Buying property in Israel is a wise investment. However one should be aware of the local laws, regulations and tax liabilities when taking steps towards a purchase, in order to bypass the potential pitfalls.
Did You Know?
Unlike other countries, in Israel it is legal for a lawyer to represent both the buyer and seller in property transactions. Most realtors/sellers would suggest that you use the seller’s lawyer, thereby avoiding any potential difficulties in the negotiations towards the signing of a sale contract. However, this is generally unadvisable due to conflicts of interest that may arise. The buyer should always prefer to hire his/her own lawyer to protect his/her interests exclusively.
This is especially true when buying property under construction. Normally in such a transaction, the builder requires the buyer to pay his/her lawyer fees, which are usually 2% of the amount of the transaction plus VAT. However, one must keep in mind that the builder’s lawyer will not look after the buyer’s interests. Therefore, a buyer would be wise to hire his/her own lawyer even when this means paying additional legal fees.
Costs and Expenses:
- Purchase Tax is the largest cost that must be added to the purchase price: Purchase tax is a gradual tax imposed on all purchases of property in Israel. There are 3 gradual tax rates for buyers who do not already own a home in Israel. For details, please see Mortgage and Purchase Tax Benefits. For those buying an addition home in Israel there are 2 gradual tax rates and no tax break (tax rates are accurate as of January, 2009): On the sum up to NIS 1,318,400 the tax rate is 3.5%; on the amount over NIS 1,318,400 the tax rate is 5%.
- Real Estate Agent’s Commission: Generally the real estate agent’s fee is 2% of the amount of the transaction + VAT.
- Purchaser’s Legal Fees: As mentioned above, it is imperative to have representation by an Israeli lawyer, whether buying property under construction or buying second hand property. The fees generally vary between 0.5% and 1.5% of the purchase price plus VAT depending on the complexity of the matter and the amount of work involved. There are also additional expenses such as registry fees paid to the Land Registration Office.
- Seller’s Legal Fees: As mentioned above, when buying a new home (under construction) the seller generally requires the buyer to pay his legal fees. These fees are generally 2% of the purchase price plus VAT. This is regardless of the fact that the seller’s lawyer does not represent the buyer or look after his interests.
- Other Expenses and Costs: One must take into consideration exchange rate differences and bank commissions for converting foreign currency into shekels.
- Maintenance Costs: A buyer should also be aware that there are regular maintenance costs once you receive possession/occupation of the property. The buyer is obligated to pay monthly municipal taxes and committee charges for the care and upkeep of the common property. Another expense to consider is home insurance.
- Title Verification and Caveat Registration: Your lawyer should examine title of the property; verify that the property is clear and free of any third party rights such as liens or mortgages. This information can be obtained at the Land Registry Office by referring to an extract of the property. Once the sale contract has been signed, your lawyer should register a caveat in your name at the Land Registration Office. This caveat is a type of ”warning sign” which appears on the property at the Land Registry indicating that the property has been sold. This caveat plays a part in protecting the buyer’s rights in the property until actual ownership can be conveyed to the buyer.
- Builders: Since the collapse of the construction company Hefziba, a new amendment of the law was enacted according to which building projects financed by banks are required to act according to an arrangement whereby the purchaser pays by special vouchers, depositing the payments into a special project bank account set up for the specific project. Most banks then issue bank guarantees as a security to the purchasers against each payment.
- Payment Schedule: When buying property under construction, the payment schedule should be in stages based on completion of stages in the construction. The entire amount should be paid by receipt of possession/occupancy of the property. When buying second hand property the payments may also be in stages, however possession will be transferred against payment of the entire purchase price.
- Escrow: When buying second hand property, money should be left in escrow with your lawyer until all transfer documents and tax certificates enabling the conveyance of ownership of the property to the buyer, have been delivered to the buyer’s lawyer.
- Inspection of Property: When buying a second hand property, the seller is obligated to disclose any defects in the property. However, if defects are discovered following occupancy, legal costs involved in a lawsuit may prevent the purchaser from seeking legal recourse against the seller. The best way for the purchaser to minimize the risk of additional costs for repairs or replacement is to hire an engineer that will inspect the property. This is especially true when purchasing a house. Another important thing to check is if there are any building code violations, which could result ultimately result in municipal lawsuits and possible demolition orders. It is also advisable to check municipal plans relevant to the property and its surroundings, which could affect the value of the property.
- When buying property under construction it is also advisable to hire a professional engineer to inspect the property before occupancy at a determined date. A protocol should be drawn up and signed by the buyer and the builder recording any defects and deficiencies to be repaired by the builder. By law, the builder is obligated to repair any defects found in the property within a year of occupancy. By law, the builder is obligated to repair defects in the plumbing within 2 years of occupancy, rain leakage, motor and boiler defects, peeling of wall coverings in stairway, sinking of flooring, all within 3 years. According to law, the builder is also obligated to repair cracks in walls and ceilings within 5 years, peeling of outside wall covering within 7 years.