You’ve decided to buy an apartment from a construction company and closed on the price. Congratulations. But before you travel any further down the property purchase path, here are a few important things you need to know so that you can plan your finances for the transaction without getting taken to the cleaners.
- Linkage. The prices of these types of contracts are always linked to the U.S. Dollar or to one of the Israeli price indexes. It is important to understand what this means. If you don’t, you could find yourself very short of money.
- Linking to the dollar. This means that the price in the contract appears in shekels. The payments are made in shekels but they are linked to the representative rate of exchange of the dollar. The representative rate of exchange is published by the Bank of Israel every afternoon except on Saturdays and Sundays. In order to protect themselves against the falling rate of the dollar, construction companies put in a clause that the rate of exchange cannot go below a certain rate. This means that if the dollar rate falls below the minimum rate set in the contract, you will pay according to the minimum rate of exchange and not the actual rate. Consequently, if your money is in dollars and you have to convert those dollars into shekels at a rate that is higher than the actual rate, you could find yourself in a situation where you need to sell more dollars to make up the difference.
- Linking to one of the Israeli indexes. On the 15th of every month the Israeli Bureau of Statistics publishes the Israeli price index. This measures the rate of inflation in Israel. There is an index in every category, including a building index. The average of all the indexes is called the Consumer Price Index. The prices of apartments purchased from construction companies are linked to either the Consumer Price Index or the Building Index. This means that the more you spread out your payments over a longer period of time the more the price will go up as inflation rises. You can minimize any rise in the price of your apartment caused by the rise in inflation by planning out your payment schedule accordingly.
- Late Payments. All contracts with construction companies contain clauses dealing with compensation in case of late payment. Make sure you read and understand these clauses. In most cases, the construction company will not agree to any changes your attorney might want to make, and these clauses will be enforced at every opportunity. The compensation for lateness is usually about 2% of the debt a month. On top of that you are still paying the linkage described above. If you find yourself making a late payment, that payment will first be deducted from the interest you owe, and not the principle. The principle will continue to accrue interest and linkage until it is paid off. This can add tens of thousands of shekels to the price depending on how late you are with the payments.
- Compensation for breach of contract. If you are in a fundamental breach of contract due to late payments, the construction company can charge you a compensation fee in addition to the interest and the linkage fees. The stipulated fee in your contract is usually about 10 – 15% of the apartment purchase price.
- Additional costs. The additional closing costs involved in this type of deal are the construction company’s legal fees, your lawyer’s legal fees, purchase tax and the cost of hooking up to the utilities.
- Avoiding the pitfalls. While linkage cannot be avoided completely, your Israeli real estate attorney can help you minimize the extra costs due to linkage by advising you on how best to plan your payment schedule. Once you’ve figured out the price, the linkage and the closing costs and you have your payment schedule in place, plan your finances accordingly. Make sure you make your payments on time. If you see that you have a problem, let your attorney know so that he or she can contact the construction company and work out an alternative payment schedule. Very often the construction company will agree to a revised schedule with no problem. Remember to deal with any issues as they come up. At the end of the deal the company won’t give you possession of the house if they feel you owe them money – even if you have paid the price in full and all you owe is interest for lateness.