This article is the first of two that will cover the various aspects of buying real estate in Israel. The first article will provide a general overview of the Israeli real estate system, the major differences between transactions in Israel and the United States, and the most important considerations in such a transaction. The second article will cover special issues when the property is new and being bought from the contractor, and also taxation associated with purchasing and selling property in Israel.
There are two types of property in Israel: privately-owned (private land) and state-owned property administered by the Israel Lands Administration (“Minhal”). Private real property, like in the U.S., is owned by the buyer with title vesting in him. Land is registered in the land registry (Tabu) under the name of the buyer. On the other hand, title to Minhal property does not pass to the purchaser. Instead, the buyer gets a long-term lease to the property which is usually for 49 years with an option for an additional 49 years. Over 80% of the land in Israel is Minhal land, so the buyer should not be deterred from buying it. However, private land is often viewed as preferable. As each type of land involves a slightly different purchase process, one of the first things to check is whether the property is private or Minhal.
Most buyers start the process by obtaining the services of a real estate agent in the area in which the buyer is seeking to buy. An agent’s fees are success based and range from 1-2% plus VAT depending on the size of the deal, and your negotiating abilities vis a vis the agent. The fees usually become a legally binding obligation once a legally binding purchase agreement is signed. Agents are required sign the potential customer on a written agent agreement and then add each property they show the buyer to the agreement, asking the buyer to initial next to the property to establish the agent’s right to a commission in case the buyer purchases that property. Many agents try to sign you up on many properties without actually showing you them all. This can cause a conflict between you and multiple agents so it is advised only to sign after the agent has physically shown you a property.
After finding a property and negotiating a price with the seller, the actual process of buying the property commences. The process of buying land in Israel is different from that in the U.S. in numerous ways. First, there is no standard escrow process and there are no escrow companies. Second, there is no title insurance. Rather, lawyers play a dominant and indispensable role in the purchase process and are responsible for protecting their client’s interests and handling the multifaceted and bureaucratic process from start to finish. Should each party retain its own attorney? Ethical rules of the Israeli bar are more liberal than in California and allow one attorney to represent both buyer and seller, a situation that happens often. However, a foreign buyer is particularly vulnerable and should not rely on the seller’s attorney, given the obvious potential for conflict of interest. Attorney fees vary between 0.5-2% of the deal plus VAT, depending greatly on the experience of the attorney and the size of the deal.
After finding a property and negotiating a price with the seller, and at times before retaining an attorney, it is not uncommon for the parties to sign an informal (binding or nonbinding) memorandum of understanding which sets forth the main terms, such as price and date of transfer of possession. The buyer may ask for a small deposit at this stage. Most attorneys caution very strongly against the signature of an MOU as it oftentimes leads to legal disputes as the parties who are not yet advised by an attorney do not realize that such a document will be binding upon them, and they may fail to insert certain critical language to it.
There are a few important issues to take into account prior to signing any document. First, the buyer’s should obtain a print out of the title of the property and make sure they are dealing with the true owners. The seller’s should be identified by formal identification. Second, given the fluctuation of the $/Shekel exchange rate and the devaluation of the dollar, purchase prices are now negotiated in Shekels. For a U.S. buyer to protect himself against further dollar devaluation, he should either negotiate a floor exchange rate, or have sufficient Shekels on hand to buy the property
Third, as there are no standard inspection processes in Israel, it is absolutely vital that no binding agreement be signed before the buyer have a contractor or architect conduct an inspection of the property to make sure that the property is in proper shape. For example, small cracks in the wall, which may or may not have been intentionally concealed by the seller, may indicate that parts of the property have been illegally built and are sinking. It also advisable to retain a licensed appraiser in order to obtain an appraisal as to the value of the property This is especially true for foreign buyers who are less familiar with property values in Israel. An appraiser is also qualified to give an opinion as to whether the apartment/house was built in accordance with the building permit and local zoning laws and regulations, and also to provide information as to what else may be built in the vicinity of the property in question.
The next stage is to retain an attorney to represent you. No transactions in Israel take place without attorneys. The lawyer is responsible for drafting the contract and conducting several aspects of the due diligence. The role of the attorney is vital because there are no other documents that set forth the rights and responsibilities of the parties, no escrow companies and no title insurance to verify title. Remember: other than when buying new property directly from the contractor, there are very few provisions set forth in the law that provide protection to either side beyond what is negotiated and written in the contract.
In preparation for preparing the contract, your attorney will examine title of the property; verify who the owners are and whether the property is owned free and clear of any third party rights or is subject to a mortgage or lien. If the land is Minhal, the attorney will check how many years are left in the current lease and whether a lease payment is due to the State. Usually, the lease payment is paid for the 49 years in advance and thus no monthly or annual fees are due from the purchaser at the time of the sale. However, if the lease is over, or the lease payments were not previously paid for in advance, a monthly or annual lease payment will be due to the State.
One of the issues that the attorney does not check, but which is the responsibility of the buyer is inspection of the property. While the seller is obligated to disclose any defects in the property, he may not. Also, defects may become apparent following the sale. In addition, building code violations such as unauthorized enlargement of the house are common and could result in future municipal lawsuits, demolition orders or payments to the city. As stated above, the best way for the purchaser to minimize these risks is to hire an engineer or architect that will inspect the property before the signing of a binding agreement!
Another very important issue which must be ascertained is whether the property is subject to betterment tax. Betterment tax is levied by the local municipality or regional counsel on properties which have received additional construction rights as a result of a change in the local zoning laws. Thus, if a house has become entitled to construct an additional level, then that is deemed to be a taxable benefit, which is taxed at the high rate of 50% of the value of the benefit. The seller is usually responsible for paying this tax, but if the contract does not address this issue, then the obligation may fall upon the purchaser, who will not be able to transfer the property to his name without settling this debt.
The most important part of the agreement from the standpoint of a purchaser is the part of the contract dealing with the payment schedule and escrow arrangements. The agreement must establish the portion of the purchase price which is paid to the seller at each step of the process, from initial signing of the agreement until the transfer of possession and title.
The amount to be paid at each milestone is negotiable and it is important to understand the various material milestones in the process. Usually, the first milestone is filing a “warning” on the property’s title at the land registration office (“tabu”) after the contact is signed stating that the property is under sale and cannot be re-sold by the seller. Another milestone involves the removing of any mortgage on the property. If a mortgage exists on the land then the seller is required to bring a letter of intent from his lending bank setting forth the sum required to be paid to the bank in order for it to release the mortgage. In such a case a certain sum is usually paid after the mortgage is removed, or the buyer pays off the mortgage directly to seller’s lending bank to release the mortgage.
Another milestone occurs when the buyer providing the seller with all the documents required to transfer title. These documents include certificates from the tax authorities and the local municipality that the seller has paid all debts owed and that there are no building violations. Another crucial document which is required to be furnished by the seller is an irrevocable power of attorney which authorize the purchaser’s attorney to sign any document and take any action required in order to transfer the property to the name of the purchaser. This power of attorney is irrevocable, by the terms of Israeli law, because the rights of a third party, the purchaser depends upon its validity. These documents, especially the power of attorney, is released to the purchaser against payment of all or almost all the purchase price to the seller, as the transaction is near the end and the only remaining action is actual transfer of title by the purchaser’s attorney, and granting of possession. [not done any more]
With regard to apartments, a few additional point should be mentioned. First, joint buildings (condominiums), buildings containing two or more apartments, involve relationships between tenants. These relationships are covered by building by-laws and address issues such as use of common property, entitlement to use unused building rights, the share of each apartment in building maintenance, and so on. The purchaser should ask the seller for a copy of the by-laws. Many times buildings do not adopt by-laws in which case the statutory by-laws set forth in the Real Estate Law apply. Second, various attachments to the property, such as parking spaces, should be part of the title to the apartment. Third, in addition to arnona, each apartment pays monthly house committee dues. The purchaser should inquire as to the amount of the dues, but unless one is dealing with a building which provides many services (a pool, exercise room, doorman, etc.) these dues are usually fairly nominal.