In light of the alarming increase in fraudulent real estate schemes and the demand for information on pre-sale purchases, we’ve prepared this comprehensive guide. Buying an apartment during the pre-sale stage offers unique opportunities but also comes with risks. This guide explains what a pre-sale transaction is, its advantages and disadvantages, and how to navigate this process safely and effectively.
This guide was written by Attorney (Economist) Osher Elkayim.
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What is pre-sale apartment purchase?
A pre-sale purchase involves buying an apartment at the earliest stage of a project—typically before construction begins. Developers often sell to a select group of investors and associates before launching public marketing campaigns. These transactions are often referred to as buying “on paper,” as buyers are purchasing based on plans and projections rather than a finished property.
Pre-sale purchases occur before detailed planning is completed, meaning specifics such as the number of apartments, their layout, and the project’s approval status may still be uncertain. However, professional developers usually have a solid framework to guide these early transactions.
Important information!
If you have seen an ad stating that you are purchasing the apartment at the PRE-SALE stage – it is probably not a pre-sale but at the sale stage! A pre-sale is not announced to the public in ads.
Why is it called buying an apartment “on paper”?
The term is common in the real estate market because what characterizes the apartment is that it is still in a very preliminary “draft”. After buying the land, the contractor will promote a plan on the land to obtain a permit. This stage is called in professional language – the planning stage.
During the planning stage, the contractor does not yet know for sure how many buildings he will be able to build, how many floors each building will have, how many apartments there will be, in which directions the buildings will face, and more.
Therefore, buying an apartment “on paper” means that the contractors are selling the apartment before receiving a permit, approving the plans and even before the local/district committee’s decision to approve the project with conditions.
Why does the contractor sell apartments on paper?
At first glance, it may seem logical for developers to wait until later stages to sell apartments at higher prices. However, there are several reasons for pre-sale transactions:
- Financing Requirements: Banks and other financing entities often require developers to demonstrate demand by securing early sales.
- Project Prestige: Early sales can create an impression of strong demand, boosting the project’s reputation.
- Initial Cash Flow: Early sales generate funds to support construction and related expenses.
- Maintaining Relationships: Developers often sell pre-sale units to trusted associates, strengthening business and personal networks.
What are the advantages of buying an apartment on Pre-sale?
Buying an apartment “on paper” has several notable advantages. Here is a partial list:
- The low price – Buying an apartment on paper is characterized by lower prices than apartments sold after a committee decision for approval on terms and bank financing. The prices are a result of the (temporary) uncertainty in which the project is, and the fact that the contract
- Index linkage – Sometimes, contractors allow the purchase of the apartment with linkage to a future index (for example, the index known at the time of issuing the permit), and in special cases, they allow the purchase of the apartment without linkage to the index,
- Entry into the club – Certain contractors create “groups” of early sales that are dedicated to people close to them. If you managed to get in – you will receive offers to buy apartments “on paper” in future projects.
- Early selection and plenty of options – buying an apartment “on paper” allows for the maneuverability of choosing an apartment from a large number of options. Experienced buyers purchase the apartments that are most profitable in terms of investment .
What are the risks and disadvantages of buying an apartment on paper in Israel?
Here are a few disadvantages and risks of buying an apartment on paper:
- Buying an apartment for a long period of time – buying op paper is regarded as “the purchase of an apartment” in accordance with the Real Estate Taxation Law. This rules out the possibility of purchasing other apartments for a long period of time.
- Planning uncertainty – the apartment being purchased may be changed dramatically.
- Index linkage – In most cases, the contractor requires the purchase of the apartment at the index known at the time of signing the agreement, which may be several months before receiving the permit.
- Refusal by the local committee – The local committee may deny the construction of the project altogether or deny the construction of the project in the manner proposed to the buyer. Buyers may find themselves waiting for the apartment for many years
- “Confidant” developers – We have often encountered contractors who try to trick their clients. In one case, a developer offered to buy an apartment on paper “in disguise” when in reality he was offering to purchase through a purchasing group. This constitutes a violation of the law and may leave the buyer without his money and without the apartment.
- There is no security under the provisions of the Sales Law – in light of the fact that the apartment is purchased at such an early date, the financing entity does not yet provide bank financing and does not provide a guarantee to the buyers.
- Inexperienced developers/contractors – contractors who are not experienced in the field may sell an apartment on paper, when only later it becomes clear that to the buyer that there was no planning certainty for its construction in the first place.
How much does it cost to buy an apartment on paper in a foreclosure in Israel?
The law imposes on the seller (contractor or developer) the obligation not to receive from the buyer more than 7% of the consideration for the apartment. In other words, the law understands that the seller’s interest in receiving money at an early stage is strong, and therefore it prohibits this.
The consequences of the affair are still felt today. The affair shook the real estate market and forced everyone to “change the rules of the game” in order to change the reality that existed at that time.
Why was 7% of the apartment price set?
Prior to the amendment, the law stipulated that the threshold for providing security under the law was 15%.
That is, a person purchasing an apartment for 2,000,000 NIS could pay an amount of 300,000 NIS, and if the contractor were to go bankrupt, the buyer could lose (practically and legally) the entire amount he paid.
Therefore, as part of the amendment, the legislator decided to “cut” the amount by more than half to 7% and stipulated that the seller would be required to secure the buyer’s money through one of the securities in the law.
Beware, a red flag!
If a contractor tells you to pay more than 7% before providing the security – run away! He may indicate that if you personally transfer part of the amount to him (by transfer and/or in cash) you can receive an additional discount on the price.
What is the usual payment schedule for a paper apartment purchase transaction?
We recommend that you adhere to the following rules when setting a payment schedule for buying an apartment on paper:
First payment – a payment of 7% will be paid within 7 days to a closed trust account of the project trustee only. Make sure that there are written instructions for the trustee and what its terms are.
Second payment – a payment of 13% will be paid within 21 days from the date the buyer receives the voucher book. Payment will be made using the voucher book only.
Interim payments – payments according to your personal needs. You can divide it into several payments or make a single payment in order to save on index increases. Of course, all payments will be made using the voucher book only. The dates must be set Through a certain number of months from the date of receipt of the voucher book.
Final payment – a payment of 5% or 10% will be paid up to 14 days from the date of receipt of the apartment, after the apartment has been built, Form 4 has been received, and the apartment is suitable and safe for habitation.
What is important to demand when buying an apartment on Pre-sale?
In this chapter, we will provide some of the professional knowledge and experience we have developed over many years in the real estate market. we will detail a number of highlights that you should print out and request when negotiating to buy a new apartment from a contractor.
A closed trust account for the project to be opened by the trustee:
One of the most important aspects is examining the trust mechanism for the first payment. You should read (or verify with your lawyer on your behalf) that the trust account will be opened specifically for the project only. Make sure that after depositing the funds, you will receive a “deposit receipt” indicating that the amount has actually been deposited; and most importantly, you should verify what the conditions are for transferring the payment to the contractor’s order – and making sure they will be made only after receiving security in accordance with the provisions of the law.
Option to cancel the agreement within a certain time:
This is an especially important option. You may now think that the deal is profitable, but sometimes, after a certain period of time, the data may Change. It is possible that other contractors in the area have gone on sale, and their terms will be much more attractive.
There are several reasons for cancelling the agreement :
- If a full permit for the project has not been received within 6 months of the signing date.
- If material components have changed regarding the apartment (area, floor, directions, connections, etc.).
- If bank financing and collateral in the form of a bank guarantee and/or an insurance policy have not been received by a financing entity that provides collateral and/or an insurance policy.
Prohibition on changing the project’s designation:
Contractors sometimes try to maximize returns and make certain planning changes. For example, we encountered a residential project in the south of the country where, after selling a number of free-sale apartments in the project, the contractor promoted a plan to change the designation in which commercial floors would be built within the project.
Additional provisions
It is important to note that a thorough legal review of the project raises many more conditions that must be included before entering into a binding agreement.
We recommend contacting a real estate attorney before entering into an agreement so that he can examine and assist you in the negotiation process with the contractor.
How to find pre-sale deals on apartments:
We have mentioned several times that deals to buy an apartment on pre-sale are characterized by a limited number of knowledgeable people. Therefore, the question arises – how do you get to those deals?
Focus on a specific area and call contractors:
This is the main tip. You must first choose where you want to focus. We recommend focusing on a new neighborhood that is being built, and that is still in the planning process.
You can go to the local authority website and/or the websites of contractors operating in the area and try to see if anyone has a project in preparation there. It is important to make sure that it is not yet on the market, and in such a case, pick up the phone to the contractor and ask to speak to the project’s marketing manager (before it goes out to an external marketing company).
Follow the RMI tenders:
All the results of winning RMI tenders are available on the authority’s website. If a company has won a project in the last year in the area you want – pick up the phone and ask to enter the purchase at the presale. You will be surprised how easy it is to be first in line and receive a significant discount, if you know how to call in advance.
Call and pester the sales people and/or the marketing department:
This is a tip that takes a few minutes – but can save tens and hundreds of thousands of shekels. All you need to do is pick up the phone or send an email to the marketing department of the major contractors.
Once you have done this, the contractors tend to save the contact information for additional projects and pull them out if it is necessary to sell an apartment at the presale stage.
Beware, a red flag!
We repeat and say it again – if you receive a message and/or advertisement that says the contractor is in the free sale stages – it is probably not true.Pre-sales are not advertised to the general public.
A lawyer for buying an apartment on paper or a free sale apartment:
The most critical and important step in the process of buying an apartment “on paper” from a contractor – is choosing the lawyer who will accompany you through the process.
A lawyer for buying an apartment on pre-sale knows how to perform the relevant legal checks, conduct negotiations with the contractor, and ensure that the buyer is fully protected from the enormous power that the contractor has in an agreement to buy an apartment on paper.
The Osher Elkayim office has many years of knowledge and experience in the field of real estate and transactions to purchase an apartment from a contractor in general, and purchasing an apartment on paper in particular, and we have accompanied hundreds of buyers who purchased new apartments on paper in various areas, and by large and small contractors in all parts of the country.
In conclusion,
If you also want to receive efficient, high-quality, discreet and personalized legal service, feel free to reach out to us on our site or call us at: 077-997-1180 and we will get back to you today to provide a proposal for legal assistance in purchasing an apartment on paper
Disclaimer:
The information on this page and website is meant to only provide initial and basic information and does not/ will not constitute as legal advice and guidance or a substitute for individual legal advice provided by the firm. Nothing stated on this page can be constituted as guidance and/or recommendation and/or instructions for taking and/or avoiding taking various legal proceedings.
We recommend consulting with a professional attorney before taking any action. The responsibility for any result caused by the reliance of the information above shall apply solely to the user.
