the buyer the option of paying an up-front, one-time fee in place of the yearly Lease Fees (see Israel Lands Administration above). This payment also exempts the buyer from the Agreement Payment to the ILA when he eventually sells the property. You may want to have your attorney check into this possibility. Licencing Plan (Tochnit Rishui, also known as Tochnit Ha'amada or Tochnit Binui.): This shows the building in relation to its surroundings. Memorandum of Understanding (zichron devarim): Some people sign a "preliminary" memorandum before the final contract. What is often not understood is that this document is usually a fully binding legal contract and cannot be cancelled or even revised without stiff penalties. A Memorandum of Understanding should not be signed without obtaining the same professional advice as you would seek when entering into a full contract. Mortgages: Shop around. There are differences between banks and even branches of the same bank. Try to get a better deal. Some banks are now offering dollar-linked mortgages at reasonable rates. Find out what the monthly payments will be and what level of mortgage is affordable before you enter into a purchase agreement. If you are entitled to government mortgage rights, make sure that they apply to the specific home you are considering. Note: mortgage interest payments are NOT tax deductible in Israel. Municipality: Title transfer cannot be effected without confirmation that there are no debts to the municipality. A certificate can be obtained from the Municipality Treasurer. Note: the municipality demands that the Arnona (see above) be paid up for the entire year. Outline Plan (tochnit miter): Shows which parts of the area in question are slated for various purposes: open spaces, residential areas, commercial and industrial zones, public services new highways and so forth. This is available from the municipality. Payment terms and protection: Contrary to popular belief, there are no standard payment terms. In the case of secondhand apartments, everything is open to negotiation. The three standard methods for protecting payments on the purchase of a secondhand apartment are:   1.The buyer files a Cautionary Note (see above) in the Tabu (see above) stating that the apartment has been sold.   2. The seller grants an irrevocable power of attorney to the buyer, giving him the right to transfer the property if for some reason the seller does not do so;   3. A significant portion of the sale price is withheld until possession and/or title is transferred. In dealing with building companies the law places certain restrictions in order to protect the purchaser. The contractor must give guarantees – the most common of which is a bank guarantee – to secure the buyer's investment. There are alternative securities, which are of lesser value. The law also gives the option of linking payment to progress on construction. Remember to exercise your right to register a Cautionary Note if possible. Planning Laws: When buying an apartment, it is important to examine the Outline Plan and the Detailed City Building Plan (see above) to avoid unpleasant surprises, such as a new highway going through your backyard. Possession: Taking possession is the aim. The seller, for his part, will usually give possession only when a large portion of the price has been paid. Possession is still nine-tenths of the law in the sense that it is difficult to get someone out of an apartment once they're in. The possessor should not, however, be lulled into a false sense of security; in the long term, the law will not protect a buyer from an eviction order if he has not held up his part of the bargain. Price Linkage: Property prices are normally quoted as linked to the dollar. Contractors, however, often insist on linking to the official government construction index, which usually increases at a faster rate than the consumer price index. Purchasers whose resources are in dollars should ensure that they have the means to cover the rise in the dollar price. Realtors: There is no law governing the practice of real-estate agencies (accept that agents must be licensed. Pps) If the agent's introduction was effective in achieving the transaction, then the realtor gets a fee of 2% plus VAT, unless otherwise agreed. The burden of proof for any reduction from the 2% figure is on the buyer. Make sure that any agreement regarding this is put in writing. Tabu (land registration offices): Offices are scattered across the country. It should be noted that much land has yet to be registered with the Tabu. If your property is not registered with the Tabu, then title transfer is accomplished through the Housing Company and/or the Israel Lands Administration. Technical Specifications (mifrat): A contractor must provide signed Technical Specifications. Significant deviations from the Technical Specifications violate the contract. Many people ignore the Technical Specifications, but they actually make up the heart of the contract between the purchaser and the vendor. Any item not mentioned in the Technical Specifications could result in extra charges. It is imperative that the Technical Specifications be filled in correctly and fully. Title: No real-estate contract is fully executed until the seller's rights to the property are registered in your name. This process can vary greatly in length, from a few months to a much longer period. If the property is registered with the Tabu then it can be expedited rather quickly. When the title is registered with the Housing Company or the Israel Lands Administration, the transfer process involves many additional steps. The purchaser should try to ensure that the rights are transferred as quickly as possible. To this end, some of the price should be held back (in escrow) until the rights are transferred. It is customary for the seller to deposit with an attorney, as a security, an irrevocable power of attorney enabling the purchaser to complete the transfer once he has fulfilled all contractual obligations. VAT: Check carefully whether the price quoted to you by a contractor includes the Value Added Tax or if you are expected to pay an additional 17%. There is no VAT on secondhand apartments. Dr. Chaim Katz is an attorney practicing in Jerusalem.