Almost anyone purchasing a home in Israel faces the same dilemma between buying a brand new apartment versus a second-hand home. On the one hand, the new, modern design and finish of a new build, the price, the payment terms, and the potential for greater appreciation in value may be attractive, while on the other hand, buying a new apartment involves many elements of uncertainty, from the final look of the apartment and the building to the actual date of possession. In order to facilitate the decision process, Buyitinisrael has summarized the major advantages and disadvantages of each of the forms of purchase. Behatzlacha!
Two years ago, S. decided to buy a new build in Modi’in from the building contractor. At the time, the apartment was still under construction and the contract included a commitment by the builder to deliver the apartment by April 2020. The contract also included a three-month “grace” period, so that at the latest the builder would deliver the apartment by July 2020, without sanctions. In fact, the builder was delayed by an additional three months, and S. only received the keys at the end of September 2020. S., who had planned to rent out the apartment, was furious. “The house-moving season, from June to August, was already over, and I knew that it would now be much harder for me to find a tenant.” And indeed, after several months of advertising the apartment for rent, S. found tenants only in late October, at a lower rent than she had originally sought.
Second-hand apartments offer fewer unknowns than buying a new-build
A dilemma faced by many home-buyers in Israel is whether they should buy a new apartment from a contractor (known as “buying on paper”), or a second-hand apartment. The story of S. vividly illustrates one of the main disadvantages in buying from a contractor – uncertainty as to the exact date the apartment will be available. On the other hand, when buying a second-hand apartment, the contract will include the exact date on which the keys should be handed to the new owners.
Purchasers of second-hand apartments enjoy a high level of certainty, not only in respect of the date of delivery but in almost all aspects of the purchase. This begins with the physical form of the apartment and the building. Most contracts for newly built apartments are concluded before the apartment is actually constructed. Even though nowadays contractors’ sales teams use advanced technology to demonstrate, so far as possible, how the finished apartment will look – there is no guarantee that the actual apartment will look exactly like the demonstration model. The uncertainty also extends to the view from the apartment balcony. In particular, when the whole neighborhood is new and still under construction, it is very difficult to gauge whether the view will remain open or will be blocked by other buildings. Finally, there is also uncertainty regarding the common areas – the entrance lobby, garden, etc., whereas with a second-hand apartment, “what you see is what you get”.
When the new apartment is part of an entirely new neighborhood, which is all being constructed at the same time, besides not knowing who your neighbors will be, the uncertainty extends even further and includes elements such as the character of the neighborhood, the level of services and schools that will be available, and so forth.
Buying off-plan offers advantages in price and payment terms
Despite these significant disadvantages, purchasing off-plan offers several major advantages for buyers. The main advantage is the price of the apartment and the payment terms, especially if the apartment is bought at an early stage of the project. When the deal is signed before the building permit is issued the price to buy a new build is often reduced as part of a “pre-sale promotion” and may be as low as 10%-15% below market price.
In addition, contractors often promote attractive payment terms to encourage buyers. For example, it is common in Israel today to offer an advance payment of 20%, with the remainder payable only upon receipt of the completed apartment. This allows the contractors to deal with one of the main challenges faced by purchasers of new builds – the difficulty in buying a new apartment without first selling their current home.
Early increase in value with new apartments
Another major advantage of new apartments is the potential for a significant increase in value. Apartment values go up at two points in the development process: the receipt of the building permit – if the apartment was bought earlier; and on delivery of the finished apartment. When the whole neighborhood is being constructed at the same time, purchasers are justifiably put off by the thought of living in a building site for the first few years. However, once the construction of the neighborhood is finished, purchasers of new apartments reap the benefits of a further rise in value.
However, there is an exception to every rule. A second-hand apartment may also see a meteoric rise in value if the apartment is in a building where there is a high likelihood that urban renewal projects will be implemented.
Maintenance costs for both new builds and second-hand homes
The level of maintenance needed in second-hand apartments varies depending on the age of the apartment. However, as noted above, the buyers can see with their own eyes what they are buying and can also bring in professional advisors before they buy, to check that the building does not have any particular problems.
While most contractors aim to provide quality work, problems do arise in new builds even where the delivery stand is high, which can cause the buyers headaches, particularly during the early years. To protect purchasers of new apartments, under Israeli law building contractors are responsible for repairing defects for a defined period, known as the “warranty period”. The warranty period ranges from one year to seven years, depending upon the nature of the defect. It should be noted, however, while this legislation is intended to protect buyers and is a strong factor in favor of purchasing new off-plan, in practice the picture is often more complicated.
Common areas – new construction standards higher but more expensive to maintain
Construction standards, including the specifications for common areas, have gone up over the years. In the past, apartment buildings had basic stairwells and no elevators, whereas today when purchasing off-plan, new buildings have designed lobbies, at least one elevator, if not more, a residents’ club room, underground parking, and, in more prestigious projects, even a private gym and swimming pool.
These elements provide the residents with a higher standard of living, but at a high cost. In older buildings, the monthly maintenance costs may be in the region of 100-200 NIS per apartment. In new buildings, the monthly maintenance costs of the common areas start at no less than 300 NIS and are often much higher.
Registration of rights much faster with pre-owned homes
Under Israeli law, immediately following the purchase of an apartment, the change in ownership must be registered in the “Tabu” (land registry). In the case of a second-hand apartment, this does not usually cause any particular problems. However, registration of ownership of a newly constructed apartment may be a lengthy process, which can even take years, due to the registration processes known as “parcellation” of the land. Essentially the constructed area must first be divided into plots and subplots, and only then can the apartments be registered in the names of the new owners. In Israel today, the processes remain far too long.
There is no clear answer to the question of whether it is preferable to buy a new build or pre-owned home in Israel. The answer will differ depending upon the identity of the buyer – each with their own characteristics and needs. However, our analysis indicates that purchasing a new apartment in Israel, especially at the early stages of construction, is not recommended for buyers who are risk-averse, or for whom certainty is a high priority. Purchasers who can deal with the stress involved in buying “on paper” and with the lack of certainty regarding certain aspects of the product, can benefit from lower price levels and all the other advantages offered by new apartments.