Purchasing an apartment in Israel – what do you need to know ahead of time?
The largest transaction that most people make in their lives is, without a doubt, purchasing an apartment. Real estate prices in Israel have been rising for decades and this trend is expected to continue, certainly in areas that are in demand. This means that buying an apartment in Israel (not to mention a house or piece of land) is expensive and complicated.
When faced with a transaction of this magnitude, it is important to conduct it responsibly and carefully. A mistake in one of the stages of the purchase could spell disaster for the buyer, who may find themselves without their money and without an apartment either.
Our office specializes in assisting sellers, renters, and buyers of real estate in Israel. In this article, an attorney from our office will detail the steps of purchasing an apartment in a professional manner, including choosing a lawyer with the knowledge needed to accompany the transaction from start to finish.
Step 1 – Identifying the seller and the property
You saw an ad in the newspaper for an apartment at a good price, you visited the property in the presence of the advertiser who introduced themselves as the property’s owner, and you are interested in moving forward with the purchase. Now you must check whether the advertiser is indeed the owner of the property.
It is important to know that the fact that the advertiser has a key to the apartment is not enough to prove their ownership of it.
That is why it is important to ask various questions relating to the apartment for sale, to ask for written proof of ownership of the apartment, and to follow up on any detail that may seem suspicious. Courts have heard hundreds and thousands of cases of con deals that succeeded as a result of a buyer’s carelessness.
In order to identify the property, a Land Registry extract (Tabu) must be issued which details its owners. The extract can be ordered on the website of the Ministry of Justice by entering the details of the property: block, plot, sub-plot. If you do not know these details, ask the property owner.
If you cannot ask the owner, go to the Israel Mapping Center website, enter the address of the property and get the block and plot numbers. After that, go back to the Ministry of Justice site to order the Land Registry extract, and order a consolidated statement for the property, where you will find the property owner’s details.
If you cannot find the property on the Ministry of Justice website, it is possible that it is owned by a mortgage company or the Israel Land Authority, which have separate registries.
Step 2 – Choosing an attorney
The most significant figure in a real estate transaction is undoubtedly your attorney. They understand the steps of the procedure, know the legal requirements, and know how to perform the evaluations in the best possible way. Not hiring an attorney to guide you through a real estate deal puts your money at risk in what is likely to be the largest transaction you will make in your lifetime.
Besides their basic duties in a real estate transaction, an attorney can also manage the negotiations for you since they have extensive experience in such transactions. That is why you should focus on an attorney’s qualities when making your selection. Check their professionalism, experience, and reliability and, just as importantly, their civility and patience.
Step 3 – Checking the property’s status
After you obtain the Land Registry extract, you must ask the property owner for their ID card to make sure that their ID number matches the number that appears in the extract.
In the extract you received, you can find out whether there are foreclosures or debts on the property that may restrict the possibility of transferring ownership of it. You can see this information at the bottom of the extract in the section on debts or warning notes.
Also, check the blueprint of the apartment and the attachments belonging to it, and make sure that the apartment in its current state has a building permit. These details can be checked on the local authority website.
Step 4 – Checking the value of the property
The owner is asking two million for the apartment, but you don’t know whether that price is indeed the value of the property being sold or whether it is higher than the market price? Assuming that real estate is not your main field of expertise, you will not know how to estimate the property’s value.
For this, a real estate appraiser must be hired whose job it is to evaluate the value of the apartment, as well as to check whether there are any construction deviations in the property being sold. It is important to know that construction deviations may disqualify eligibility for a mortgage and even impose criminal liability on the buyer, even if they did not themselves execute the prohibited construction.
Step 5 – Getting approval for a mortgage
Most apartment buyers take out a mortgage in order to raise the amount required for the purchase. Even those with means may prefer to finance the purchase with a mortgage and pay the interest in order to maintain liquid assets.
Commonly in sales contracts in Israel, failure to receive a mortgage is not a condition that enables the automatic cancellation of the transaction. In some cases where a mortgage application is rejected, the buyer may be obligated to pay the seller compensation for the cancellation.
For this purpose, there is a document called “mortgage approval in principle” and it includes the amount of the mortgage and the terms that the bank offers. The approval is granted based on the financial details you provided to the bank and it is valid for a limited time.
To order an approval in principle, as well to obtain a mortgage under good conditions, we recommend contacting an expert mortgage consultant for assistance in the entire procedure.
Step 6 – Calculating ancillary costs
The transaction of purchasing a real estate property is expensive, not merely because of the high value of the property that requires taking out a mortgage, but also because of the ancillary costs. Lack of planning may sometimes lead to significant financial pressures during the sensitive period of the property purchase.
The ancillary expenses include, among others: brokerage fees, attorney’s fees, mortgage consultant, real estate appraiser and other expenses explained in detail in the article on calculating the costs of buying an apartment.
Step 7 – Calculating the purchase tax
Anyone who buys real estate in Israel is obligated to pay a purchase tax of up to 10% of the value of the property. The tax is calculated using tax brackets based on the price of the property.
The law defines several situations in which the buyer is exempt from purchase tax, such as a single apartment with a value of up to 1,805,545 ILS.
Please note that the amount of the purchase tax and the details of the law may change from time to time, so it is important to consult with an attorney in the field of real estate taxation and get their opinion regarding the amount of the tax.
Step 8 – Capital gains tax and improvement levy
In a real estate transaction there are several types of taxes and levies. In the previous paragraph we talked about the purchase tax which the buyer must pay. In contrast, the seller pays the capital gains tax and the improvement levy, but it is still important for the buyer to understand how to deal with these taxes since a failure to pay them may delay processing of the transaction.
Capital gains tax is paid on the gains in the apartment’s value between the purchase of the apartment and its sale. The amount of the tax is 25% of this increase in value. That is, if the value of the apartment increased by one million shekels since its purchase, the seller of the apartment must pay 250,000 shekels in tax at the time of the sale.
An improvement levy is a tax paid to the local authority in the amount of 50% of the increase in the price of the property due to building plans approved next to it. For example, if the local authority approved the construction of a multi-story building on a lot, and the approval yielded a net profit of two million shekels to the developer, then the local authority would be entitled to a levy of one million shekels.
In order to carry out a real estate transaction and transfer the registration in the Land Registry extract to the buyer’s name, you must produce certificates from the authorities showing payment of these taxes, or produce a certificate of exemption from payment.
Step 9 – Signing a sales contract and registering a warning note
This is the most important and exciting step in the whole arduous process you have gone through. Now after all the tests, calculations, advisors and documents that have passed through hands, you must go to the law office that you chose, where a signature session will take place in the presence of both sides.
At this stage, you will also need to transfer the first payment, as agreed upon by both sides. Usually, the first payment is the equity capital held by the buyer, or the greater part of the equity capital. It is accepted to pay between 10% and 20% of the apartment’s value at the time of signing.
After signing, and in order to ensure your rights to the property, a warning note is recorded in your name on the sold property. The note is a document signed by the seller confirming that there is a contractual obligation between them and the buyer.
Step 10 – Delivering possession and completing the transaction
Congratulations! After you have signed the sales contract, and according to the agreed-upon date of possession, you have entered the property and now want to finish the procedures related to moving.
So first of all, you must update your name at the local authority in order to update property tax debts (arnona) as well as at the electricity, water, and gas companies, and with the tenants’ committee. Note that regarding property tax debts, it is advisable to seek the services of a property tax attorney who is an expert in the field.
After that, you must make sure that you have all the documents required to complete the registration of the property in your name. This process may take time and will begin after the buyer’s payments to the seller are completed.
As you have seen, buying an apartment in Israel is a complex process that requires attention to detail, thorough inspection and a great deal of responsibility in order to avoid a misstep that may result in financial loss.
To go through the process safely, it is important to seek the services of a professional law firm that deals with both accompanying the transaction and calculating the various taxes.
If you wish to receive professional and comprehensive support throughout the transaction, contact our office in Jerusalem and Tel Aviv for an initial consultation at no cost.