What is a purchasing group?

A purchasing group is a group of people who join together to build a residential building, or a project of several buildings, with all that this entails – purchasing land, hiring the services of professionals, and contracting with executing providers and contractors. Sometimes this is a group of people who know each other, but more commonly, the association is managed by an organizing company that specializes in projects of this type.

Savings on developers’ profit

Over the past 20 years, purchasing groups have become a popular way to purchase an apartment in Israel, allowing group members to reach their goal at a much cheaper price than buying an apartment from a developer. The main advantage enjoyed by a purchasing group is the savings on the profit. While residential construction developers generally enjoy a profit ranging from 15%-20% for construction projects, in the case of a purchasing group, there is no entrepreneurial developer, and thus the profit is saved.  Where there is an organizing company – it usually takes for itself a management fee of 7% of all payments. In the past, members of the purchasing groups also received numerous tax benefits such as exemption from VAT on land and fees, but these benefits were canceled in 2017. As a result, the popularity of purchasing groups has declined in recent years.

Risk and uncertainty

Furthermore, the process of buying a home through a purchasing group bears more risk and uncertainty, regarding the final price of the apartment and the date of completion of the project, than buying a new apartment from a contractor. When purchasing a new construction project, the developer usually bears the risk and the buyer pays an agreed price — if there are disruptions in the project the buyer is generally not harmed.  In the case of a purchasing group, however, the group members are exposed to the various risks involved in advancing the construction of a project – such as delays in issuing a permit or a contractor who goes bankrupt in the middle of the project.

Another issue with purchasing groups is that the organizing companies are often not professional or respectable. In recent years, there have been several cases where such companies have collapsed, and purchase group members have found themselves severely damaged harmed and forced financially, or in the most extreme, but rare, cases,  left without an apartment. Therefore, checking the reputation of the organizing company is of utmost importance when joining a purchasing group.