The process of buying real estate in Israel is not the same as in the United States. Many U.S. residents or expats who buy property in Israel are surprised to learn of these differences only at the last hour of their real estate transaction and often have a hard time adjusting to the mindset and reality of an Israeli real estate closing. This article is not meant to delineate the entire process of a real estate transaction in Israel but rather focuses on the differences between a real estate closing in the U.S. vs. Israel. It is assumed that the reader is somewhat familiar or has some kind of experience with a real estate closing in the U.S.
The following are several material differences between a US real estate closing vs. an Israeli real estate closing.
1. The ramifications of a real estate contract in Israel
In the United States, when a real estate contract is signed the buyer and the seller commit themselves to buy/sell a property but the real celebration and consummation of a real estate transaction takes place at the closing when a deed conveying ownership of the property to the buyer is executed by the seller and delivered to the buyer. Although a real estate contract certainly gives the parties bound by the contract the rights to enforce the contract subject to the terms and contingencies found therein , there still is a closing to attend to at which time the transaction is completed and the closing expenses are paid.
In Israel however the deal is mostly completed at the contract stage. In Israel all real estate contracts are required to be reported to the required tax authorities after signing and taxes on the real estate transaction must be paid within approximately 60 days after signing. The Israeli tax authorities’ view of a fully executed real estate contract is similar to how US tax authorities view a deed transfer in the US. In Israel, unlike the United States, contracts of sale are reported and recorded almost immediately giving the buyer pseudo ownership right at the contract stage subject only to payment of the full purchase price and clean title. When new construction is involved , when the property is encumbered by a construction loan, the buyer is also given a bank guaranty which guarantees the payments made by the buyer to the seller until completion of construction.
The buyers and sellers in Israel also sign an enforceable irrevocable power of attorney to the attorneys representing each side, giving the respective attorneys the right to enforce the real estate transaction in lieu of the buyer and/or seller (or cancel the recording of the contract should the buyer fail to timely pay the purchase price). In Israel most of the closing expenses (including the brokerage fees) will therefore be paid at the contract stage. Although, there is a stage of the closing process in Israel when the seller actually “gives over” the property to the Seller, that stage is more of a move in stage rather than a closing stage and usually the Seller receives only the final 10% of the sales price at that point.
Because of the strong ramifications of a contract signing in Israel, it is very difficult to get out of a contract in Israel and it is a very arduous process to get a refund of the taxes that were paid to the Israeli tax authorities should a contract be cancelled.
2. There is no title insurance in Israel
Overseas real estate buyers in Israel are often shocked to learn of this. In the United States, a buyer via their lawyer buys an insurance policy from a reputable title company which insures clean title to their property. In the U.S. the bulk of the buyer’s closing expenses are spent on title insurance.
In Israel there have been several attempts by insurance companies to introduce title insurance to the real estate market but it never really caught on. In Israel, although the Seller represents to deliver clean title, it is the buyer’s lawyer that is responsible to perform a title search and ensure that clean title is received. This fact justifies the fee charged by real estate attorneys in Israel which is generally a percentage of the transaction amount. A real estate lawyer in Israel is not just representing their client but is also performing the work that a title company in the U.S. generally performs.
3. “AS IS”
In the U.S. many contracts contain a provision that the property is sold “AS IS” however very often the buyer can back out of a deal if termites, lead or asbestos are discovered. This is very rare in Israel. In Israel, a Seller often warrants against moisture (which would make them liable for damages but would not allow for a full contract termination) but for the most part unless new construction is involved where the law required builders to warrant against building defects, all inspections must be done prior to contract signing.
4. No financing contingency in Israel
This is another nuance that overseas real estate buyers have a hard time adjusting to. Most real estate buyers do not possess enough spare cash to buy a property outright without obtaining a mortgage loan from the bank. In the U.S. it is common to incorporate a mortgage/financing contingency into the real estate contract. In the U.S. should a buyer in good faith fail to obtain a mortgage loan for generally 80% of the purchase price, the contract would allow to cancel the transaction and receive their earnest money deposit back.
This is not so in Israel. In Israel, other than in mega commercial deals, there is generally no financing contingency in a contract of sale. A buyer must therefore provide all of the requested income documentation to the bank prior to signing a contract and get a firm mortgage commitment before signing the contract subject only to an appraisal of the property. Also in Israel a buyer of real estate can generally only expect to borrow up to 50-60% of the purchase price as of 2016.
5. Money does not need to be held in escrow in Israel
In the United States, money paid by the buyer to the Seller is generally held in escrow by the Seller’s lawyer until the actual closing of sale. Rarely does the Seller see a penny from the sale until the sale is final and until the closing has been consummated.
This is not so in Israel. Given that real estate contracts are reported almost immediately in Israel, a lien is generally placed upon title to the property in favor of the buyer after signing the contract of sale. There generally is a short grace period after signing the contract prior to the buyer being obligated to deliver the first payment in order to enable the lien to be filed and to enable the buyer to remit the first payment. Because a prospective buyer is afforded a lien and because title has for the most part been checked prior to contract signing, it is safe and very common for a buyer to deliver the payments directly to the Seller per the payment schedule of the contract of sale. Furthermore, because of strict anti money laundering regulations found in Israel and because general escrow accounts of attorneys are very restricted and highly regulated in Israel, it is often a very arduous process to move large sums of money in Israel from overseas and Israeli lawyers often prefer that monies be paid directly from the buyer to the seller.
6. Real estate prices in Israel are tied to the inflation index and the buyer bears all currency risk
In the late 1970s early 1980s Israel experienced major hyperinflation. The Israeli Shekel experienced rapid decline against all major currencies. Sellers of real estate whose properties’ were under contract often lost their shirts because they got paid per the contract in a currency that was worth much less than when they signed the contract. Israel took many steps to stabilize the Shekel and eventually succeeded. Israel at the time created the New Israeli Shekel and put the former Shekel out of circulation. Also, after the inflation debacle it was common for real estate to be bought and sold in the then more stable U.S. dollar. Additionally, it became common for real estate prices to be tied to an inflation index so that the buyer bears the risk of inflation not the seller.
In the U.S. it is common to find long term rent prices tied to some sort of interest rate or inflation index, but for a standard real estate transaction to be tied to an inflation index is virtually unheard of. In Israel it is very common for the price of real estate to be tied to an inflation index.
Another risk that a potential foreign buyer of Israeli real estate faces is currency risk. If a potential property is priced in Israeli Shekels and the buyer is holding U.S. dollars on deposit at the time they go to contract, the buyer is bearing the risk that the US dollar can depreciate in the interim against the Israeli Shekel causing the buyer to be obligated to come up with more of their local currency (i.e. in this case US dollars) to fund their purchase. The buyer may not have anticipated this from the beginning and should never assume that their currency will not weaken against the Israeli Shekel. In the past, there have been currency fluctuations between the USD-ILS of close to 20% over time (short term fluctuations of 2-3% have been found to be common).
One way for a buyer to avoid this pitfall is to insist that the price be in US dollars but very often the Seller will not agree since they have a mortgage to pay off that is in Shekels or simply because they live in Israel and use Shekels as their currency of living. It is also possible for the purchase price to be pegged to the US dollar but usually the Israeli Seller will only agree to the US dollar peg up to a specific exchange rate but if the Shekel would depreciate against the USD above the specific exchange rate, the Seller would insist on a more beneficial exchange rate irrespective of what the market exchange rate is. Real estate prices and economics have always been a hot topic even among the Israeli common-folk and it is very difficult to negotiate away the potential currency risk. It is therefore advised for the buyer to exchange all their equity up front (or to speak with a foreign exchange professional about buying a forward contract to hedge their risk) unless they are willing to and have the wherewithal to speculate on the exchange rate. It is also possible to get a mortgage loan in Israel that is pegged to a foreign currency to avoid long term mortgage payment currency risk. Most mortgage loans in Israel however are partially tied to a variable interest rate but this is changing over time. Mortgage brokers have been very uncommon in Israel in the past, with buyers having to negotiate and apply for mortgages directly with the banks. This is changing and highly qualified mortgage brokers are springing up all over the place in Israel. It is recommended for a foreign buyer to engage the services of reputable mortgage broker to assist them in obtaining financing for their purchase.
7. Closing expenses for a buyer are quite high in Israel mainly because of Purchase Tax
In order to combat rapidly rising real estate prices in Israel which was said to be one of the main causes of the Israeli housing shortage, in mid 2015 legislation was quickly passed in Israel to raise the Purchase Tax on foreign residents who already own real estate (wherever that property may be) to 8% (then rising to 10% after 4.6 million Shekels as of the 2015 legislation). Even if a foreign buyer does not own real estate already they would still be subject to the 8% tax because there is no way to prove to the satisfaction of the Israeli tax authorities that a foreign resident does not in fact own real estate anywhere else in the world prior to their purchase of real estate in Israel. An Israeli resident is also subject to the 8% Purchase Tax if they already own a property in Israel and since the land records in Israel are centralized it is easy for the tax authorities to find out whether an Israeli resident owns real estate in Israel or whether they are a first time buyer (the ownership of foreign properties are not considered for Israeli residents with respect to their reduced Purchase Tax) . Lower purchase taxes are paid by new immigrants who are purchasing their prime resident and there is a sliding scale of purchase tax that must be paid by Israelis and foreigners based on the price of the purchase (this sliding scale and the required Purchase Tax is ever-changing in Israel based on legislation and a potential purchaser of real estate should always assess their tax liability prior to signing a real estate contract in Israel.
Other common closing expenses for a purchaser of real estate in Israel are the following:
a. Brokerage fee of 2% plus VAT (VAT or Value added Tax as of 2016 is 17%). The brokerage fee is commonly paid at contract signing.
b. Legal fees of 1% plus VAT. For new construction it is common to pay a portion of the Seller’s legal fees as well.
c. Mortgage broker fee of 1% plus VAT. If you are able to work directly with a bank vs. a mortgage broker you can avoid this fee but mortgage brokers offer tremendous value to your mortgage options especially if you are an overseas buyer. In addition banks generally charge a 0.25% initiation fee.
d. Engineer, appraiser, misc. (shouldn’t cost more than $1500 as of 2016)
e. Cost to convert foreign currency to shekels (up to 1%, though there are companies that charge .50% to .75%).
f. When buying new construction there is an additional cost to consider and that is the building construction index, which over the past years (as of 2016) has fluctuated from as low as under 1% for the past 2 years to as high as 4% about 7 years ago. Also a marketing fee can be assessed by the Seller of new construction.
Sellers of real estate in Israel are exposed to brokerage fees, legal fees and capital gains tax (there are exemptions to paying capital gains and theses exemptions are slowly being phased out as of the new 2015 legislation in order to attempt to lower housing prices in Israel). There is also improvement taxes that a buyer or a purchaser may be exposed to that is beyond the scope of this article. Tax exposure is ever changing and should always be assessed prior to signing a real estate contract.
8. Intra-family transfers and estate planning
In the U.S. it is very common for gift transfers of real estate to family members to be exempt from taxes up to a certain amount. This is not so in Israel. Intra-family gifts incur (as of 2016) 1/3 of the normal purchase tax that would be paid based on the fair market value of the real estate being transferred.
Furthermore, in Israel, there is no automatic inheritance by a spouse of a deceased spouse’s real estate even when the property is owned by both spouses (as is common in many states in the U.S.) Also in Israel, property acquired after marriage is generally jointly owned by both spouses even when legal title is only in one spouse’s name. A proper will should be drawn up and the opinions of a competent family law and/or estates attorney should be engaged in order to avoid any unexpected inheritance pitfalls
Gershon Kayman, Esq. is a seasoned real estate lawyer both in NY and in Israel. He can be reached at firstname.lastname@example.org