What is due diligence in Israeli real estate transactions? What questions does a potential buyer need to ask before entering a real estate transaction? Who is the professional that can answer these questions? Some of these questions need to be asked of the seller, your lawyer, and the authorities, and some you need to ask of yourselves.
Essential Questions to Ask During the Due Diligence Process in Israeli Real Estate Transactions
Question # 1: Who is the owner?
The first step is a basic title search. Israel has a very efficient land registry office. It is all computerized. The land registry office can provide you with an extract within a short period of time that will show who owns the property, whether there is a mortgage on the property, and whether or not there are liens or other debts. It will also provide you with plans of the building that show the location of the apartment, the size of it, what is attached to the apartment like a garden, rooftop, parking space, or storage unit, and the location of these attachments.
The land registry can also provide information about whether or not owners of apartments have any additional rights.
The professional that does this title search is your real estate lawyer. There is no title insurance in Israel.
Due Diligence: It’s all about the property
Question # 2: Is the building structurally sound?
Does the building have cracks? Is there dampness? Was the electrical work done properly? In order to know this, you need to hire an engineer to check the apartment and write a comprehensive report as to the condition of the apartment. The purpose of this report is to know what the condition of the apartment is. What needs repair and what will be the cost and extent of such repairs? You need to know what you are getting yourself into.
Question # 3: Is there any Illegal building?
Did the current (or previous) owner build any additions to the property without obtaining a building permit? If there is an illegal building, then this can cause problems with a mortgage and registration of title. The municipality may come and ask you to demolish the illegal parts of the property. You may incur a hefty fine.
It is not enough to rely on the word of the seller. Perhaps the illegal addition was built before he bought the property, and he is not aware of it. You cannot rely on the plans of the land registry which are correct to the day they were registered and may not include any additions built after that date.
The only way to know for sure is by having an appraiser or architect compare the land registry plans, and the actual built situation to the building permit on record with the municipality. If there are illegalities, then the next questions to ask are can the illegalities be made legal, and how much this will cost?
Question # 4: What can be done with the property?
Do you have ideas for renovating the property you are about to buy? If so, you need to check whether you can obtain a building permit for the work you want to do and how much this will cost you. For this, you need an architect who will check what you are allowed to build from a town planning perspective. You also need to check whether what you plan to do is structurally possible. For this, you need an engineer.
Question # 5: Do you need to do any tax and estate planning?
In every real estate transaction, there are taxes to be paid. Purchase tax is paid by the purchaser and capital gains tax is paid by the seller. Before purchasing an apartment, you need to consult with an Israeli real estate attorney who is well-versed in these taxes. Perhaps there are legal ways to save money on these taxes.
It is important to give some thought to how this transaction can affect future taxes on other transactions and how it will affect the disposition of your estate after you die. Should this transaction be done through a trust? Will there be income tax for the rental of the apartment? How much will these taxes be? These questions and more need to be asked of your lawyer and answered according to your situation and status at that time. The tax situation should be reviewed every few years to assess any need for change.
Finances and Transactions
Question # 6: How to finance the transaction?
The question of how to finance the transaction is not exclusive to Israeli real estate transactions. How will you finance the transaction? Through an Israeli mortgage bank? Perhaps you can obtain a loan in your country of origin? Perhaps you do not need financing but are thinking of taking a loan anyway?
Israeli mortgages are sometimes more worthwhile than a loan in your country of origin, but this is not always the case. Times change, economies change, and interest rates change so it is wise to consult professionals about this question.
If you are thinking about taking an Israeli mortgage it is wise to consult with an Israeli mortgage consultant (not a business adviser in your country of origin). Israeli mortgages have different tracks that provide different ways of calculating the repayment of the mortgage. A mortgage consultant can advise which mortgage is best for your situation and can negotiate better conditions for you with the mortgage bank. This can save a lot of money over the life of the mortgage. Both your mortgage consultant and your Israeli real estate lawyer can explain the mortgage process to you.
If you are unable to finance the transaction with a mortgage, the question of the mortgage must be settled before the signing. You must get approval in principle for your mortgage beforehand. You will not be able to renege on the contract after the signing because you weren’t granted the mortgage you needed.
Question #7: How will you transfer your money to Israel and convert into NIS?
This may seem an easy task and, in the past, it was, but not today. Due to the enactment of Anti-Money Laundering Laws in Israel and many other countries in the past few years, transferring money to Israel has become more complicated. The banks ask for a lot of documents concerning the origin of the money and whether or not taxes were paid. So, the question of the money transfer necessary to finance the purchase needs to be settled before signing the contract. If not, unforeseen delays can cause a purchaser to be late in paying, which is a fundamental breach of contract. This can cause the purchaser to incur the payment of damages.
In addition to this, the issue of how the money will be converted needs to be addressed to save money on conversion costs at Israeli banks.
When buying or selling real estate in Israel, consult with Israeli professionals. Your lawyer in your country of origin cannot help you in an Israeli transaction. The law is different, the language is different, and the practices are different. Don’t think of what should be in Israel but learn what is in an Israeli real estate transaction.
Don’t consult with an architect or interior designer in your country of origin in an Israeli real estate transaction. They cannot help you in Israel. They don’t know the laws, the materials, and the procedures in Israel. The same is true of consulting your business consultant when debating the mortgage issue. Israeli real estate practices, economy, and mortgages are different from what you may be used to, therefore your business consultant may not have the right understanding needed to give you the best advice.
Here is another article on due Diligence: Before entering a real estate transaction there are a few basic things that should be checked in to. In short – due diligence.