Based on reader requests, we are running a series of “how to” articles that focus on various aspects of purchasing a home in Israel.
We are involved in property sales throughout Israel, many of which are of existing homes. However, since demand for quality housing greatly outstrips supply, hundreds of our clients have purchased not-yet-built apartments, which is known as buying “on paper.” The goal of this article is to help you understand the process of buying on paper.
Three Construction Stages
The construction process comprises the following three stages:
Stage One: “Pre-Construction” is the stage before the developer receives the final building permit, and sales usually begin at this point. The initial plans will frequently be altered in the final building permit, which is often received after the first contracts have been signed. However, a good attorney will insert a contract clause permitting the buyer to drop the deal and recoup their deposit if, in the final building permit, there are any material changes to the purchased unit. Despite this stage being fraught with many uncertainties, there are big advantages in buying early, including the opportunity to cut the best financial deals, choose the finest units and revise the floor plans at no, or limited, additional cost.
Stage Two: If you purchase an apartment “During Construction,” you might not have as much flexibility as “Pre-Construction.” Some developers will not allow changes after the plumbing, electric and walls have been installed, while others allow changes, subject to the purchaser covering the cost to tear down and then rebuild the space.
Stage Three: If you buy “Towards Completion of Construction,” most developers will not allow changes to the plans. Only after receiving the keys to your apartment will have the opportunity to hire a contractor to make your changes.
Types of Changes
The three areas where one can make changes are in (1) the floor plans; (2) selecting finishes, such as tiles, kitchen cabinets and bathroom fixtures; and (3) completing the fine finishes, such as light fixtures.
Floor Plans: If you purchase an apartment early in the construction process and want to make changes, in most cases you will need to hire a professional designer/architect who will receive construction plans from the builder, determine with you the best layout for your needs, and then draw wall division plans plus plumbing and electric plans. After approving the technical plans, the builder will give you a price quote. Most developers will not charge for making pre-construction changes unless you increase quantities, such as adding doors or electrical outlets.
Selecting Finishes: The builder will provide you with a list of suppliers and their contact information. Even if it is too late to make floor plan changes, buyers will usually be able to choose their finishes.
You or your designer will contact the suppliers for all the items—including kitchen cabinets, flooring, air conditioners and faucets—and schedule appointments in their showrooms to select the finishes. If you choose from the standard finishes that are offered, you will not incur any charges. Most purchasers, though, will upgrade their kitchens, and possibly also the tiles and air conditioning system. If you upgrade any of the finishes, you will receive a credit for the standard items that you did not buy, which can be applied toward purchasing upgrades. The credit amount that you will receive is the developer’s actual cost, which is minuscule compared to its market value because the developer, who buys in bulk, receives deep discounts.
If you decide to hire a private carpenter and not use the developer’s kitchen cabinet suppliers, the builder can do all the electrical and plumbing preparations; however, for insurance and legal reasons, the kitchen will not be installed until after you receive the apartment.
If one buys an apartment as an investment, we highly recommend choosing the standard items, as the upgraded finishes will not generate a significantly higher rent. Similarly, if one’s goal is to eventually use the apartment but to initially rent it out, we advise to buy the standard finishes and upgrade later, as tenants typically do not treat the unit with the same kid gloves as would an owner.
Fine Finishes: The developer does not provide light fixtures, appliances or bedroom closets. These items, plus other finishes such as furniture and window treatments, may only be delivered and installed after receiving the keys. If you plan to rent out the apartment, you can disregard this section altogether, as your tenant will bring their own appliances, closets and furniture.
Building Construction Index
When buying on paper, you will make a down payment upon contract execution and then, depending on the developer, either make subsequent payments as the builder achieves construction milestones or make one large payment at the end. The unpaid portion of the purchase price is subject to the building construction index, which has fluctuated from as low as under 1 percent per annum for most of the past half-decade to as high as 4 percent 10 years ago. One can limit this risk by front-loading most of the payments, which is safeguarded by a bank guarantee—in essence, an insurance policy to protect you should the builder go bankrupt.
Buying on paper can be a wonderful opportunity. Hopefully this article clarified the process and armed you with knowledge to help you make informed decisions.
Disclaimer: The article above is for informational purposes only, and should not be construed to come in place of using legal counsel and hiring professionals to carry out all due diligence, including reviewing all legal and planning issues, prior to purchasing an apartment.
By Gedaliah Borvick