What is a pre-sale transaction in Israeli real estate?

The purchase of an apartment in a “pre-sale”, is a transaction that is carried out before the developer receives a building permit. Until around a decade ago, this method of purchase was considered acceptable yet not very common and characterized approximately 15% of all new home transactions. In recent years, however, with exceptionally high demand for apartments, the volume of pre-sale transactions soared, reaching more than half of all transactions for the purchase of a new apartment in Israel. According to data published by the Chief Economist at the Ministry of Finance in mid-2022, about 60% of all new home buyers during that period did so as part of a “pre-sale”.

Advantages of pre-sales

Purchasing pre-sale has several advantages. The main advantage is price level which may reflect a discount of 10%-15% compared to the price of the property after receiving the building permit. In addition, as the construction process progresses towards the completion of the project, the prices of apartments marketed continue to rise. Another advantage is the gradual distribution of payments throughout the years of construction (3-4 years), where at the time of signing only 20% of the amount can be paid.

Risks and uncertainty

However, the price benefit reflects some risk as well. In most purchase contracts, the developer undertakes a date for delivery of the apartment only from the date of issuance of the permit. In other words, a purchase made before receiving a permit has no set delivery date. It should be noted that even the deadlines specified in the contract are rarely fulfilled. According to Ministry of Housing data presented in a Knesset debate in 2022, in 83% of cases, there was a delay of more than two months compared to the date of delivery in the contract, and in 40% of cases a delay of more than a year.

Another uncertainty is related to the physical structure of the apartment. Although the project is planned in accordance with an approved plan, which determines the number of apartments and the total building areas, in the process of issuing the permit, changes may arise and various dictates may be given by the local committee issuing the permit, which may also lead to variations in the building itself. In general, there is notable difficulty in understanding what the apartment might look like, what view it offers, and more, when the procedure is done entirely “on paper”.

Finally – the risk of various disruptions throughout the execution of the project, such as bankruptcy of the developer or the executing contractor, is also greater when we purchase an apartment “on paper”. Therefore, it is recommended to carry out transactions of this type mainly with well-known, reputable companies of medium size and above, and to be particularly careful when the developer is small and unknown.