Purchase groups in Israel are a popular and less expensive way to buy a new apartment than through a developer. But with potential savings up to 20% of the apartment price, this route bears a greater risk and the Government is now considering tightening regulations to protect purchasers.
Increasing signs of instability followed by legal proceedings against Perry Real Estate, controlled by businessman Eldad Perry, have recently created heated discussions in the Israeli financial press, not for the first time, about the dependability of purchase groups in the local Israel real estate market. Over the past 20 years, the purchase group sector has grown among many Israeli apartment buyers, who have found this way of purchasing to be more cost-effective. However, in the past five years, there has been an alarming increase in the number of cases dealing with problems, scandals, and even fraud. Although quality players operate in the field, these problematic cases, of which Perry Real Estate is the last, give the entire sector a bad name.
A popular alternative way of purchasing a new apartment in Israel
Purchasing an apartment as part of a purchase group is one of the main alternative ways in Israel to the most common purchasing route – purchasing an apartment from a developer. Whereas in an average year the number of new apartments purchased from a developer is between 20,000 and 25,000, the number of apartments being built within purchase groups is estimated to range between 2,000 and 4,000 apartments.
The concept of purchasing from a developer is considered to be safe: a buyer pays for the apartment, the developer is obligated to deliver the apartment at the time set forth in the contract, while all risks to the project’s costs apply to the developer. In addition, the developer is obligated to compensate the buyer if there is a delay in the delivery of the apartment, and according to the law, he is also obligated to provide the buyer with a bank guarantee for the value of the apartment, which protects the buyer’s money in the event that the developer goes bankrupt during the construction process. However, this safety net comes at a price of 15%-20% of the cost of the apartment in an average project — entrepreneurial profit that the developer pockets.
Savings of 15% – 20% on entrepreneurial profit
With purchase groups in Israel, on the other hand, a group of individuals band together to establish a real estate project on their own, from start to finish. Generally speaking, the group acquires a plot, hires the services of a construction company and various professionals, applies for building permits, and so on and so forth. Since the group functions as a real estate developer, it bears all the risks of a developer. The greatest advantage of this type of structure is the savings on the entrepreneurial profit, which stands at hundreds of thousands of shekels to each group member. In areas of high demand, savings may even reach NIS 1 million for each member of the group. With increasing high prices in the housing market, purchase groups became very popular over the last 20 years.
Since in most cases group members themselves are not real estate professionals, the various processes are usually led by a professional “organizer.” As popularity of purchase groups increased in recent years, prominent “organizing” companies emerged in the sector, organizing groups for the purchase of hundreds of apartments a year.
Events have led to calls for increased regulation on purchase groups in Israel
However, a number of events in Israel over the past five years have highlighted the level of risk associated with buying as part of a purchase group. Specifically, the collapse in 2016 of “Or City” – one of the largest and most recognized real estate companies in Israel – under the management of Inbal Or who was one of the most well-known figures in the Israeli real estate industry. Buyers discovered that millions of shekels they had paid for their apartments had been drawn from the projects’ funds for other purposes. In 2016, the court issued a liquidation order against all the subsidiary companies, and in September 2019, an indictment was filed against Or for fraud and tax offenses. The dissolution of the parent company, which was involved in several new housing projects at the same time, left hundreds of buyers affected and caused a public outcry.
The Inbal Or affair created pressure on the government to increase the level of regulation on purchase groups. Indeed, in the years since then, the Ministry of Justice began promoting a bill to regulate the activities of the purchase groups. Among the various restrictions included in the proposal is obligating the group organizers to inform the purchasers who join the group of the various risks involved in the process such as the potential price increases, chances of delays in project completion, and even possible failure of project implementation. The proposal also prohibits group organizers from marketing projects on land where no building plan has been approved.
However, although three years have passed since the bill was first introduced, the proposal has not yet been passed into law, and now with the entanglement of the Perry Real Estate Group – another significant player in the field – calls to increase the scope of regulation on purchase groups in Israel have been reignited.
Buyers looking for bargains should go in with open eyes
However, not everyone agrees that increased regulations are required. According to Attorney Moshe Raz-Cohen who specializes in transactions conducted through purchase groups: “There is no doubt that the level of risk in the purchase group is greater, but that is precisely the product. Increased regulations that will make purchase groups safer will also add costs that will eliminate the advantage altogether. However, those who take part in the group should do so with open eyes. They must understand the nature of the deal and thoroughly check the background and reputation of the organizing company.”