When you buy an apartment “on paper” you don’t really know how the finished product will look because all you see are the pre-construction plans. You have very little idea how the apartment will turn out or how the neighborhood will evolve. So why buy an apartment that hasn’t even been built yet? Well, for one thing, the prices are often cheaper than those of second-hand apartments, and for another, you can often change the internal plans of the apartment to suit your needs.
However, buying a new apartment at this stage can sometimes be a daunting experience and you may have many unanswered questions, such as:
- What happens if the construction company goes bankrupt?
- Will the company finish the construction on time?
- Will the apartment be built according to what was promised?
- Will there be hidden costs?
10 Important Things to Know
- The plans you see may not be the final plans. The final plans may differ and any measurements or sizes that appear on the plans you are shown when you visit the company’s offices or the construction site may not be final either. The plans that bind the construction company are the plans that are attached as an addendum to the purchase agreement and signed by the parties.
- Once you’ve chosen an apartment and have agreed on the price, the company’s representative will try to sign you on a registration form or offer to purchase form and take a registration fee. Once you have signed this form the company is bound to keep this apartment for you and may not sell it to anyone else. Ask your real estate attorney to check the form before you sign it to make sure that any fee you pay will be returned to you should you decide in the end not to buy. These forms usually include a date by which you are supposed to sign a formal sales agreement.
- After you sign the registration form, the company should give you copies of your real estate contract which you will then take to your real estate attorney. Your lawyer will read the contract and perhaps make some changes in the content. There is often room for negotiation at this stage, despite the fact that these are standard contracts for the whole building project and it is important that your interests are protected.
- There are several laws governing the sale of new apartments by construction companies. These laws provide for the protection of the purchaser’s money, they warranty the quality of the building and control the content of certain aspects of the sales agreements.
- The law mandates that the buyer’s money must be protected. There are three ways in which this can be done:
- the construction company can insure the money in an insurance policy
- the payments can be made in accordance with the progression of the building
- the buyer can be issued a bank guarantee for the amount of the money paid
A bank guarantee is by far the most common method of financial protection.
A bank guarantee works in the following manner: The funding for the project is given by a bank, which then issues the bank guarantee to the buyer. The money paid by the buyer is deposited in a special account in the name of the construction company. The bank allows part of this money to be given to the construction company at predetermined stages of the project, as and when the construction company completes its obligations, as confirmed by an engineer working on behalf of the bank. In return for the bank giving this guarantee, the whole project is mortgaged to the bank. The mortgage is only lifted when the construction is complete, and the rights to the apartment are registered in the buyer’s name. In order to protect the purchasers the bank guarantee stays in effect until the registration is complete.
- Two documents, the plans and the specifications describe the apartment you are buying. These two documents are attached to the purchase agreement as addendums and signed by the parties to the contract. The plans show a sketch of the apartment with the actual size of the rooms, the location of windows and doors etc. The specifications describe the materials that make up the apartment, including how many electrical sockets are in a room, what the kitchen cabinets are made of, what kind of sinks and bathtubs you are getting and more. If the apartment includes a garden or a roof this should appear in the plans and the specifications. The law provides that the company must deliver the apartment as specified in the plans and the specifications and that the company must compensate the purchaser if it fails to do so.
- The company is responsible for delivering a product without defects. If there are any flaws in the construction, the company is responsible for fixing them. Before you take possession of the apartment you will have an opportunity to view the apartment together with a representative of the construction company. Together, you will prepare a protocol which lists any defects that are visible by a layperson. Note that the company is not required to repair any defect that could have been seen at this point by a layperson and was not written in the protocol. For this reason, it is prudent to ask a qualified building engineer to accompany you to this meeting to point out any flaws that you may not notice. Frequently, the construction company will fix any defects immediately and you will be asked to confirm in a second protocol that all the issues have been dealt with. Sometimes, there are hidden problems which cannot be detected at this stage. For example, dampness might only be detected in the winter after rain. The construction company is required to repair these defects as well. Israeli law provides warranty periods for various items in the apartment.
- When purchasing an apartment on paper the buyer is usually asked to pay the legal expenses of the construction company. This usually varies between 1.5% and 2% of the price of the apartment plus Value Added Tax (VAT, which is 16.5% of the fee). In addition to this, the buyer is very often asked to pay the costs of the bank guarantee as well. It should be noted that sometimes these costs are factored into the price. At the conclusion of the construction, the buyer pays to have the apartment hooked up to water, gas and electricity. If you choose to upgrade any of the specifications, you will need to budget for this as well.
- Usually the construction of the project is completed before the registration of the property title. The company’s attorney is responsible for the registration of the project, the apartment building and the specific apartment in the land registry. The registration is done after the relevant authorities have surveyed and mapped out the land, a court order has been issued, and architectural plans have been filed with the land registry. Very often this process takes many years. In the meantime, the rights of the purchaser are registered in a temporary registration at the construction company or its attorney and until this temporary registration has been done, the bank guarantee must stay in effect.
- After the construction and protocol are completed, the buyer can take possession of the apartment. From this point onwards, all running expenses such as electricity, water and municipal taxes are paid by the buyer.