Attractive financing terms increase the number of transactions for new homes but with risk

2024 began with a sharp increase in the number of transactions for the purchase of an apartment, and one of the main reasons for this is the favorable financing terms provided by the developers, in which it is possible to pay 20%, 10%, and sometimes even 5% at the time of purchase, and the balance in the delivery of the apartment without interest and linkage. This winking benefit worth tens or hundreds of thousands of shekels makes purchasing more attractive. However, the performers are also attracting speculators trying to make a slight profit, and it is not at all certain that they will be able to complete the deal.

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As is well known, 2023 was a low year in residential real estate for many reasons: the year was characterized from the beginning by a high interest rate and a murky atmosphere surrounding the legal reform promoted by the government and the huge protests that followed, and at the end, a war broke out. However, surprisingly, 2024 brought a new atmosphere to the market, which was reflected first and foremost in a surge in the number of home purchase transactions. January, for example, recorded the highest volume of transactions in a year and a half, with 7,900 homes purchased.

An in-depth examination of the data reveals that the sector responsible for the sharp increase, even compared to last year, is the new housing sector, while the number of second-hand transactions remains stable. Many found the increase surprising since there is no real change in macro data. The war that began in October is still ongoing, albeit at a lower intensity; the interest rate is still high, and the Israeli economy is still slowing.

It seems that one of the reasons for the increase in the sale of new projects is the trend of financing campaigns on the part of developers, which currently make it possible to purchase an apartment while making an initial payment of only 20% or 10% of the apartment price, and in extreme cases even 5%, when the balance payment can be made on the day of delivery, without interest or linkage. This is actually a ‘balloon loan’ that the developer grants to buyers without interest – a benefit worth tens of thousands of shekels, or even hundreds of thousands of shekels – depending on the price of the apartment and the length of time that elapses from the date of purchase until delivery.

Apart from the benefit, this is also a very convenient buying method for housing upgraders, who can purchase without the need to sell their existing apartment in the current and difficult market conditions and can do so only in two or three years, in the hope that conditions will improve by then. Also, of course, a mortgage does not need to be taken until the day of delivery.

The extent to which this form of purchase has become popular in recent months can be seen, for example, from data from the Chief Economist at the Ministry of Finance on the volume of home sales from contractors in February. On the one hand, it was found that as per the price of homes sold in February, the potential income of contractors was 40 percent higher than in February of last year. In practice, however, the contractors’ VAT reports indicated that there was a decline of 9% in actual cash flow due to the aggressive financing campaigns, in which, as stated, apartments can be purchased with minimal initial payment.

Alongside serious buyers for residential or investment, attractive financing deals also attract adventurous buyers who are blinded by the tempting financing conditions and may commit to a deal they cannot execute. A person who purchased an apartment at a price of NIS 3 million and must pay only NIS 300,000 immediately may do so based on optimistic assumptions that the interest rate will decline when the balance is due in two or three years.  Or his financial situation will improve. But as we know, these are assumptions without guarantee that they will be realized.

The financing terms also attract speculators of all kinds, who see these operations as a means of making an easy profit. This is done through a relatively simple method, in which the apartment is purchased with an initial payment of only 10%- 20% of its price and then sold close to the date of sale. The investor enjoys an increase in value and a high return relative to the low amount he invested.

In fact, these promotions create the possibility of buying an apartment “without money.” If we assume that the price of the purchased apartment is about NIS 2 million, then 10% of its price is NIS 200,000—an amount that can be borrowed as part of a regular commercial loan. Thus, someone who makes a speculative purchase only to sell before occupancy may, in the positive scenario, earn hundreds of thousands of shekels in a short time with no capital at all.

However, the positive scenario does not always materialize. Anyone who enters such a deal assumes that home prices will continue to rise, even though this is not always certain.

Another problematic aspect of this type of conduct is found in the legal sphere, as indicated by a position paper published by Amit Grady, Commissioner of the Sales Law at the Ministry of Construction and Housing, in April. In the document, Grady explains that “as part of the purchase of a new apartment, a person who purchased an apartment from a developer may seek to sell the same apartment to a third party. Thus, for example, a person may purchase an apartment from a developer, which will be delivered in three years, and about six months before the delivery date, the first buyer will sell his rights in the apartment to a second buyer. As far as he is concerned, the second buyer purchases a new ‘contractor apartment’ that will be delivered to him in six months. In such a case, insofar as the first buyer intended to purchase the apartment to sell it, the first buyer will be subject to all the obligations that the Sale Law applies to the seller of an apartment, similar to the obligations that apply to the developer who sold the apartment in the first place.”

In other words, in simple terms, Grady warns that from the point of view of the law, a person who sells an apartment under construction before it is occupied becomes a kind of contractor himself and owes to the buyer all the debts owed by the contractor to his buyers under the Sale Law – a law designed to protect buyers of contractor apartments. Among the protections that the seller of the apartment is obligated to give the buyer, and probably the most problematic – he must provide a “sales law guarantee,” that is, a bank guarantee that protects the buyer if, for one reason or another, the project gets complicated and his apartment is not sold. Also, the seller may find himself exposed to claims checked after the delivery of the apartment.

The bottom line is that this period of entrepreneurs’ distress provides buyers with various advantages and the possibility of receiving exceptional benefits that, in normal times, could only be dreamed of. However, anyone considering this type of purchase should not be dazzled by the relative ease with which apartments can be purchased and should ensure that he enters into a deal that he can complete.

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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