Published January 28, 2018 by Dani Schecter

Caution: Know this before negotiating on property being purchased second-hand, while still under construction by a developer, in Israel.

You might think real estate mortgages in Israel is a boring topic, but actually, every day is an adventure. We recently did damage control on a case where countless hours of negotiations, paperwork, lawyers fees, appraisal fees, time invested by the buyer, seller, and real estate agent, could have been saved if they had avoided this one mistake.  

A mistake that would have obligated a buyer to pay 300,000 NIS to the seller if there had been a breach of contract. A mistake that could have been easily avoided.

What happened?

An overseas couple wanted to buy an apartment in Tel Aviv. The property they wanted to buy had been purchased 2 years earlier on paper by the seller for about 2.2 million shekels. The owner was now selling the apartment for 3.1 million shekels before construction of the property had been completed. The seller had already paid the developer 600,000 shekels to build the apartment but still owed him 1.6 million shekels. The couple’s intention was to purchase the property immediately and complete the outstanding payments (1.6 Million) to the developer while paying the seller the remaining 1.5 MM shekels.

It is complicated business, both legally and financially, for a foreign citizen to buy property in Israel. In this case, after negotiations back and forth between the buyer, the seller, and the developer – everyone was on the same page. Green light from the buyers. Green light from the seller. Green light from the developer who built the apartment. They contacted First Israel Mortgage to let us know the nature of the transaction which they settled on and that they were planning on signing the purchase contract in the coming days. We stopped them just in time.

Getting Pre-approved for a mortgage is the beginning – not the end

This was where they almost made their mistake. A mistake so easy to make and yet so easy to avoid. Rewind 5 months earlier…

At the beginning of the buying process the buyers submitted their documentation to First Israel in order to obtain a pre-approval for the amount of credit which they wished to borrow – without specifying the type of transaction which they wished to finance. We obtained a general pre-approval for the borrower (as they did not yet know the property which they wanted to purchase) however, for a transaction concerning a property in Israel under construction and sold second-hand, by a seller who has not yet completed his payments to the developer it crucial to obtain guidance regarding the  banks legal requirements before continuing with negotiations.

What the lawyers, the real estate agent, the buyer, the seller and the developer all missed in their rush to draw up the contract and finish the deal was they never confirmed what the bank would require in order for them to finance this type of purchase. They simply assumed it would be OK. In the end – it wasn’t.

Second hand sale still under construction: Who needs to sign a Hitchayvut?

After all of their work to complete a contract which satisfied both the buyers and the seller, we advised the client that due to the nature of the transaction the bank would required that a “Hitchayvut” be signed by both the seller as well as the developer. A Hitchayvut is a document which outlines the terms by which, should the transaction fall apart for any reason after the bank had funded any portion of the mortgage, the bank could pursue those who signed the Hitchayvut to get their money back. In this case, this would allow the bank to go after the seller and/or the developer, and demand that the mortgage funds be returned – regardless of who received the funds.

The seller had been moving forward with negotiations based on the assumption that he would not be required to sign this legal obligation and that he could sell the property for profit and drop out of the picture. Now that he knew that the bank also wanted him to obligate himself until such time that the construction was completed and the new buyers received possession of the property he was no longer prepared to execute the transaction. After all of the work negotiating and drawing up the contract the deal was dead.  

So much trouble could have been avoided, so much time, money and effort could have been saved had they simply been informed of the bank’s legal requirements before moving forward with negotiations.

This scenario may seem like an outlier but these types of stories happen on a regular basis in Israel. When looking to finance the purchase of a property in Israel, always confirm what the banks legal requirements will be before you start negotiating. Of course, each bank has their own criteria when underwriting deals so be sure to speak with a qualified mortgage consultant to ensure that you are working with the right bank for a given financing scenario.