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With All Due Diligence Respect

We recently were involved in a very small deal in Jerusalem, and I mean tiny. We sold a 15 square meter (sqm), or approximately 160 square foot, studio in Rechavia for 500,000 NIS, or $130,000.

Everything about the unit appeared to be kosher, despite its diminutive size: the building drawings were recorded in the municipality and the unit was registered in TABU (land registry). Accordingly, and against our advice, the purchaser did not apply for a mortgage prior to signing the contract, as he had good credit and was only planning to borrow a relatively small portion of the purchase price.

That was a mistake.

In Israel, no contracts of sale are signed “subject to” financing or an engineer’s report. All due diligence must be completed prior to contract execution because canceling a signed contract subjects the buyer to a hefty 10% penalty.

 Credit: LexisNexis

In our case, the buyer applied for a small mortgage and the bank appraiser requested to see the land registry drawings and the building permit. We located the registered drawings but were unable to unearth the original building permit. Consequently, the bank refused to give a mortgage to the buyer.

In the past, lenders did not require building permits. If an apartment was registered in TABU with accurate building drawings, the banks were satisfied. Three years ago, however, financiers became more cautious and tightened their lending requirements.

Consequently, buyers today must ascertain during the pre-contract due diligence period what they can borrow – and they should keep in mind that without a building permit, there is a good chance that they will not receive a mortgage.

Understand that you’re not home free just because a building permit exists. You must also demonstrate that the existing apartment conforms with the building permit. If you purchase an apartment that was originally built in accordance with the building permit but was subsequently illegally extended, banks will give a mortgage based only upon the value of the legal space. In addition, they will subtract the cost to remove the illegal extension.

One attorney recently told me that her client wanted to buy a 100 sqm apartment, but only 60 sqm was legal. Regrettably, the amount of the mortgage was based on the value of the 60 sqm of legal space, less the cost of resetting the apartment back to its original size. The reality is that the borrower is not going to eliminate the illegal space - nor, for that matter, is it a bank requirement to do so - though this caveat shows how cautious lenders have become when dealing with illegal construction.

Returning to the story of the miniscule Rechavia studio, the bank denied the mortgage application but fortunately our client found the cash to close the deal. Had the buyer been forced to cancel the contract, he would have been subject to the 10% penalty.

Moral of the story: Surround yourself with seasoned, honest real estate professionals who will ensure that you thoroughly complete all necessary due diligence prior to signing the contract.

Gedaliah Borvick is the founder of My Israel Home (www.myisraelhome.com), a real estate agency focused on helping people from abroad buy and sell homes in Israel. To sign up for his monthly market updates, contact him at gborvick@gmail.com. 

2017-02-26 18:02:41



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