8 Questions to Ask When Buying Second Hand Real Estate in Israel

Buying real estate in Israel needn’t drive you crazy. If you know what questions to ask, you’ll be able to navigate the legal maze much more easily.

Who owns the property?
A majority of the land in Israel is owned by the government. Only a small percentage is privately owned. When you buy an apartment built on land owned by the government you get a long term lease for 49 or 99 years. At the end of the lease period the lease is renewed for an additional 49 or 99 years. The land is administered by a government agency called the Israeli Land Authority. Simply put, you own the property but the Israeli government owns the land it sits on.

How could zoning affect me?
Every city, town or village has a town plan. This plan sets out how large the houses can be, how tall they can be, how far away from the road they have to be situated etc. Before you purchase an apartment it’s prudent to check out what is being planned for the neighborhood. Is there an empty plot of land next door? Is it slated to be for public or residential use? Could a tall building be built there?

It is also wise to find out whether the house or apartment you are considering has used all its building rights. If this is so, you will not be able to obtain a building permit to make additions to the house unless the town plan is changed, which can be a long and expensive process. You should also check to see if the property you are buying is built according to the building permit. If it isn’t, you run the risk of being forced to dismantle any illegal additions to the house.

What do I need to know about conversion costs?
Prices of second hand apartments in Israel are often linked to the US dollar. This means that the price is paid in shekels according to the representative rate of exchange of the dollar to the shekel on the date of payment. However when you sell your dollars to the bank or money changer, you are paid a lower rate of exchange. When you buy dollars from the bank or money changer you pay a higher rate. The representative rate of exchange is the average between the high and low rate as set out by the Bank of Israel every day (except Saturday and Sunday). All this means that when you convert your dollars to shekels you lose money because of the difference between the representative rate and the rate at which you sold your dollars. Additionally, the banks charge a commission for the conversion and for receiving foreign currency. These are conversion costs and should be included in your budget as part of the closing costs.

If your money is in dollars, you will be financially better off if you can pay for the apartment in dollars and avoid any conversion costs. However, since the shekel and not the dollar is the legal tender in Israel, the seller does not have to accept payment in any currency other than the shekel.

When do I need to pay for the apartment?
In many countries the payment schedule is a very easy affair. Ten percent is paid upon signing the contract and 90% is paid at the closing. This is not the case in Israel. Although the law does not prohibit such a payment schedule it is not customary.

In Israel, you are free to set out any payment schedule you want, but there are some issues you need to take into account. For instance, the process of getting a mortgage is often not a quick one. It is a good idea to give yourself at least a month to arrange the mortgage. If the seller also has a mortgage, he has the option to transfer his mortgage to another property instead of paying it off. That can take a few weeks if not longer. If the purchase is part of a housing chain so that the seller needs to get money from you in order to pay for the house he is buying, two or more transactions might require a parallel payment schedule.

You may also need to adjust your payment schedule to take into account funds which may only be liquidated by a certain date. Money should be held back until all the tax issues connected with the deal are settled and this also takes time.

Since payment schedules can be complex, you should never agree to any arrangements without consulting your real estate lawyer. If you don’t get it right, you could find yourself unable to pay on time through no fault of your own.

How do I protect my investment?
The payment schedule means that you will pay money in advance without actually taking possession of the apartment at that time. After the first payment, your lawyer will register a notation with the authority with which the property is registered. A pledge in your favor may be registered with the Registrar of Pledges. This prevents the seller from selling the property to someone else. Payments should be held back or held in escrow until the seller completes certain acts or presents certain documents. For example some payments should be held up until the seller’s mortgage is lifted or the taxes connected with the transaction are paid.

How much tax will I have to pay?
Every real estate transaction has certain taxes associated with it. The seller has to deal with capital gains tax, sales tax, betterment tax and sometimes property tax.

The purchaser has to pay purchase tax. This tax has to be paid within 50 days of the signing of the contract. The tax is computed on a sliding scale and is easy to calculate. The more expensive the apartment, the higher the tax. If the purchase tax is not paid, the property cannot be registered in your name. Lateness in paying the tax will incur fines. Your lawyer will be able to tell you how much the purchase tax will be for any apartment you are considering, so that you can add this figure into your budget.

When can I move in?
Transfer of possession takes place on the day of the last payment. The last payment is made in cash, bank check or transfer, and the purchaser is given the keys to the apartment at this time. The parties should meet at the apartment so that the purchaser can have a chance to look around and make sure the apartment is in the same condition it was in on the day of the signing.

Second hand apartments are bought as is. This means that the purchaser cannot sue the seller for any defects existing at the time of the signing or any hidden defects that the seller was unaware of. At this time the meters are read to make sure there are no outstanding utility bills.

When does the property get registered in my name?
After the final payment, the house is registered in your name. At the time of the signing the seller had signed an irrevocable power of attorney empowering both lawyers to complete the transfer of rights. At the final payment this power of attorney is given to the purchaser’s attorney.

If all the paper work is not yet prepared, money is held in escrow by the seller’s attorney until all documents necessary for the registration are in place. The registration can take several months. After an apartment is built, it takes several years until the whole project is registered in the land registry. Until this registration takes place, the rights in the apartment are registered with the company that built the building.