Buying a New Home in Israel: Why am I paying the Kablan more than the agreed price?
Posted on 24. Jan, 2010 by buyitinisrael in Buying On Paper, Legal Matters
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By Joshua Portman, Advocate
The new apartment unit was selected, the purchase price was agreed, and the contract was signed. Why then was the amount due to the kablan more that the agreed price? There are five main factors that could impact the amount payable for real estate in Israel:
- Contractor’s Legal Fees – When purchasing an apartment in Israel from a kablan, the purchaser typically will pay an administrative fee to the kablan’s attorney which can range from 1.5%-2% of the purchase price including VAT. While this payment is mainly meant to subsidize the contractor’s legal fees, even though his attorney does not represent the purchaser, it is also meant to cover the fee for recording of title in the purchaser’s name which is handled by the contractor’s attorney.
- Currency Transfer and Conversion Costs – The price of new property in Israel are typically fixed in Shekels at the signing of the contract and therefore the payments to the kablan should be made in Shekels. If one is using currency other than Shekels to pay for the property, one must bear in mind that he will incur additional charges when depositing these funds into an Israeli bank. There are three typical charges when sending foreign currency to Israel: (1) fee for receiving funds which typically runs between $25-$140 depending on the amount sent , (2) bank commission charge, typically 0.15% of the amount converted, and (3) exchange rate differentials. On days when there are foreign currency transactions the Bank of Israel publishes the “Representative Rate”. While the Representative Rate is what is looked at as the official rate of exchange, the rate actually received when converting funds will typically be a 0.5%-1% lower than the “Representative Rate”. Rates of exchange like many aspects of transactions can be negotiated in advance with the bank to reduce the cost of the currency conversion.
- Currency Fluctuations – Due to the fact that transactions in Israel are typically fixed in Shekels, as stated above, there is a risk if foreign currency will be used to pay for the property. Any devaluation of the foreign currency effectively means an increase in the price of the apartment. By contrast, there is also a potential windfall, in that if the currency value increases in relation to the Shekel, the purchase price of the apartment effectively becomes cheaper. While there are a number of ways to hedge your risks, the objective of this article is to create the awareness of the issue. Methods for addressing these issues will be discussed in a future article.
- Inflation – The consideration paid to the kablan is usually linked to a measure of inflation, either the Israeli CPI (‘Madad‘) or the Israeli Building Index. This effectively means that any outstanding portion of the purchase price will readjust for changes in the index to which the contract is linked. If the index increases so does the price of the apartment. For example, the agreed purchase price of an apartment is 1,300,000 NIS. The initial down payment of 500,000 NIS has been made and 800,000 NIS is outstanding. This portion is linked to the Israeli CPI which has increased by 2%. The readjusted outstanding amount is therefore 816,000 NIS. For the purposes of the contract, the index can never decrease below the base index listed in the contract. Consequently, a buyer will never pay less than the contract price.
- Upgrades and Modifications – The agreed price does not include changes and additions to the plans and technical specifications of the apartment which a purchaser may wish to order from the kablan. Since many modifications and upgrades will require additional payment, it is preferable to hire an architect or designer who will design the apartment in advance and present the changes to the contractor in order to facilitate the pricing of the changes in advance. This plan and price, if approved, should be incorporated as an addendum to the contract. In fairness, it should be noted that this is not always possible due to various reasons, including: (1) the fact that there is not always time in advance to complete the design, or (2) the purchaser does not know what changes he/she wants to make at the contract stage and (3) sometimes the kablan will not address the issue of changes until the contract is signed. In such circumstances, the next best situation is to attempt to limit the kablan’s ability to charge for changes and additions at whim by contractually limiting the cost of changes to an objective index (in Israel, we often use the “Dekel” price list) or to the kablan’s own price list, in as much as he has one.
The writer has been practicing law in Israel for thirteen years and is a founding partner of Portman, Rachlin and Co. Law Offices. He can be contacted by telephone +972-2-563-0224 or by email at josh@rplaw.co.il.
The contents of this article are designed to provide the reader with general information and not to serve as legal or other professional advice for a particular transaction. Readers are advised to obtain advice from qualified professionals prior to entering into any transaction.
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