How & why you should join a collective buying group? Oh, and the pros and cons of course.
Collective buying is…
A group of people that act together in order to buy real estate and build on it. The group acts as the entrepreneur and finds the land, the contractor and the buyers of the properties that will be built in the project.
What are the reasons for collective buying?
A collective buying group allows the it's members to lower the burden of taxes and other expenses (for there is no entrepreneur to pay for his services and there are no commissions for realtors). In other words - it is cheaper. Collective buying can lower the properties price by 20%.
Before we elaborate on how to start a collective buying project, let’s talk about the advantages and disadvantages of collective buying.
- no VAT on land - The collective buying group is not considered a business, rather a group of private individuals. In other words: No VAT for the land. This does not apply to lands of “Israel Land Administration”, owing to the fact that the administration is a business.
- No VAT on construction fees and development taxes.
- No Purchase tax (you only pay purchase tax for the land, not for built property)
- No entrepreneur to pay to. You are the entrepreneurs!
- Minimizing the risk of freezing the building process as a result of the contractor going bankrupt. You, and not the contractor, are the project’s managers, and you can replace the contractor.
- Easier to get funding for the project - the banks require a list of purchasers before giving the contractors the loan, in order to minimize the risk that the loan will not be re-paid. In your case, each one of the apartments in the project has been purchased already by the collective buying group. Therefore, getting a loan from the bank will be much easier.
- You will not need to pay the administration, because the members of the committee will be group members who volunteer.
- High quality results! This is in your hands. You will decide on the designing, finishing, quality of the materials and so on.
Unfortunately, are many as well.
- Uncertainty regarding the final price. There is no contractor to vouch for a final price. In case of unsuspected expenses, you will have to pay.
- Uncertainty regarding the final date of finishing the project. Just like the price, There is no contractor to vouch for a final date and be sanctioned in case of delays.
- With great power comes great responsibility. The results are on you and there is nobody else that responsible for the quality of the building. Furthermore, there is no law that will protect you and the other members in case of a failure of the project.
- Emature? How much do you really know about entrepreneurship, building, planning, licensing, finishing standards and quality materials? Your lack of knowledge can cause a poor choice of mediocre professionals that will cause damages and delays.
- Not the best Loan terms - The banks require a higher interest for the funding of the project than the interest given in a mortgage, because you are considered entrepreneurs and as such you get the terms of merchants.
- The percent of the price funded by the bank is much more restricted - The bank’s insurance company will not give insurance to the bank when it comes to collective buying projects. Therefore, the bank will not allow a loan that is higher than 70% of the property’s worth.
- A dependency in the other member’s financial stability - this might cause trouble as a result of one of the member’s lack of ability to pursue all payments. Though, usually it is possible to solve this by getting extra funding from the bank, that in return will receive the rights for the member’s part of the property.
- Selling an apartment before the end of construction requires the owner to receive approval from the group’s committee and the bank.
- Land - find the land, hire a lawyer and a real estate appraiser that will evaluate the potential of beginning a building project.
- The bigger the collective buying group is, the harder to complete the project: more people means more opinions, more Interests and difficulty in receiving bank loans for all the participators.
- After the collective was created, a cooperation agreement between the members of the collective is necessary - who will be in the committee that is in charge of the entire process, who will get which apartment, how will the project be funded, etc. The cooperation agreement is necessary for the collective legal status as a group of individuals (and not a cooperation) and as a contract between the group members.
- Collect the money from the collective members and buy the land. Each one of the members should create a caveat.
- Pick the committee members.
- If the land does not have a building permit yet, at this point, the committee will apply for one. It is, however, preferable to buy a land that has a building permit already, in order to prevent the risk of not getting a permit. Finding a land with a permit will allow you to estimate the size of the building, the amount of apartments in it, the costs of the project and the schedule. Furthermore, it will make it much easier for you to find members for your collective.
- Professionals - hire an architect, advisors and a lawyer.
- Split Purchase Transaction - in order to be defined as a collective buying group and thus be exempted from purchase tax (on the built property, not on the land) you need to make a Split Purchase Transaction, meaning - 2 seperate purchases: you buy the land and the building services from different entities. You must make sure that there is no connection between the collective leaders, the seller of the land and the building company.
- Now, after purchasing the land, you can look for a contractor to build your project.
- Building and payments program - the committee will agree on the building program and payments stages (according to the building progress) with the contractor.
- The committee will choose an escrow bank to fund the project, and sign a contract with the bank in which guarantees and securities will be given to all the collective members.
- Before paying each payment to the contractor, an appraiser (on the escrow bank’s behalf) will estimate whether or not the contractor fulfilled his commitments.
Debating whether you should join a collective buying group? Here are a few tips.
- You should thoroughly examine the identity of the collective initiator, how professional and decent he is. Check online whether there are legal cases he is involved in and whether there are lawsuits against him. A group organizer that is a contractor with a good reputation will be less risky than a person with no experience in this field of knowledge. A group organizer that is a contractor will have a better clue regarding the costs of the project and will be able to guarantee for a final price. A compromise can be a group organizer that isn’t a contractor but has experience with organizing collective buying groups (There are some companies that specialize in organizing collective buying groups).
- If the organizer is one of the collective members, investigate whether the collective's good is in his top priority and he isn’t saving benefits for himself. Furthermore, the collective’s legal consultant shouldn't be hired by the group organizer, in order to avoid a conflict of interests.
- In order to minimize the risks, it is recommended to hire a lawyer on your behalf, and not be satisfied with the collective’s lawyer solely. Your lawyer will escort you through the entire project stages and will make sure that a caveat will be signed and that your money will be transferred to an escrow bank account.
- Get your own appraiser to estimate the project’s costs- the land’s price, the costs of building, etc. Compare his findings with the costs of other properties in the same area, in order to estimate the profitability of the project.
- Condition your joining to the group with a final price guarantee, that a deviation from it will allow you to leave the project without losing your money.
- Condition your joining to the group with an ultimatum date for receiving a building permit. In case the permit will not be granted until the ultimatum date arrives, the deal is canceled and you will recieve your money back.
- Check by yourself:
Is there an escrow bank account that is designated for the funding of this project solely?
Who is the contractor? Go see a few of his finished projects.
Who is the architect of the project? Go see a few of his finished projects.
Does the collective have good consultants?
Is there already a caveat for this land?
What are the characteristics of the area and are there future building plans for it? Go on the Israel Land Authority’s website (to get info regarding the area, planned routes, new schools plans, etc) and the municipality website (or go speak to the municipality workers themselves).
Who are the other collective buying members? What is their socio-economic status?
Oh, good luck!