Since buying on paper means your apartment will not be completed for several years, one of the most important questions to ask when purchasing a property from a developer is: How are my payments protected?
Buying in a new development involves paying substantial sums of money long before construction is complete. For that reason, Israeli law requires developers to provide buyers with specific protections designed to safeguard their investment if the developer encounters financial difficulties or is unable to complete the project.
Understanding these protections is essential for any buyer to enusre you feel protected and at ease with a transaction spanning over several years. While one might assume there are several ways to secure a buyer’s payments, according to Israeli law there are only two ways a builder can protect a buyer – (i) Lien (Caveats) with payments according to the advancement in construction and (ii) Bank Guarantees. Each offers protection, but they operate very differently and carry different practical implications.
Liens (Caveats)
One form of protection is the registration of a lien, sometimes referred to as a caveat, against the land in favor of the purchaser.
Under this model, the buyer’s payments are linked to construction milestones. Because the land itself has value and construction may already be underway, the lien provides security for the purchaser’s investment. The buyer only pays according to stages of construction as prescribed by law, meaning payments are made only for work that has already been completed. The builder can give better payment terms, but never less than the schedule set by law.
Key Features of a Lien Structure
1. Payments Correspond to Construction Progress
Buyers pay according to legally prescribed milestones, reducing the risk of payments for work that has not yet been performed. As such, the buyer is holding back all funds for future work.
2. Easier Resale During Construction
For investors, one advantage of a lien structure is that it can be easier to sell or assign the property rights before construction is completed.
However, buyers should also understand some of the practical considerations associated with this form of security.
Potential Challenges
1. Collective Decision-Making
If difficulties arise with the project, purchasers may need to act collectively. This can require cooperation among numerous buyers, which is not always simple or efficient.
2. Dependence on Other Units Being Sold
Unsold apartments within the project can sometimes create complications when attempting to reorganize or move a project forward if problems occur.
3. Less Institutional Oversight
Unlike projects financed through a construction loan, there may not be the same level of bank scrutiny and monitoring throughout the development process.
Bank Guarantees
A bank guarantee is generally considered the gold standard of purchaser protection.
Under this structure, the developer finances the project through a construction loan provided by a major Israeli bank or major insurance company. All purchaser payments are paid into a designated secured account using a specific payment method (payment vouchers), guaranteeing the payment is deposited into the specific account for the specific project. In exchange, the buyer receives a bank guarantee covering the amounts paid.
This means that if an unforeseen problem arises with the project or the developer is unable to fulfill its obligations, the purchaser’s funds are protected and mechanisms exist to ensure either reimbursement or completion of the project.
Please note that the VAT portion of every payment is not guaranteed by this Bank Guarantee, as the state will be responsible for paying back the VAT portion of every payment if something goes wrong.
Key Advantages of a Bank Guarantee
1. Backed by a Major Financial Institution
The guarantee is secured by a major Israeli bank or one of the major insurance companies in Israel, providing buyers with a significant level of financial protection.
2. Extensive Project Review
Before issuing a construction loan, the bank conducts its own due diligence and thoroughly vets the project. While this does not eliminate all risk, it provides an additional layer of oversight beyond the developer itself. In addition, the bank or insurance company will only release funds to the builder according to the advancement in construction.
3. Independent Protection
Each purchaser receives an individual guarantee. Your protection does not depend on the actions, decisions, or financial circumstances of other buyers in the project.
4. Predictable Payment Schedule
Payments are generally made according to a predetermined contractual schedule rather than being directly tied to construction milestones. The downside here is that the buyer has to make the payments unrelated to the work the builder has carried out to that point.
Which Protection Is Preferable?
Both bank guarantees and liens are recognized legal mechanisms designed to protect purchasers. However, from a practical and risk-management perspective, most real estate attorneys prefer projects that provide bank guarantees.
The involvement of a major financial institution, the independent nature of the guarantee, and the additional due diligence performed by the bank typically provide buyers with greater certainty and peace of mind.
For this reason, many attorneys will encourage clients to prioritize developments that offer bank guarantees whenever possible.
A Word of Caution: Early-Stage Projects
In some cases, developers begin marketing and selling units before the project’s financing structure and guarantees have been fully established. In such cases, the law allows the builder to charge only up to 7% of the purchase price as an initial down payment.
This 7% will not be guaranteed until the construction loan or the lien is registered, which puts this payment at slight risk. That being said, many of the builders will hold this payment in escrow and not deposit it until the security is in place.
Before signing any purchase agreement or making any payment, it is important to understand exactly what security is being provided and when that security will be issued.
The Bottom Line
When purchasing a property from a developer, price, location, and design are important—but so is understanding how your investment is protected.
Every development is different. Before committing to a purchase, consult with an experienced real estate attorney who can review the protections being offered and ensure that your interests are fully protected throughout the transaction.
