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Purchase Agreements Done Right

By Shia Getter

Mazal tov! You found a promising new project and have decided to purchase. May your new apartment in Israel bring you much nachas, and may you enjoy your investment for many long years.

But, wait. Don’t call a moving company yet. Actually, don’t even sign yet. There are still many details to work out. In this article, we’ll look at some of those details concerning the first payments you will be making to the developer for your apartment. Being “in the know” before signing anything can end up saving you thousands of shekels.

Understanding The Memorandum Of Understanding

Many developers insist that you sign a memorandum of understanding—an MOU, or a zichron devarim—at a very early stage. A “Request to Purchase” document is the same thing. Signing such a document is often the first step in the purchase process.

An MOU is actually a contract under which interested buyers are asked to put down a cash deposit (usually between NIS 10,000-40,000). Since this document is a general agreement, and the developer may try to pressure buyers into signing it right away, most people mistake the MOU to be merely a declaration of intentions and not binding. In fact, most memorandums are contracts for all purposes and are enforceable by law.

However, it’s not a good contract. It usually has only very basic information, leaving loopholes the seller may use to back out further down the line. It is never in the buyer’s best interest to sign a zichron devarim. If the developer insists that you sign one to show you are serious, bring in a lawyer first. Although it may seem premature to involve a lawyer at this early stage (especially if the developer tries to convince you it isn’t necessary), a contract is not to be taken lightly, and again, this is a binding contract. A good lawyer will add some clauses for your protection to make sure the MOU is not weighted against you.

For example, make sure there is an explicit clause which reserves your right to back out within a reasonable amount of time, as well as your right to back out in any situation of legal disagreement, in which case your deposit will be returned in full, with no penalties or fees. Also make sure it is explicitly understood that this deposit counts as your first payment toward the purchase price (and, as such, will be deposited into the project’s designated bank account, to be explained below). Everything needs to be in writing; a verbal, “yeah, of course, of course” does not suffice.

Verify That The Project Uses A Construction Loan

Since “Cheftziba”—that 2007 real-estate nightmare which cost many buyers their entire investments—Israeli law now requires a construction loan. This means that the individual buyers put their payments in a designated bank account instead of paying the developer directly. The bank ensures that every shekel withdrawn goes into the project. For each payment (above the first 7%), purchasers are provided with a bank guarantee or insurance policy within 14 days, as required by the Sale (Apartments) Law. The cost of this is covered by the developer.

This system protects your payments until construction is complete: the developer cannot put the money to any other use, and the purchaser is protected against the possibility of the developer’s insolvency. Additionally, the payment schedule is pegged to the project’s progress. And if the project gets stuck, the money from the guarantee will be used to complete the project.

Verify that the contract stipulates that all payments (including the initial deposit upon signing the MOU) will be deposited only into the project’s designated bank account.

Penalty Clause

Building projects are known to lag. Sometimes this has financial consequences, and it certainly causes anxiety, especially if you are waiting to move in. This must be expected to a certain degree, and you should take it into account, but you’ll also want to take steps to ensure that the delays will be kept to a minimum. A late-penalty clause in the contract encourages the developer to keep the construction moving according to schedule. The standard penalty amount is the value of one theoretical month’s rent for each month overdue.

Use The Payment Schedule To Your Advantage

When buying from a developer, the full purchase price gets paid gradually, parallel to the construction’s progress. This is stipulated in the contract. However, let’s take a look at how adjusting the payment schedule can save you—or cost you—thousands of shekels.

On the one hand, you’ll want to put down as little as possible at the beginning and leave the majority of the payments for the later stages, as this will push off the date of taking out a mortgage, which means you won’t yet be accruing interest at the bank.

On the other hand, your payments to the developer are linked to the price index of input in residential building and to the inflation index. So payments not yet deposited in the project’s account are actually growing at about 3% or higher per year.

Good planning here can save you thousands in interest or inflation, so it definitely “pays” to hire an expert (and make sure he is an expert) to map out these payments to your advantage. v

Shia Getter is the CEO of the Shia Getter Group, a full-range real estate services firm in Jerusalem catering to the Anglo investor. He is a noted expert, columnist, and author of The Guide to Investing in Jerusalem Real Estate. He and his professional team manage many upscale Jerusalem properties and have helped countless people buy, sell, and renovate property in Israel.

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Posted by on January 23, 2014. Filed under In This Week's Edition. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.