Presale - Buying a home before it’s built

Buying a presale property can be an excellent move. Here are the pros and cons, the risks and how to avoid them.

Smadar Arditi10/12/2017

Buying a house presale is a method meant to help the buyers, on the one hand, to finance the purchase, and the contractors, on the other hand, to finance the constructions.

How exactly does it work?

The contractor sells the properties to the buyers in a discounted price, in the early stages of his project - when it is still being planned. Selling at this time makes the funding of the project easier for him and promises him a guarantee profit for his investment (because he knows for sure that he won’t be stuck with properties he can not sell).

Why is it good for you?

The discounted price can reach up to tens percent lower than the price of the property completely built. If it is a new neighborhood, the gap between the presale price and the final price will be significantly big.

Where’s the catch?

There are of course some downsides. You’re buying “a pig in a poke”. You don’t see the final product that you will get and you can’t be a 100% percent sure that the promises will match the results.

Furthermore, even though the price is significantly cheaper, you should take in consideration:

  • The linkage of the payments to the building inputs index (it can get to tens of thousands nis more).
  • The monthly rent that you will pay for a different house, while waiting for the property to be built.
  • Delays and unexpected building expenses during the building process .
  • And the worst case scenario, the chance that the contractor will go bankrupt and the building process will freeze.

Project stages

To every project that are 3 stages of presale, that in each one the property will be sold in a different price. Each stage has its advantages and disadvantages:

The early stage of a project: buying a property in a project that did not yet receive a building permit.

Well, the problem is obvious. There is no building permit and no one can guarantee that one will be received - the municipal committee will not approve the planned structure. In other words, it is possible that it will never be built. This is the worst case scenario. In other cases, the building permit might be given only after a few years, or that the permit will require to make structural changes - meaning, you will receive a property different that the one you signed for.

On the other hand, this is the cheapest option. On the next stages the price will be much higher.

If you do buy a property before a building permit was granted, you should take a few safety measures:

  • First, you should definetly check in which stage is the contractor, regarding the building permit application. If the project is still just an idea, the chances of it being canceled are the highest.
  • Only pay a symbolic down payment in order to promise your place in the buyers list.
  • Transfer the money straight to the third party lawyer or the escrow account, but not to the contractor himself.
  • Condition the down payment - only pay if there is a clause in the contract that ensures that your money will be payed back to you in the case of not receiving a building permit in the agreed time framework.
  • In order to ensure your rights, hire a lawyer on your behalf, to go through the contract before you transfer the down payment. The lawyer could also help you check in which stage of receiving a building permit the contractor is.

Mid stage : before the building begins

On this stage the contractor already has a building permit, thus the risk of losing your money is significantly lower. On the other hand, the price is significantly higher.

On this stage, it is recommended that you hire a lawyer, that before the signing of a purchase contract, will create a payments transfer hierarchy, according to the building process. Furthermore, transfer the payments to the third party lawyer or the escrow account and not to the contractor.

Third stage: building process

On this stage, you are buying a property in a project that is already being built. The risk is low, but the price is much higher (though still lower than buying after the building is finished).

Extra safety measures, relevant to all 3 stages:

  • Know your contractor! To minimize the risk, search for information regarding the contractor, entrepreneur and the building company: does the contractor have a valid license? what is his financial status? which other projects was he in charge of? Are there legal cases against him?
  • Try to find other people who in a former project purchased a property from the contractor, and get their feedbacks: was the project progressing according to the planned time schedule? What is the quality of the property? Did the contractor fulfill his promises?
  • You can also find information regarding the contractor and the entrepreneur in the Association of Builders and the Contractors Registrar of the ministry of construction and housing.
  • Check if the contractor is indeed the owner of the real estate and that there are no Foreclosure and Encumbered Securities.
  • A big contractor or a small one? A smaller contractor will go bankrupt more easily and will have more difficulties receiving a building permit. A smaller contractor = a bigger risk.
  • Hire a lawyer, but not the contractor’s lawyer.
  • Don’t let them surprise you - make sure that the final price (including VAT) includes: the parking, a boiler, the land registration, etc.
  • Make sure that the property’s plot is exclusive to the property, and that common areas are not included in it.
  • Make sure that there isn’t a clause in the contract, preventing you from creating a caveat.
  • Make sure that the contract contain a commitment to a final date for the land registration.
  • Demand a detailed contract that includes the building materials kinds and the levels of finishing.
  • Don’t count on the proportions in the simulation sketch. Check whether the sizes of each room suit your needs and that the rooms are big enough.
  • Delays - add a clause to the contract, that guarantees a financial compensation in case that contractor hasn’t finished building on time.
  • Divide the purchase into payments and condition each payment in the completion of each stage. Transfer the payments to the third party lawyer or the escrow account. Make sure that there are guarantees for your money in case that the project is not executed.
  • Sign a land registration and a foreclosure and make sure that the land registration is not conditioned in the progress of the building stages.
  • Get an engineer to check the property in the advanced building stages and before the property is handed over to you.