Real Estate Abroad
Have you considered buying a home abroad? Why it’s worth seeing the property, what’s important to check, and what to watch out for · A GUIDE
17.05.17 | Lital Dobrovizky
The acquisition of property abroad by Israelis has become a common phenomenon recently. In many cases it is a smart move, but buyers are often tempted to invest in a home or land abroad in light of promises of doubtful credibility. “Mammon” has developed a guide for people considering buying a property overseas, with Adv. Shai Pines, a senior partner at law firm Hamburger Evron & Co., who represents clients investing abroad, and Arnon Grafi, an expert on commercial law who represents buyers purchasing properties abroad.
How widespread is the purchase of a property abroad by Israelis?
Grafi: “It’s an extremely widespread phenomenon. Tens of thousands of Israelis, if not more, buy properties in different parts of the world, the most popular regions being the United States, Canada, Eastern Europe, and Western Europe too – for example London and Berlin. The reason for this is high prices of properties in Israel whereas, for a relatively low amount, compared with a comparable property in Israel, it is possible to purchase a property abroad.
“A detached house in the United States could cost 50,000-100,000 dollars, and a property in Europe, a parallel amount in euros, and if you translate this into Israeli currency, the amount would range between 180,000-350,000 shekels, which is relatively low compared with Israel. Therefore, people who have such an amount, and who are unable to purchase a property in Israel, consider doing so abroad. Investors form another audience. Their assumption is that a real estate investment abroad will yield a greater return than any channel in Israel, in light of the low interest rates in Israel and worldwide.”
In many such investments an exceptional rate of return is promised. When should you be suspicious?
Pines: “Any promise in relation to any investment – whether in real estate, finance or any other field – bearing a fixed return, should arouse suspicion and one should not be tempted by it, and all the more so if it is several times higher than the market norm. This sort of thing cannot exist, and certainly not over a number of years, and someone is trying to sell you tall tales. There is also a huge difference between the gross and net return – what you’ll have left after paying expenses (management fees, periodic maintenance fees and expenses for repairs, local and Israeli taxes). You also need to look at how the return is being measured – whether only against the cost of the property at the time of purchase or whether it includes weighting of all the expenses incurred in its purchase, such as attorney and notary fees, realtor fees and taxation (in some countries there is also a hefty stamp duty). You must calculate the return on the total investment required.”
What should you check before purchasing a property abroad?
Grafi: “It’s very important to visit the place and check it out at close range. It’s also important to compare the property to similar properties in the area and hear the opinions of professionals who are not connected to the proposed property, such as realtors, appraisers, and attorneys. Also pay attention to the location – often a problematic location is the reason for the low price.
“Another matter concerns the calculations of the return made by the marketing company, which usually only refers to rent versus the value of the investment, while ignoring costs such as management fees, maintenance fees, taxation, financing costs, and other payments that have a dramatic effect on profit and returns. It is also essential to check whether you’ll have to make payments to professionals for holding the property, such as an attorney or an accountant, who will have to produce a report every year – a considerable expense that also takes time.
“At the stage of signing the contract, make sure you understand all the details of the agreement, including the fine print, even if the marketing representatives claim they are looking after your interest. You should check whether the property is registered in the name of the investor or whether there is another form of co-ownership in place, under which he has almost no status, in view of the low percentage of his holdings in the property.”
Pines: “As a rule of thumb, do not buy real estate without seeing it. The iron rule of ‘location, location, location’ also applies overseas. It’s advisable to gain a direct impression of the property – where it is located in relation to the city center; what the neighborhood is like, what the access routes are, whether there is already development in the area (water, roads, electricity, cables, sewage, landscaping, sidewalks) or whether further massive investment in infrastructure will be needed.
“Another consideration is the distance from the property. If the property is in the US, your options for control will be fewer, and they’ll be expensive, and over the years the investments you are required to make could make the whole investment non-viable.
“You must of course check the rights you are purchasing using an independent consultant, and not by the person selling you the property. In the United States there are Title Companies that check ownership and it is worth your while to independently hire their services.
“In addition, check the tax treaties to make sure that the tax paid in that country is recognized by Israel, ‘the ultimate country’ to which the money comes. Make sure that the management and maintenance fees do not bite deeply into your current income. On a commercial property in England, for example, the maintenance costs are paid by the tenant, which makes it easier for you to calculate the real return, because you only have to verify what the management fees are.”
If there is a dispute, where will the hearing take place?
Grafi: “Make sure that in such an event, the parties agree that the case will heard by a court in Israel. Most of the marketing companies – even though they are Israeli, and even though the transaction itself is carried out in Israel, embed a clause whereby any dispute between the parties is to be resolved in a court abroad. This means eliminating almost any possibility or economic feasibility of conducting a court case against them, given the costs and complexity of such proceedings abroad, such as expensive attorneys, flights, the costs of accommodation abroad and bringing in witnesses etc. However, Grafi notes that cases have been heard in Israel, and Pines adds: “If you agree on arbitration in the event of a dispute, the courts will also generally honor the arbitration clause.”