Due Diligence

Due diligence. Due diligence. Those two words are the key to any successful business deal. Why should it be different when buying real estate? It certainly should not be different when buying real estate in Israel, whether you live abroad or in Israel.

Before entering a real estate transaction there are a few basic things that should be checked in to.  In short – due diligence.

  • Is the property registered in the seller’s name.  In Israel there is no title insurance. Your real estate lawyer does the title search.  This title search will show if the sellers own the property and whether it is mortgaged or there are other debts or encumbrances.
  • If there is a mortgage, your real estate lawyer should find out what is the outstanding amount owed in order to make provisions within the payment schedule for the mortgage to be removed.
  • If there are other debts your real estate lawyer should find out what they are and make provisions in the contract for them to be removed.
  • If the property is an apartment in an apartment building (condominium) then your attorney should ascertain what is attached to the apartment.  Is the parking space that you were told belongs to the apartment the same one that appears in the registration as being attached legally to that apartment? Is there a garden or storage unit legally attached to the apartment? What about the roof? It is not enough that a custom has developed over the years that the people who own this apartment always park in this spot or use this storage unit. It has to be registered. This is part of the title search your real estate attorney will do.
  • Is the existing apartment built according to a legal building permit? Did the seller or some previous owner close a porch or add on a room? If so, did they have a building permit to do this? If they didn’t then this can affect your ability to get the mortgage you want.  The mortgage banks always send an appraiser to make sure the apartment is worth enough to allow them to give you the mortgage you are asking for.  The appraiser will only appraise the legal parts of the apartment. For example, if you are asking for a mortgage that is worth 50% of the price in the contract and the appraiser appraises the apartment for less than the price in the contract then you will only get 50% of the amount the apartment was appraised for.
  • In addition, if there is illegal building you may be called upon in the future to dismantle the illegal additions or apply for a building permit. Therefor it is wise to hire an appraiser before the signing of the contract to make sure there is no illegal building.  If there is illegal building then the appraiser can tell you whether or not there are additional building rights that would allow you to get the permit and whether from a zoning perspective a permit would even be grantable.
  • If the property is a free standing house, then it is necessary to check that the boundaries of the plot are correct. This is done by a licensed surveyor who can measure the plot and check with the land registry that all is correct.  This would prevent any future claims by neighbors that you are encroaching on their property.
  • It is important to hire an engineer to check the property to make sure that it is structurally sound and whether or not there are dampness problems.  The engineer will usually prepare a written report that will list all the defects found in the apartment. If the defects are minor things then it should not be a reason to walk away from the deal. You could renegotiate the price or not as you see fit.  If there are major issues you may decide not to buy the property. A good engineer’s report will give you an idea of what you are getting yourselves into vis a vis the condition of the property.
  • If the property is an historical building with landmark status then special rules apply. Some historical buildings cannot be added on to. This means that you cannot change the façade of the building.  You can’t add a floor or build from the sides. Some historical buildings allow for some additions to be made.  When buying such a building it is important to research its history and the reason it was given landmark status. This can affect any future renovations you are planning for the property. Very often these buildings are not built by conventional means and therefor it is important to learn about the building technologies and materials that were used. It is therefor important to consult with preservation architects and engineers to find out the answers to these questions.
  • It is important to note that when asking for a building permit to renovate or build on to an historical building a special dossier needs to be prepared.  This dossier includes historical information about the property, the original owners, the architect who designed it, whether any historical events happened there, what are the building materials, what is the building technology used and what is the style of the architecture. The file will include old plans, and historical pictures. There are preservation professionals that can prepare this dossier for you.
  • It is important to decide how you will transfer funds to Israel in order to pay for the property. Do you have a bank account in Israel? Will you transfer the funds to your lawyer’s escrow account or will you use the services of an exchange company? It is important to make this decision because opening accounts takes longer than they did before and banks require documentation before allowing an account to be opened and before allowing the transfer of large amounts between accounts.
  • If your funds are not in Israeli currency, then thought must be given to the various options for converting your money into Israeli currency. Israeli banks charge a commission when receiving funds into an Israeli account, then they charge a commission for the act of converting the money into Israeli currency.  The banks also do not give a favorable rate of exchange. This situation causes many people to transfer their funds through Israeli exchange companies which don’t charge commissions and who negotiate a better rate of exchange for you. You must make sure to choose an exchange company licensed by the Bank of Israel.
  • If you are purchasing an apartment from a construction company the price is linked to the Israeli building price index. Therefor it is important to plan the payment schedule in such a way that any rise in the building index will have a minimum affect on the final amount you need to pay for the apartment.
  • If you are buying an apartment from a construction company and plan to make changes and upgrades you should consult with an Israeli architect or interior designer to make sure the changes you want to make to the apartment can be implemented.  This professional should look at the specifications of the apartment to see that the materials used are indeed in accordance with the official Israeli standards. If you have dreams of a great panoramic view from the apartment porch then it is wise to consult with a town planning expert (an architect or appraiser) to see whether there are plans to construct any buildings on the empty lot right opposite your apartment.
  • In Israel 90% of the land is owned by the government and administered by a government agency called the Israeli Land Authority (the ILA). The rights in the land that you are given are long term leasehold rights for 49 years.  In some cases the ILA will allow you to purchase the direct ownership rights.  It is important to check this out first to see how much purchasing the direct ownership rights will cost. This is something your real estate lawyer can initiate for you.

Purchasing real estate in Israel, like any business transaction requires that you do our due diligence so you do not make any mistakes that will cost you extra money and aggravation down the road. If this seems like a daunting task or you feel that you just don’t have time for this then do what you would do in your business – delegate.  Hire the right professionals to do this for you.

Leave a Reply

Your email address will not be published. Required fields are marked *