Purchasing an apartment in Eretz Yisroel is an exciting opportunity yet can be a drawn-out and complicated process. This article is not intended to replace the guidance and services of an agent or a lawyer, but it may help with some of the preliminary steps involved.
The following is an overview of the process.
Finding an Apartment
Although you can try scanning the classified section of various periodicals and random adverts hanging at bus stops or outside stores, you may find it worthwhile paying for the services of a real estate agency, or tivuch, to help you find just the right apartment you are looking for.
Using a Real Estate Agent (Tivuch)
An agent will present you with different properties available and explain what your options are. There are countless real estate agents throughout Israel. Agents in Israel typically charge 2% of the sale price, plus VAT. Be aware that you can attempt to negotiate this amount prior to making a purchase, especially if the purchase price is high.
Despite the cost, it is often worthwhile to use an agent. Firstly, they may present properties that you would not have found otherwise. Also, a good agent’s negotiations on your behalf can sometimes get you better terms than you would have gotten on your own. An agent can save you an amount close to or even equal to the fee he charges in this way.
Purchase Contract
If you are considering purchasing a new apartment, see the section on New Apartments further on.
Before signing any papers or committing to any sums, it is highly recommended to find yourself a good lawyer to assist.
Find a Lawyer
It is crucial to find a good lawyer who can negotiate the terms for you. In Israel, it is not uncommon for the buyer and seller to use the same lawyer; it’s cheaper and simpler. However, it may be worthwhile to use separate lawyers. A lawyer working for both of you cannot necessarily represent your best interests.
Signing a Zichron Devarim (Principle of Understanding)
A zichron devarim is a binding document without many of the important details included in a full contract. Very often, a real estate agent who is anxious to sign on a deal will suggest signing a zichron devarim. In most cases it is strongly recommended not to sign a zichron devarim. If there is a real need, it should be done in consultation with a lawyer who can explain the damages that can possibly result. Once a proper zichron devarim is signed, it is equivalent to a full-scale contract — with many of the responsibilities, but not all the protections, included in a contract. Your needs may not be spelled out, and cancellation could result in hefty fines for breach. It may even be tantamount to an apartment contract, which cannot be altered.
Signing a Purchase Contract (Chozeh)
Your lawyer will prepare the chozeh (purchase contract). The chozeh must be written extremely carefully. Just one mistaken word could cost hundreds or even thousands of dollars. Your lawyer is there to protect you and can negotiate on your behalf, but ultimately the terms and conditions are decisions you need to make. Therefore, make sure that you understand every sentence, and don’t be afraid to comment or question.
The contract must include every minute detail relating to the apartment, the payment schedule, and the transfer of property. Make sure that the contract includes the condition of the apartment and whether furniture, air conditioning, etc. are included in the sale. If there are other issues, such as water damage (retivut) or illegal additions made to the apartment, they should also be clearly addressed in the contract.
Payments and Mortgages
Arranging a Payment Schedule
Though you are entitled to try to negotiate a payment schedule that suits your needs, there is a standard payment schedule. Usually, 10% of the total property cost is paid at the time the contract is signed. This is done only after the lawyer verifies that there are no liens on the apartment and that the apartment is really registered in the seller’s name. The next payment goes toward paying the seller’s mortgage, if applicable. The down payment must be paid in full before the bank will release any funds from the mortgage. The amounts and dates of each payment are included in the contract.
If the money for your payments is coming from overseas, the most cost-effective way to transfer the money to Israel is through a wire transfer — either to your Israeli bank account or through a money changer. The total fees range from 0.6% to 1.5%.
Note: If an American citizen has more than $10,000 at any given point throughout the year in an overseas bank account, he is legally required to file an FBAR with the IRS.
Taking a Mortgage
Taking out a mortgage (mashkanta) in Israel can be a daunting experience. Banks are full of bureaucracy and red tape. You just might be held up for no good reason, and you’ll need patience, perseverance and expert advice.
It is worthwhile to apply for a mortgage even before you find an apartment because it takes time to get approved. Details, including the amount of the mortgage, can easily be changed once you find an apartment to purchase.
The process may be long and harrowing, but you don’t have to do it on your own. A mortgage broker can put you in touch with top lawyers and real estate agents and negotiate the best rates for you. Investing in a professional broker who can do all the legwork will cost more initially, but it will likely pay for itself by saving you large sums of money in the long run.
General Guidelines
- You will need to show proof of an income at least three times your anticipated monthly mortgage payments. This is because banks want to be sure you can repay your loan. If you have insufficient income, you can often be approved on the basis of a co-signer. Some banks even accept foreign co-signers.
- You can borrow up to 70% of the property value; under certain circumstances you might even be allowed to borrow more. If you do not have a teudat zehut, the law allows you to borrow only 50%. The property value is generally determined according to either your purchase price or the appraised value, depending which is lower.
- If you are planning on doing renovations on the property at a later stage, it is possible to get an additional loan. However, interest rates are not as favorable for renovation loans as they are for purchasing a property. In the long run, it will save you money on interest if you borrow more initially for the purchase, then use your own money for renovations.
- It is possible to set up your mortgage in the same currency as your income. Israel has a wide range of loans up to 30 years in foreign currency, at both fixed and variable interest rates.
- Shop around. Each bank has its own unique benefits, as does each type of mortgage. An educated customer is a bank’s least favorite customer: be in the know so they can’t take you for a ride. Again, all of this would be the job of a broker if you hire one.
- If you are considering purchasing a home from a contractor, you might be concerned about paying both rent on your current apartment and a mortgage while the new apartment is under construction. Request information from your bank about grace chelki (partial grace period) or grace malei (full grace period), which will enable you to pay less or even none of your mortgage until the apartment is ready.
There are exceptions to almost every rule.
Documents Needed at the Bank
- Teudat zehut for you and your spouse; if you are not Israeli, two photo identifications for each spouse, i.e. passport and driver’s license
- Bank statements from the last three months
- Proof of income — for foreigners, two years of tax returns are required (if applicable)
- A credit score or report for foreigners — required by some banks
Other Expenses
Other expenses are incurred over the course of buying a property. Following is a rough estimate of the additional costs involved.
- Mas rechishah (purchase tax) — the purchase tax rates formula is complicated, and the percentage rises in relation to the purchase price. A recent Oleh (new immigrant), a newlywed, disabled individual, or a first-time homeowner can receive a substantial discount on this tax. Foreigners pay a higher rate of mas rechishah. However, foreigners who can prove that they are residents whose center of life is in Israel may be entitled to pay mas rechishah like an Israeli. Ask your lawyer for updated information.
- Real estate agent commission — approximately 2% + VAT
- Lawyer fees — these generally vary between 0.25% and 1% + VAT.
- P’tichat tik (mortgage processing fee) — generally between 0.25% and 0.5% of the loan.
- Property appraisal fee — before you get approved for the mortgage, the bank stipulates that the property you are looking at must be appraised by a shamai (appraiser). This costs between 400 NIS and 800 NIS, depending on the bank, the amount borrowed, and the property value. Some people prefer to appraise the value of their property even before starting with a mortgage. Hiring a private appraiser costs around 4,000 NIS. Also, if you hire a private appraiser and you will be taking out a mortgage, make sure that he is approved by your bank.
- Additional charges, including registration fees paid to the Land Registration Office. Factor in around 700-1000 NIS for these expenses.
Registration of Ownership
There are three categories of registration of ownership:
- TABU
- Minhal M’Karkai Israel (Israel Lands Authority)
- Chevrot Mishkanot (Land Management Companies).
Ownership of property in Israel is somewhat complicated. Your lawyer will deal with this matter. Ask him to explain the ramifications of the different ownership options.
New Apartments and Contractors
New apartments are generally sold directly by contractors. In the case of a new apartment, investigate whether there is proper licensing for the contractor and his project. Make sure his taxes have been properly dealt with and that he has the proper building rights if he has entered a “combination deal” with landowners. If you will be taking out a mortgage, the bank will require you to submit documentation of all the above. Before making a decision, be sure to get bank guarantees and check out projects or buildings that the contractor has built in the past.
You have the legal right to receive technical plans of the apartment and the building in which it is to be built. You also have the legal right to show the plans to professional engineers, architects and an attorney.
Often, contractors will try to demand that you use their lawyers. However, it is very difficult to make any changes to the contract or to negotiate any details of the sale without your own personal lawyer. It is usually worth the extra expense of a private lawyer so that you have a say instead of signing based upon the contractor’s lawyer’s decisions.
You are entitled to make changes to the proposed contract. It is an uphill battle, but changes can be made — even if the contractor claims at first that they cannot.
Unlike in the case of secondhand apartments, matters such as parking spaces, solar heaters, development, gardens, water, gas and electric connections, as well as public ownership between neighbors, taxes and repairs, must be specifically agreed upon.
When you buy an apartment through a contractor, you are obligated to pay only according to the progress of the building. The terms of payment are set by the bank offering the guarantee or the lawyer signing ne’emanut (an escrow account; another form of guarantee, as mentioned above). This is not just a negotiating pawn — it’s the law.
By law, nothing should be paid unless the contractor provides a bank guarantee (arvut banka’it) or a similar guarantee.
Generally, the payment schedule is as follows:
- When the roof, or first floor of the building not on pillars, is finished: pay up to 40%.
- When the frame (skeleton), including the walls, is finished: pay another 20%.
- With the outer plaster: pay another 20%.
- With the key: pay the last 20%.