Buyers Groups: A New Trend in Israel Real Estate
Posted on 22. Jan, 2010 by Buy-It In Israel Staff in Israel Real Estate
©iStockphoto/Jacob Wackerhausen
Rising prices of property in Israel have led to a new trend in the popular Israel real estate market expanding across the country. Over the past few years, the phenomenon of so-called “buyers groups” also known as “purchasing groups” is gaining momentum. The combination of an expensive property market, financing constraints amid the economic crisis and a general mistrust of the stability of building companies have given way for the search of an alternative way to directly purchase land for the purpose of construction rather than buying from a contractor or construction company and thereby saving some of the purchasers’ costs.
According to a recent study by Israel’s Finance Ministry, the value of land purchased by private investors, most of whom were organized in a buyers group, rose by 168% between 2005 and 2007. The figures showed that in 2009 about a third of all new homes bought in Tel Aviv, were acquired by private individuals acting as part of purchasing groups.
Purchasing groups are organized groups of mostly private individuals who join up to buy land in order to build one or two buildings mainly for residential purposes but recently also for commercial use. Depending on the investment of the entities in the group, apartment units are allocated accordingly to the purchasers at the end of construction.
The main idea of purchasing groups is built on the concept of choice rather than being dependent on a constructor chosen by a certain project with vested interests. Instead the organizers of a purchasing group have a common interest and can choose the professionals in charge of the construction and management of the project, as well as the legal professionals dealing with the purchase of the land, contracts and the bank financing the project. Furthermore purchasing groups generally allow for much more flexibility regarding the internal design and upgrade of apartments at the expense of purchasers.
Experts estimate that if all saving elements exist in a project, then purchasing an apartment through a buying group could save up to 20% of the apartment value. The savings include mainly the developer or contractor’s profit and the tax benefits enjoyed by private individuals of buying groups, which do not apply to developers or contractors. For example, private individuals do not have to pay Value Added Tax (V.A.T.), which is currently set at a rate of 16%. There are also some savings on Mas Rechisha (purchase tax).
On the outset, the concept of purchasing groups is attractive since it offers more independence and choice than buying from a developer. While the direct track promises to save some of the purchasers’ costs otherwise charged by construction companies, as in any deal, there can be accidents on the way. A construction project is a long and complex process involving many risks and therefore it requires very specific experience and know how.
The main difference between buying from a contractor or as part of a purchasing group is the legal framework which may cause much damage and costs when things go wrong. Following the fall of Israeli construction company, “Hefziba”, Israeli law demands for purchasers to be provided with a bank guarantee or an insurance policy for all monies paid in order to protect their investment in the event of the construction company going bankrupt before the project is completed.
In contrast, with purchasing groups payments are made in accordance with the progress of the construction and a bank guarantee is usually not necessarily given. In addition when buying directly from a construction company the purchaser is protected by the laws regarding warranties and responsibility for quality of construction. There is no legal backing in place when purchasing within the framework of a buyers group. And last but not least the cost of an apartment bought directly from a construction company is final and determined in the purchase contract and non-changeable, while the cost involved in buying through purchasing groups could change in the case of unexpected additional costs.
However the issue of the lack of regulation and legal protection of projects operated by purchasing groups may change. Israel’s Housing and Construction Minister Ariel Attias has this week called for a hearing on the subject of purchasing groups in an effort to regulate buyers groups and protect purchasers’ and consumers’ monies. The hearing will give those active in the Israel real estate sector and other interest groups the opportunity to present their positions.
The ministry noted that in light of the ever growing trend of buyers groups in the Israel real estate market, which until now has expanded without any supervision or regulation and the lessons learnt from the Heftziba debacle putting the money of thousands of purchasers at risk, there was a need for regulating the pitfalls in the sector and guaranteeing consumer protection.
© Copyright 2010.
Related articles:
New trend of groups of buyers from kablanim to replace purchasing groups
Related Articles:
