Imagine it is the last day of your short trip to Israel. Finally, you see that dream apartment you were looking for; perhaps a penthouse with a view of the sea.
It might even have a winding staircase and a guestroom on the roof with the perfect rooftop terrace. The seller or agent suggests that you sign a Zichron Devarim and pay a small deposit to hold this great apartment.
I’m here to tell you JUST SAY NO!
A Zichron Devarim is a short written agreement between buyer and seller, which typically includes the basics of the deal, such as price, payment terms and date of possession, but not much more.
In English, it might be referred to as a Memorandum of Understanding. The typical Zichron Devarim is not more than one page.
Though brief, there may be just enough details in that Zichron Devarim for the Israeli court to consider it a contract, yet it is vague enough to cause conflicts between a buyer and seller.
Often, either the seller or buyer changes their mind, after getting more information about the transaction, resulting in one party insisting the Zichron Devarim is a valid sale contract, while the other party will argue the point.
This conflict can easily land you in an Israeli court, debating your intentions and the voluminous Israeli precedent in this area of law.
Here is a list of issues, which are part of the due diligence your Israeli lawyer will do prior to having your sign a sale contract.
Relying on a Zichron Devarim, will cause a minefield of problems in any of these areas:
The most important thing that your Israeli lawyer will check, before signing any sale contract is the title, by getting a title extract from the Israel Land Registry.
That is the way to verify the sellers’ ownership and to check whether the property is privately owned, or actually a “long term lease” from the Israel Land Authority.
This is a very common form of property right and it is important for you to know this, because the sale contract must be drafted differently for this type of property and there is additional paperwork and expenses that you will not have when purchasing privately owned property.
2. Liens and Mortgages
The same title extract will show the seller’s liens and mortgages.
The pay off of the seller’s mortgage should be addressed by the sale contract and is not part of a typical Zichron Devarim.
3. Building Permits
It is important to check with the local municipality if that gorgeous guest room was built with a permit.
Sign a Zichron Devarim without knowing this and you will have issues with the local municipality.
4. Special House Committee Payments
The building’s house committee may just have decided to impose $10,000 on each owner for a building renovation.
A Zichron Devarim doesn’t address who will pay for this.
5. Tax implications
Both buyer and seller are obligated to report a sale transaction. The buyer must pay Purchase Tax, while the seller is either exempt from Betterment Tax, or obligated to pay that.
Technically, this tax reporting must be done within 50 days from the date of the Zichron Devarim, as it is considered a contract.
If you as the buyer, for example, claim that it isn’t a contract and want to extricate yourself from the deal, you could discover that the seller has already reported the Zichron Devarim to the Tax Authorities; a situation which will likely require court intervention.
Israeli property transactions do not generally allow for financing contingencies. This means that you must line up your financing, PRIOR to signing any agreement.
A Zichron Devarim inevitably comes before you’ve had a chance to get written confirmation from your mortgage broker, or bank, about your financing abilities, putting you in a precarious position if the financing you hope for isn’t available.
Some countries, such as the US, have a product known as title insurance, which enables buyers to sign contracts prior to knowing the title situation, by relying on the insurance they’ve purchased.
There is NO such thing in Israel, so a buyer must do their due diligence prior to signing anything, making the Zichron Devarim a risky piece of paper.
Deborah Opolion is a licensed attorney in Israel and the US (WI), specializing in Israeli real estate transactions, estate planning and Israeli investment in the US. She can reached at:
Tel. 1-414-305-6183 or email: email@example.com.
Related: Current Interest Rates in Israel & First Israel’s Mortgage Services.