Attorney Shlomi Ashkenazi recently shared with me a distressing story of a couple who bought an apartment “on paper” in a new project under construction in Jerusalem. The couple, let’s call them David and Yael, did not hire an attorney to represent them and relied on the developer’s lawyer to draft the contract and guide them in the transaction.
Initially, everything went smoothly. The couple moved into the apartment and, over the next decade, their family grew. Twelve years after purchasing the unit, Yael and David decided to sell their apartment and purchase a bigger home to suit their larger family’s needs. They found a buyer, agreed on a fair price, and the apartment was sold—or so they thought.
After receiving the first few payments from the buyer, Yael and David started the process of purchasing the larger apartment. They once again bought an apartment “on paper” and received a mortgage. A few weeks later, David received a phone call from the buyer of his apartment who informed him that he wanted to cancel the deal. The buyer explained that he received initial approval for a mortgage and the bank hired an appraiser to inspect the apartment. The appraiser first checked the deed, and everything looked kosher, as the square meterage recorded on the deed matched the apartment’s actual size. Then the appraiser checked the building permit and discovered that the apartment was not properly recorded on the permit. The unit was actually half of a big apartment that the developer had illegally divided into two smaller apartments. The developer never informed David and Yael that the apartment was illegally divided and that the building permit was never revised.
When information in the deed does not match the building permit, it is difficult to obtain a mortgage. In the best-case scenario, a bank would lend the value of the smaller apartment less the cost to change the building permit. However, sometimes the building permit cannot be altered, which makes the property unfinanceable, and this was one such situation. The developer had built the maximum number of apartments permitted and was prohibited from creating the additional unit. Accordingly, the building permit could not be modified to reflect the revised apartment count.
The lack of a correct building permit lowers the value of an apartment, as there are significantly fewer purchasers for a unit that cannot be financed. Unfortunately, as we learned in Economics 101, decreased demand and unchanged supply leads to lower prices.
This disaster could have been avoided altogether had David and Yael initially retained their own attorney who had no conflict of interest, as opposed to the developer’s lawyer who represented both parties. In the course of performing due diligence, their lawyer would have checked the building permits and discovered this issue before a contract of sale was executed. It is true that sometimes developers sell apartments prior to receiving the final building permit; in that situation, your lawyer can insert language in the contract to protect your interests and, even more important, will monitor the situation to ensure the final building permit has been received and is correct. The key is to hire an attorney who will guide you and advocate on your behalf should any surprises arise during—and after—the construction process.
There are many good places to save money when purchasing a home; not retaining legal counsel is definitely not one of them. As I always say, a good lawyer is worth her weight in gold.