Everything you need to know is included in our Israel Property Pack
Israel's innovation ecosystem and economic stability are making it a preferred destination for foreign real estate investors.
If you're not a local resident, dealing with the property market in this area can be a bit of a maze. Be prepared for potential obstacles and surprises.
Both our customers who purchased properties there and our on-site local experts have reported a significant list of pitfalls. We've listed them all in our Israel Property Pack.
This article provides a brief overview of potential pitfalls that may arise during the property buying process in this country.
Is it safe or risky to invest in real estate in Israel?
While scams are not rampant in the Israeli real estate market, they do occur.
One prevalent scam involves sellers attempting to sell properties they do not legally own.
This can be especially challenging for foreign buyers unfamiliar with the intricacies of Israeli property law. For example, a foreign buyer might encounter a seemingly great deal on a property, only to discover that the seller lacks the legal right to sell it.
Foreign buyers often face language barriers when navigating the Israeli real estate market. Miscommunication can lead to misunderstandings or disputes. For instance, a foreign buyer may think they have secured a property, only to find out later that there were miscommunications regarding the terms of the deal.
Additionally, property transactions in Israel can involve cultural differences in negotiation styles, which can be a potential pitfall if not understood and managed correctly.
Israeli property law provides a reasonably robust framework for protecting property buyers. However, it's essential for foreign buyers to understand these laws fully and to engage local legal professionals who are well-versed in Israeli property regulations.
An example of the legal protection offered is the mandatory use of escrow accounts in Israel, which ensures that the buyer's funds are safeguarded until the transaction is complete.
The Israeli legal system is generally efficient and fair when it comes to resolving property disputes. However, the efficiency may vary depending on the complexity of the case and the willingness of the parties to cooperate.
An example of this efficiency can be seen in cases where disputes arise over land boundaries, and the legal system steps in to resolve the matter swiftly.
Foreign buyers should conduct meticulous due diligence before purchasing property in Israel.
One specific example is the need to verify property ownership and title deeds, which is particularly important because Israeli land records can be complex. Furthermore, understanding zoning regulations is crucial, as building restrictions can vary across municipalities, potentially impacting the buyer's intended use for the property.
The Israeli government actively regulates the real estate market, and this can significantly impact buyers. For instance, the government imposes high property transfer taxes, which can substantially increase the overall cost of purchasing property.
Additionally, there are restrictions on foreign ownership in certain areas near the borders, which foreign buyers must be aware of before making an investment.
Foreign buyers have reported specific challenges, such as lengthy permit approval processes, especially in areas with sensitive security considerations.
For example, in East Jerusalem, obtaining building permits for property renovations can be a cumbersome and time-consuming process, which can affect the timeline and budget for investors.
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Avoid these pitfalls when purchasing property in Israel
The concept of "Tabu"
When buying residential property in Israel, a common pitfall, especially for foreigners, is overlooking the concept of "Tabu" registration.
"Tabu" is the Land Registry Office in Israel, and it is crucial to ensure that any property you're interested in is registered there. This is unique to Israel's real estate system.
In Israel, not all properties are registered in the Tabu. Some are still documented in older systems, like the "Minhal Mekarkein" (Government Land Authority) or in cooperative societies' registries. If you buy a property that is not registered in the Tabu, you may face several challenges.
For example, it can be more complicated and time-consuming to prove ownership, secure a mortgage, or resolve disputes about property boundaries or rights.
The frequency of encountering properties not registered in the Tabu is relatively high, especially in older neighborhoods or in cooperative housing communities (Kibbutzim or Moshavim). As a foreign buyer, you should be particularly vigilant about this.
Always ask if the property is Tabu registered. If it's not, you might want to reconsider the purchase or, at the very least, seek specialized legal advice to understand the implications and potential risks.
The risks related to "Heter Iska"
Another unique aspect to consider when buying residential property in Israel is the issue of "Heter Iska," a concept deeply rooted in Jewish law (Halakha) and its application in Israeli financial transactions.
This is particularly relevant if you plan to take a mortgage or enter into any financial agreement involving interest payments.
In Jewish law, charging interest on loans between Jews is prohibited. To address this in the modern financial context, the "Heter Iska" agreement was developed. This agreement transforms the loan into a sort of investment, where the bank or lender becomes a silent partner in a venture, thus avoiding the direct charge of interest and making the transaction Halakhically permissible.
For you as a foreign buyer, it's important to understand that most Israeli banks will automatically include a Heter Iska clause in mortgage agreements with Jewish customers.
This doesn't typically change the economic terms of the loan, but it's a unique legal and religious framework that you might not encounter elsewhere.
Failure to understand or properly handle a Heter Iska can lead to complications, especially if you're seeking financing from Israeli financial institutions or entering into private lending agreements with Jewish individuals.
It's not a frequent source of major issues, but being unaware of it can lead to misunderstandings or confusion about the terms of your financial agreements.
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"Hevrat HaMeshakenet" or the Building Maintenance Company
A specific challenge you may encounter when buying residential property in Israel is dealing with "Hevrat HaMeshakenet" (the Building Maintenance Company).
This concept is particularly unique to Israeli real estate and can be a source of unexpected complications, especially for foreign buyers.
Hevrat HaMeshakenet is a company responsible for the maintenance of common areas and services in apartment complexes or residential buildings. When purchasing an apartment in Israel, you automatically become a part of this company, which is collectively owned and managed by the apartment owners in the building.
The pitfall here lies in the financial and operational health of the Hevrat HaMeshakenet.
Some of these companies might have outstanding debts, poor management, or ongoing legal disputes, which can indirectly affect you as a new owner. For example, if the company has significant debts, you might find yourself liable for a portion of these debts as a new member.
Additionally, poor maintenance or management can impact the quality of living and the value of your property.
It's not uncommon for foreign buyers to overlook this aspect, as it’s quite specific to Israel and differs from property management practices in other countries. Therefore, you should thoroughly investigate the status and history of the Hevrat HaMeshakenet before finalizing your purchase.
This includes reviewing their financial statements, understanding any ongoing maintenance issues, and gauging the overall satisfaction of other residents with the company's performance.
The awareness of the "Tama 38" risk
A lesser-known but significant aspect to be aware of when buying residential property in Israel is the potential impact of "Tama 38".
Tama 38 is an Israeli government initiative aimed at strengthening older buildings against earthquakes. It's unique to Israel due to its geographical location and the age of many of its buildings.
Under Tama 38, developers are incentivized to renovate and reinforce older buildings to meet current earthquake resistance standards. In exchange, they're usually permitted to add additional floors or units to the building, which they can then sell.
This can have a significant impact on the property you are considering.
For you as a buyer, the pitfall lies in purchasing a property in a building that might later be chosen for a Tama 38 project. This could lead to a long period of construction work, noise, and disruption. Moreover, the dynamics and demographics of the building could change significantly post-renovation, potentially affecting the property's value and living environment.
It's not always straightforward to ascertain whether a building will be subject to a Tama 38 project, but there are signs you can look for. Buildings constructed before the 1980s and those showing visible signs of deterioration are more likely candidates.
Therefore, you should inquire about any Tama 38 plans or possibilities when considering a property, especially in older neighborhoods.
Also, consult with a local real estate expert or lawyer who can provide insights into the likelihood of a Tama 38 project affecting your chosen property.
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The "Agricultural Land" risk
An aspect often overlooked by foreigners buying property in Israel is the potential implications of "Agricultural Land" classification.
In Israel, a significant portion of land is designated as agricultural, which comes with specific restrictions and regulations. This is particularly relevant if you're looking at properties in rural areas or on the outskirts of cities.
The pitfall here is that agricultural land in Israel is subject to various restrictions that can significantly impact what you can do with the property. For instance, you might face limitations on construction, renovation, and even on selling the property in the future.
Sometimes, these restrictions aren't immediately apparent, especially to someone not familiar with the nuances of Israeli land classification.
The challenge is more pronounced given that some properties built on agricultural land may appear as regular residential homes. As a foreign buyer, you might not realize the underlying legal restrictions until you encounter issues with construction permits, or when you attempt to make changes to the property.
To avoid this pitfall, you should always verify the classification of the land before proceeding with a purchase.
If the property is on agricultural land, it's crucial to understand the specific restrictions and legal implications. This might involve consulting with a local real estate attorney or a consultant who specializes in Israeli land law.
"Binyan Zocher" or "Rememberance Building”
A unique and often unexpected issue for foreign buyers in the Israeli real estate market is the concept of "Binyan Zocher" or "Rememberance Building."
This is a specific situation where residential buildings are constructed on land leased from the Jewish National Fund (JNF) or the Israel Land Authority (ILA) for a fixed period, typically 49 or 99 years.
The key pitfall with Binyan Zocher properties is that when the lease period approaches its end, there can be significant uncertainty regarding the renewal of the lease, the conditions of renewal, and potential costs involved. This situation is quite specific to Israel, where a large portion of the land is owned by the state or by the JNF and leased out for residential use.
As a foreign buyer, you might be attracted to these properties due to their often lower purchase prices compared to freehold properties. However, the leasehold nature of the land can have significant long-term implications.
For example, as the lease end nears, you may face increased costs to renew the lease or even the risk of losing the property if the lease is not renewed.
Additionally, the uncertainty surrounding lease renewals can affect the property's resale value and marketability.
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"Diyur Mugan" or protected tenants
A distinctive and often overlooked aspect for foreigners purchasing property in Israel is the complexity surrounding "Diyur Mugan" (Protected Tenants).
This situation is particularly unique to Israel and involves properties that have tenants with protected status under Israeli law.
Protected tenancy laws in Israel were established to provide security and affordability for long-term tenants, particularly the elderly or those who have been living in the same rental unit for many years.
These laws grant such tenants significant rights, including protection from eviction and limitations on rent increases.
The pitfall for a foreign buyer is purchasing a property without realizing it has a protected tenant. This can lead to unexpected complications, such as being unable to evict the tenant, facing limitations on renovating or developing the property, and dealing with rent control regulations that might make the investment less profitable than anticipated.
Protected tenancy is more common in older buildings and in certain cities with a higher proportion of long-term residents. As a buyer, you must thoroughly investigate the tenancy status of any potential property.
If you discover that a property has a protected tenant, it's crucial to understand the legal implications, including your rights and responsibilities as a landlord, and the tenant's rights under Israeli law.
"Pinui Binui" or evacuation and construction projects
In Israel, a unique challenge for foreign property buyers is understanding and dealing with the "Pinui Binui" (Evacuation and Construction) projects.
This concept is specific to the Israeli real estate landscape and can have significant implications for your investment.
Pinui Binui is an urban renewal program initiated by the Israeli government, aimed at demolishing old, dilapidated buildings and constructing new, modern ones in their place. Property owners in the old buildings are typically offered alternative housing in the new building or compensation.
The potential pitfall here is buying a property that may soon be subject to a Pinui Binui project.
While the end result of these projects is generally positive, with newer and better-quality housing, the process can be lengthy, complex, and sometimes fraught with legal and logistical challenges.
As a foreign buyer, you may not be familiar with the signs that a building is earmarked for Pinui Binui. These can include the building's age, structural condition, and location in an area slated for urban renewal.
Investing in such a property without awareness of an impending Pinui Binui project can lead to unexpected disruptions, such as having to relocate temporarily during construction or dealing with construction-related inconveniences.
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"Mehirut Dirat Horim" or "Parental Dwelling Discount"
A specific issue to be aware of when buying property in Israel, particularly for foreign investors, is the impact of "Mehirut Dirat Horim" or "Parental Dwelling Discount."
This is a tax benefit granted to Israeli residents who sell a property that they have lived in for a certain period, typically used by parents selling their home.
The key aspect of this regulation is that it allows qualifying sellers to exempt a substantial amount of capital gains tax from the sale of their primary residence. This exemption can significantly affect the property's sale price, as Israeli sellers factoring in this tax benefit might price their properties differently.
As a foreign buyer, you might not be eligible for such tax benefits when you decide to sell the property.
This lack of eligibility can lead to a higher tax burden on your end, potentially affecting the investment's overall profitability. It's a pitfall often overlooked by foreigners who may not be fully aware of the intricacies of Israeli tax laws regarding real estate.
The concept of "Arnona" tax
One unique and often overlooked aspect for foreign buyers in the Israeli real estate market is the concept of "Arnona" tax, which is the municipal property tax in Israel.
This local tax, levied by municipalities, can significantly vary in amount depending on various factors such as the location, size, and use of the property.
The pitfall for foreign buyers lies in underestimating or not adequately planning for the Arnona tax expenses. Arnona rates can be considerably higher in certain areas, especially in major cities like Tel Aviv or Jerusalem, compared to other regions.
Additionally, rates can change, and exemptions or discounts may apply in specific circumstances, such as for senior citizens or low-income individuals.
As a foreign investor, it's crucial to factor in the ongoing cost of Arnona when budgeting for your property investment in Israel. Failing to account for this can lead to unexpected financial strain and affect the overall profitability of your investment.
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