Banks and Israeli real estate are intertwined. Banks play an important role in Israeli real estate transactions. When you purchase real estate in Israel, how do you pay for the apartment if the seller is Israeli and wants to get paid in Israeli currency? You need to solve several problems. Transferring funds to Israel and converting the money to New Israeli Shekels (NIS) without losing your pants or your sanity.
Most foreign purchasers of Israeli real estate do not have a bank account in Israel with an Israeli bank. Most foreign purchasers hold their money in foreign currency and not NIS. Therefore, the first problems that need to be solved are how to transfer the funds to Israel, where to deposit those funds and where to convert the foreign currency into NIS.
Secondary questions are how to disburse payments for additional expenses like taxes, professionals etc.? How long will it take to open any form of account and what documentation do the Israeli banks require for this?
There are several options for possible solutions to this. You can open an account in Israel as a foreign resident. You transfer your funds to this account, convert the money to NIS and instruct the bank to make the payments. Another solution is to have your attorney open an escrow account. You transfer the money to this account and your attorney who controls the account can convert the money to NIS at the bank and make payments for the transaction. A third possible solution is to use an exchange company. You send the funds to an exchange company, they convert the funds and then transfer the money to an account you set up in Israel and some of these company’s will disburse payment for you in accordance with your instructions.
Before I analyze these possibilities, it is important to understand a few things about Israeli banks. The first thing to understand is that they always, and I mean always, make money off whatever transaction you are doing. That is first and foremost in their minds. Another thing to understand is that they always protect themselves first. This is not a business where making things easier for customers is uppermost in their minds.
When you send foreign currency to an Israeli bank from abroad the bank charges a commission for receiving the funds into the account. When you convert the funds into NIS they charge another commission for the act of the conversion of the funds. Then they give you a bad rate of exchange.
In Israel, there are three rates of exchange when converting foreign currency into NIS. The higher rate is the rate at which you purchase foreign currency at the bank. Who profits from this? The bank. Who loses? You. There is a lower rate of exchange for when you sell your foreign currency to the bank. Who profits from this? The bank. Who loses? You. There is a middle rate of exchange called the representative rate of exchange (in Hebrew “Hasha’ar Hayatsig”) published by the Bank of Israel at 2 PM every day except Saturdays and Sundays. No one uses the representative rate of exchange, that would be to fair and evenhanded, and the banks wouldn’t make any money that way.
This means that when you transfer money to Israel you will lose money on the conversion costs and therefore you need to find a way to minimize this loss. One way to do this is to use an exchange company who does not charge commission as the banks to and that will give you a better rate of exchange. Another solution a client of mine found was to convert her US dollars at her bank in the States and send over NIS. Ask you bank if this is possible (it is not possible with all foreign banks but with some it is) and what rate of exchange they will give.
Another thing that you need to understand is that whereas before Israel was an easy place to transact business, this is not the case anymore. Since 9/11 countries all over the world enacted anti money laundering laws and Israel is no exception. This forced banks all over the world (even in places where secret bank accounts abounded) to be clearer as to the transactions. Now the banks need to ask, where is the money coming from, was it earned legally, were taxes cleared on it?
A few years ago, many Israeli banks were investigated in the US and made to pay very hefty fines for not adhering to the above rules. These fines reached into the hundreds of millions of dollars. It started with Bank Leumi and spread to Bank Hapoalim and Bank Mizrachi as well. Needless to say, all Israeli banks are very wary of US citizens opening any type of account in Israel. They also give information to the IRS about accounts held by “US Persons”. So you would be smart to consult your US accountant on whether or not you need to include this account on your FBAR.
The result of the above is that whatever way you choose to transfer your funds to Israel you need to understand that you will be asked to provide documents such as a letter from your accountant saying that you have paid taxes on these funds, a letter from your bank saying that you are a client in good standing, a copy of the draft sales agreement you are about to sign and a letter from your Israeli real estate attorney explaining the nature of the transaction.
Even when you provide these documents it all gets scrutinized by the Israeli bank when the money arrives in the bank in Israel. The bank will hold the money in a transfer account for several days and maybe weeks as clerks from the special department that deals with foreign currency transactions and foreign clients, review the documents. Very often they will ask for more documents.
The upshot of the above is that the issue of transferring funds, conversion of funds and disbursing funds to the seller, taxes etc. needs to be addressed very early on, when you start to even dream of your purchase. You need to leave yourself enough time to get this all done on time before the signing of the contract. The years when you could wait to get organized with the money transfer until just before the signing or just after (so you didn’t send over and convert money for nothing if the deal fell through) are over. You need to get organized and leave yourself time for this.
Opening an escrow account for when the beneficiary is a foreigner can take a month. Opening an account in an Israeli bank may take time unless it is done within the framework of getting a mortgage. Then the banks miraculously open the account in a timely fashion. But this does not mean that if you want to open this account at the beginning, before you take the mortgage it will be just as easy, and it doesn’t mean that when you send money to that account the process will be easier.
Another fact to be aware of is that whoever sent the money to the Israeli account needs to be the purchaser. I have some instances where a parent wanted to send funds over to a child to assist with the purchase of an apartment and this caused problems and the necessity to present the Israeli bank with more documents.
I chose to write on this subject because when I explain the above to new clients, they don’t believe me. They get insulted, and their banks get insulted at the “audacity” of Israeli banks for questioning their integrity and heaping on them more hassle. Perhaps the banking system in their place of residence or business is easier to deal with and they can’t imagine such difficulties.
Information is power. Use the warnings and information I am giving you now. Don’t rail against the Israeli system. Don’t keep saying that the system is better run elsewhere. None of that will get you to your goal which is to purchase an apartment in Israel. Take this information and learn to work with it.
These problems are like a nasty mosquito that keeps buzzing around your head. They are annoying but there are solutions for the problem. The reward is a home in Israel.