November 6, 2010
By Yoram Hacohen, Adv. and Benzi Jablinowitz, Adv
Hacohen Wolf Law Offices
Jerusalem - Beit Shemesh
Building company Vs. Acquisition Group (קבוצת רכישה)
What's an Acquisition Group?
Acquisition Group, or in the common Hebrew term: "Kvutzat Rechisha" is the latest trend in the real estate market in Israel. A quick search in Google shows over 50,000 results for the words "קבוצת רכישה". You may have come across advertisements to participate in purchasing an apartment through one of the thousands of groups operating in Israel, or perhaps you have heard from friends or relatives about a promising project where you can purchase a dream apartment below market price by joining an Acquisition Group.
Buying through an AG means that rather than purchasing a prebuilt apartment ("on paper") from a building company where the company makes a certain profit on each apartment, the participants of the AG purchase the land directly as a group and manage the building of the project as a developer, thereby enabling a reduction in price for the participants of the AG since there is no property margin for the builder.
What's the difference between buying an apartment from a building company as opposed to buying it through an Acquisition Group?
When buying a prebuilt apartment from a building company, you sign a purchase contract with the company that includes a specific description of the apartment you are purchasing along with a drawing and the final price of the apartment. Buying through an AG means that you purchase a share of the land and undertake to participate in the expenses of the building according to your portion.
In the contract signed with an AG, there will be no final price. This is because the AG does not sell you the apartment; as a partner you are obligated to pay your share of the cost of land and the cost of building whatever it may be.
In most cases, the AG has an estimated final cost price per unit, along with a sketch of the apartments. However, the price is not guaranteed nor is it mentioned in the contract. While the draft drawing of the apartment is included, it is only presented to the participant\purchaser as an indication and is not binding.
What are the risks of buying a prebuilt apartment from an AG?
As described above, the main advantage of purchasing through an AG is the low cost for the participants of the group, which can reach up to a 15%-20% savings compared to buying from a building company. Nevertheless, there are several issues one must consider when purchasing an apartment through an AG:
Clarity & Certainty - we've mentioned that when buying through an AG, in many cases you do not have a clear picture of the apartment are purchasing. This is due to the fact that the land marketed by the AG may not be fully zoned and approved for building, or may not have a final building permit. In contrast, a building company is usually the registered owner of the land or has a building agreement with the owner, and generally has an approved building permit for the apartments. As a result, the apartment and its plans are final.
Financial stability- this may be a concern even when buying from a building company. However, investigating the financial stability of a building company is a relatively easy task. An AG is not an ordinary corporation and is usually formed by an entrepreneur without any significant financial backing and it is usually impossible to find out the real financial condition of an AG. The financial condition of the AG is crucial in order to be certain that it will meet its obligation to carry out the project. In contrast from a building company which has bought the land and has a construction loan, the participants of an AG have to rely on each other for the financial backing.
Expertise- the objective of a building company is to build and sell property. A building company manages and recruits professional personnel for these purposes and is familiar with the many aspects of building, such as bureaucracy and a realistic timetable to complete a project. Although many serious AGs hire a team of experts, it can never compete with a building company that has the experience and knowledge that is necessary in completing a building project.
Taxation- one of the benefits of the AG is its exemption from VAT (value added tax( on the purchase of the land, which does apply when buying from a building company. This benefit can turn out to be a great disadvantage in a case where the AG doesn’t do proper tax planning and as a result, the tax authorities decide to relate to the AG as an entrepreneur and impose upon the AG taxes that apply on an entrepreneurial group. Tax planning for an AG is a task that requires great expertise. In addition, the tax authorities have recently released new regulations regarding AGs; therefore taxes are a major issue and must be dealt with responsibly. This can be a major downside and change the entire concept of an AG.
Securities- several laws protect, guarantee and insure the money of buyers of prebuilt apartments from building companies. In general, a building company is obligated to provide bank guarantees to the buyers of prebuilt apartments to protect the money that has been paid by the buyers on account for the apartment, in cases of insolvency of the company and failure to complete the project. In addition, the law obligates a building company to repair and fix all defective or damaged items in the new apartment for an extended period of time. These restrictions may not apply to an AG, for it is in fact building the project on its own by the partners/owners of the land, and therefore is not bound by any obligations to third parties.
Financing the prebuilt apartment- as mentioned, the participants of the AG are required at first to pay for the purchase of the land, and at a later stage, to bear the cost of the building. The expense of the land is usually a significant amount. One must be aware that many banks provide lower financing for purchase of land, while others refuse completely to provide mortgage financing for land purchased by an AG. On the other hand, it is quite simple to get a mortgage when buying a prebuilt apartment from a building company. The banks will usually provide the same financing as they would to an existing apartment.
Conclusion
In our opinion, buying an apartment through an AG is complex and often, despite the price benefit, may turn out to be a more expensive ordeal than buying directly from a building company. Buying through an AG requires a significant amount of involvement on the part of the participants of the group and is only suitable for capable individuals familiar with dealing in real estate. However, when buying from a building company, all one must do is periodically verify the progress of the building project.