Good Real Estate Deals Lend Themselves to Good Due Diligence
The Israel real estate market is one of the hottest in the world, and it is also a risky market. For example, real estate deals are often presented as “sure things” to would-be investors and owners in both the residential real estate and commercial real estate contexts. Similarly, TAMA 38 deals are often built without proper agreements and processes flushed out between buyers and current residents, leading to a high degree of hidden risk.
For this reason, it is important for anyone interested in becoming involved in a real estate project in Jerusalem, Tel Aviv, or Israel generally to be aware of the following common traps that make seemingly exciting real estate investments less exciting:
Improper Zoning. We recently reviewed a real estate transaction in which residential units would be built in a promising new area of Jerusalem. However, there was an important catch: The land on which the residential units were to be build was not zoned for residential use at all, but rather for agricultural use. Stories like this abound: One family bought a property years ago near the beautiful town of Zichron Moshe in the Carmel region: What they were not told was that there was no building permitted on the land, only the growing of crops. Thus, even a farmhouse was not permitted. It is important to perform careful due diligence into these zoning issues.
Liens and Other Incumbrances on the Property. It is important to perform careful due diligence into the Land Registry listing of the property. Often, a careful look will find liens that have a first priority (such as bank mortgages) or even a “warning” in favor of another buyer that would block a sale. Similarly, often Land Registry listings have not been updated, and deceased owners are listed as the owners of the property, requiring probate proceedings or at the very least Land Registry transfer proceedings if probate has already been performed.
Lack of Approvals from the Municipality. Municipalities in Israel are notoriously slow and difficult, and if there has not been a building approval or a Tofes 4 approval for the final built property, years of wrangling can ensue, during which a property can languish unbuilt or without proper approvals needed for electricity hook-ups.
Construction Complications. In Israel, according to a building engineer who deals with the field, one of every two dollars (or shekels) are spent on conflicts with building contractors. If a property has not yet been built, the potential for delays and conflicts, including extra costs, abound.
It is important to perform due diligence into these and other issues in advance to ensure that all risks have been adequately identified and analyzed to the extent possible, to avoid unpleasant surprises later. Forewarned is forearmed.
* Information contained on this page is not meant to constitute or substitute for specific legal advice addressing actual legal situations as is meant as general guidelines only. Readers are advised to seek competent legal counsel appropriate and tailored to their particular legal situation.
January 27, 2019