Buying on paper: Hidden costs and how much your lawyer can save you

When deciding how much you can afford to spend on a new apartment, it’s important to be aware of the many hidden expenses that you’ll have to include in your budget. There can be significant financial penalties or worse if you can’t cough up these fees on time, so let’s look at some of these costs, and see which ones can be saved or reduced if your lawyer is on the ball.

Personalizing the specifications

One reason to buy on paper is that, to a certain extent, you can personalize your home as it’s being built. However, modifications to the basic building plan add up very quickly. A new law, okayed last month, obligates the developer to include a detailed list of specifications and prices so you know exactly how much every additional electrical outlet, or extra sink, will cost. This protects you from the unpleasant surprises buyers used to suffer before everything was transparent. Your lawyer should be able to insist that many changes and improvements are covered by the purchase price. For example, an experienced lawyer – and this is what we expect from the lawyers working for our clients – will demand that any changes stipulated prior to construction will be cost free, aside from the materials.

Linked to the index

Israeli real estate contracts link the final price to the rate of inflation on building materials. This means that the price you’re signing on is not at all the price you’re going to end up paying. Over the course of the 3—4 years it takes to finish construction, the inflation index can rise as much as 9%–12%. Knowing this will help you budget more accurately, but it also gives you bargaining power – so long as it’s before signing. You and your lawyer can try to negotiate that only certain construction costs will be linked to the index, or to postpone the date that the linkage applies, either of which can save you some thousands of shekels.

My contract has a clause stipulating that if the seller or developer causes delivery to be delayed, the price will be disconnected from the index, because it’s their fault that we didn’t get the apartment yet. On some projects, we even managed to negotiate a complete waive of this clause, which meant major savings for those buyers.

Developer’s attorney

Most developers charge the buyer 1.5% plus VAT for their own attorney’s fee. Please do not confuse this line item for your own lawyer’s fee; even though you are paying his fees, this professional cannot represent you and he will be arguing against you in court, if it comes to that. In paying his fees, the developer has simply passed on his expense to you. An amendment to the Apartment Sales Law, which will begin to apply sometime later this year, is putting a stop to this confusion and restricting the legal fees the developer can pass on: future buyers will pay only 0.5% or NIS 5,000 (the lower of the two). This payment will be made straight to the developer’s attorney in exchange for a receipt, making it clear that the payment is solely for the service of registering the apartment legally in their name.

Purchase tax

The purchase tax must be paid 50 days from signing the contract. The tax amount, which can be figured by one of many online simulators, is calculated according to purchase price and contract date, and if you live in Israel, your first apartment is entitled to a tax reduction. The tax authorities might look at the developer’s attorney fee – or other costs added in the contract – as part of the purchase price, which increases your tax amount; your lawyer can word the contract to demonstrate that these separate expenses should not be added to the taxable amount.

Utilities

Upon completion of construction, the apartment will be connected to the electricity, water, and gas companies. This can cost a surprising few thousand shekels, and it’s always better to know about those things in advance.

Your attorney

This is not the place to be frugal. Buying an apartment is one of the most significant investments you will make in your life. Don’t let anything – neither confidence in the contractor or developer, nor the innocent desire to save money where you can – convince you that you don’t need the best lawyer. Hiring a really experienced real-estate lawyer with connections and knowledge in the specific market is the best investment you can make in the purchase process. A good lawyer will probably save you many times their fee by adding important clauses to the purchase contract that will prevent or lower hidden costs and protect your money along the way.

And yet, despite having a really smart lawyer with the right connections, who will get the right clauses in your contract, you are still likely to end up with some unexpected cost differences by the end of the project. This can be the result of changed plans and unforeseen adjustments that end up being absolutely necessary, among other things. When you sign with a developer, take an extra 19% into account for additional expenses and inflation.

Shia Getter is the CEO of the Shia Getter Group, a full-range real estate services firm in Jerusalem catering to the Anglo investor. He is a noted expert, columnist, and author of The Guide to Investing in Jerusalem Real Estate. He and his professional team manage many upscale Jerusalem properties and have helped countless people buy, sell, and renovate property in Israel.

This article is intended to provide general information about the subject matter covered. It is not meant to provide legal opinions, offer advice, or serve as a substitute for advice by licensed, legal professionals. This article is published with the understanding that the author or publisher is not engaged in rendering legal or other professional services.

The author does not warrant that the information is complete or accurate, and does not assume and hereby disclaims any liability to any person for any loss or damage caused by errors, inaccuracies or omissions, or usage of this article.

Laws and interpretations of those laws change frequently and the subject matter of this article has important legal consequences. If not understood, legal, tax, or other counsel should be consulted.