Buying an apartment from a contractor differs from purchasing a second-hand apartment in several aspects. This article will discuss two of the many aspects of a deal with a contractor:The fact that the apartment will be provided a relatively long time (one to three years) after signing the contract.2. Contractor's proposal for advance payments.When signing a contract for purchasing an apartment from a contractor, you usually receive a "streamlining offer" from the contractor: instead of paying according to the usual payment schedule, take out a mortgage today, take advantage of the good interest rates, and save on indexation. Construction input index Let's say they pay 80% of the apartment's price upfront and 20% upon receiving the key.For a client concerned about paying their mortgage at the same time as the rent for their current apartment, the bank offers a grace period loan: a mortgage for which no payments are required for two to three years.There are differing opinions on the advisability of advancing payments. I personally am against advancing payments, but I will try to present the advantages of advancing payments as well.Advantages of prioritizing payments: As mentioned, advancing payments allows for greater certainty regarding the total cost of the apartment – advancing the payment secures a certain price and eliminates exposure to the construction input index. There's a thought that interest rates cannot go lower than the current level. Therefore, taking a mortgage today Get a mortgage with a lower interest rate. Disadvantages of making advance payments to a contractor: Risk: Most people would not agree to pay the full price for a refrigerator before receiving it. So if 8,000 NIS is not paid before receiving the goods which are expected in two weeks, why pay 2 million NIS for goods expected in two years? Apparently, The Law for the Sale of Apartments, A bank guarantee protects the customer. In practice, a bank will not be thrilled to pay 50 apartment buyers from a particular contractor one million NIS each (as an example). This means the process of getting money back will involve payments to a lawyer and the need for a court order, which can take a long time. In the event that the buyer does not receive the apartment as promised in the contract, the situation for buyers who did not pay in advance will be much better than for those who will need a refund from the bank. Monetary cost: Advancing payments has a cost that the customer, many times, does not take into account. If we take, for example, a mortgage of half a million NIS with partial grace (interest and linkage are paid, principal is not paid) for two years, the total interest and linkage payments during these two years will be approximately NIS 49,000. Full grace will activate the compound interest mechanism, which will cause an even higher cost. If the customer does not need the mortgage but pays the advance payment out of pocket, he loses the interest and linkage that the bank would have paid him for these two years.If you nevertheless choose to prepay the contractorDespite my strong recommendation against prepaying, I assume there will be those who wish to do so. If you choose to prepay, you should enjoy it. Back to the refrigerator example: it's quite clear that you'd ask for a discount for cash. So why wouldn't you get a discount for a large, two-year upfront payment? The contractor will, of course, say that waiving the indexation is your discount. This is an insufficient discount. You can think of it this way: your early payment allows the contractor to buy all the blocks he needs today instead of in two years, and therefore he is not exposed to cost changes either. Neither of you has the risk of price increases, but only the customer pays for the risk removal (we saw earlier that the cost can easily be 50,000 NIS or even more).What discount can you get for paying in advance? This, of course, depends on your negotiation ability with the contractor. You can check the contractor's cost of capital to understand what order of magnitude you can ask for and receive. To identify the contractor's estimated cost of capital, you can check if they are a publicly traded company that has issued bonds. Obtaining information on a private company is much more difficult, but you can assume that a certain industry behaves similarly, meaning that if you take a contractor of a similar size to yours whose bonds are traded on the stock exchange, the costs will be similar.If we see (you can check the stock exchange website or ask an investment advisor at your bank branch) that your contractor’s bonds are trading on the stock exchange with a guaranteed interest rate of 5%, for example, this means the contractor is willing to pay his bondholders an interest rate of 5% in exchange for their money. Alternatively, the contractor could take your money and buy back his own bonds to stop paying the 5%. The fact that he does not do so indicates that, from his perspective, cash is worth 5%. There’s no reason why you shouldn’t receive at least 5% in the form of a price discount in exchange for paying your contractor in advance. 5% out of 1.5 million shekels amounts to 75,000 shekels. This is a substantial sum that you can consider compensation for the risk you took by making the payment in advance.What’s more, at different stages of the project, the contractor faces various pressures. Just as you feel pressure before getting a mortgage (we’ll get to that later) and are required to show the bank your income to prove you can pay the mortgage, the bank also imposes various requirements on the contractor. When a project has bank financing, the contractor knows they can get better terms from the bank if they demonstrate lower risk. The best way for the contractor to demonstrate low risk is by stating: 30% of the apartments were already sold before the building permit was issued. Therefore, if the project is in its early stages, the contractor may be more flexible in order to demonstrate high sales.
Excuse me, a small note: There's no such thing as "interest de interest," but rather "ribit d'ribit" – that's Aramaic, not French… Thank you very much for the excellent website and all the help on the forum at Tapuz.Reply
To Dear Rimmon, , I am watching several videos you upload, and I know that many things I learn from you. Thank you very much! Keep up the good work, and stay healthy to continue your great work.My question is: I think I'm addressing a sector of people aged 30-40, (I'm 34 years old) after a degree and a reasonable salary, I don't have personal capital because the personal capital and debts went towards getting a degree. My wish is to allocate 25% of my net salary towards an apartment. Is this something achievable today, or am I just dreaming? And should we wait for developments in the "price for a resident" program and lower housing prices? (A bubble that's bound to burst, in my opinion...).I would appreciate your professional comments and opinions.,Greetings, AbiranReply
Hello Aviran, Thank you very much for your kind words. It is not possible to purchase an apartment without a down payment or a very high salary that would allow Financing a 100% mortgage or additional loans. Financing an entire apartment is risky in any case.Are you planning to use 25% of your salary for a mortgage? Great! First, put 25% of your salary into savings. If you don't have a study fund from work, you can deposit into a study fund yourself and thus Both reduce your tax burden and achieve high return savings.Regarding future changes in apartment prices, my opinion is as good as yours.Best of luck, pomegranateReply
Hi Rimmon. I'm a guy in my 30s. I have about 350k in assets. Looking for something to invest in. In the meantime, I've placed the money in an investment through an investment advisor. I want to buy an apartment but don't want to take a mortgage. I'm willing to take a loan of about 100K. Something that can be closed relatively quickly. In your opinion, where is the preferred investment area today with such amounts?Reply
Hello to you, You have not specified the reasons why you do not want a mortgage, but you should know that the ability Achieving a return that exceeds the cost of capital (interest) is one of the greatest advantages. of real estate investment. As you do not want a mortgage and your purchase budget is around 400,000 NIS, we are talking more In terms of where it's possible and where it's advisable. The good news is that possible and advisable often go hand in hand. My clients have successfully purchased apartments at similar prices in places like Mitzpe Ramon on one hand, and Kiryat Shmona on the other., Gi'vat HaMore (a neighborhood of Afula) and the Krayot. Good luck.Reply
Hi Rimmon, I just wanted to know, if you don't mind, I recently purchased an apartment, and suddenly a serious amount for the construction input index landed on me. It was about 70,000 on a sum of about one and a half million over two and a half years. Is this how it's supposed to be? Thank you in advance.Reply
Hello Eli, There's no such thing as "that's how it's supposed to be." There's what's written in the purchase agreement, which is Result of an agreement between the seller and the buyer. If the contract states that there is an indexation and the result of the calculation is reasonable (I do not know For this reason, no detail can be had (based on your lawyer's check), so this is what you need to pay. There are contracts that are not linked to the construction input index, and then of course, you don't have to pay it. There are people who think that an apartment "on paper" is cheaper. Usually, they have not taken into account the totality of the costs that exist in such a transaction and do not exist in a second-hand transaction.When doing financial planning to purchase an apartment, this point should definitely be taken into account, as well as additional costs such as installing air conditioners, upgrading the kitchen, etc.It is always recommended to perform financial planning even before purchasing an apartment, and not, for example, when a mortgage is needed. It is always advisable for the person doing the financial planning to see the whole picture and not (again) just the mortgage and only the bank's profitability from the mortgage.Reply
Hi Rimon, is the topic of discounts still relevant? Do "big" contractors still offer such discounts in exchange for early payment?Reply
And negotiation is always a give and take process. The more you give, the more the other side will give you. It has nothing to do with the period or the size of the contractor. Lately, we've definitely seen a cooling of the market, so I am absolutely Also seeing contracts without indexation to the input cost index at all.Reply
Hi, hello What is possible today regarding taking out a mortgage with my partner who has been diagnosed with cancer and is currently receiving disability income due to a temporary 100% disability classification. .Reply
There is no problem with taking a mortgage. You need to request an exemption from life insurance for Your wife. When determining the mortgage amount and its terms, the bank will only consider your income. Lots of health and strength.Reply
Pomegranate, hello, In the example you presented regarding advance payments to a contractor, the focus is mainly on buyers who cannot fully afford their mortgage payments and are forced to use a grace period, thereby paying only the interest and not the principal, which has further implications and costs. What happens with a couple who can afford to pay off their mortgage from the moment they sign the contract, thereby bypassing the construction input index and also starting to "chip away" at the mortgage in practice? I would appreciate your learned opinion on the matter.Reply
Hello Leroy, First of all, if you are going to defer your mortgage payment and the monthly payment you were supposed to make for the mortgage So you're saving, which means you've effectively "eaten" much more from the mortgage – you can take out a smaller mortgage. In full The amount of money you saved versus the situation where you took out the mortgage and a large part of the monthly payment went towards interest And not to reduce the debt. But you can rightly tell me that in addition to reducing the debt, you also prevented the construction input index. Well, let's assume the index is 11% per year, and to save that amount, you paid 31% interest per year. I suppose it’s clear now that this isn’t a good deal. The only reason the index seems more threatening to us than the interest rate is because the index is paid in one lump sum of, say, 30,000. which look intimidating, while the interest is part of the monthly payment and we don't even know it might have been 50,000 shekels In the same year (assuming we ate the debt). Good luck.Reply
Greetings I am interested in prepaying a contractor half a million to save on the indexation. I am currently paying a grace period. I did not understand in depth what you wrote about me potentially paying compound interest. Thank you very much!Reply
Hello Mendel, and thank you for reading. Perhaps And this newer article will help understand the matter – click here Reply
Hi Rimon, we are only now seeing the wonderful information you provide to readers In any case, we already bought an apartment and paid everything, and I didn't ask for a discount as you said, which is a shame. But my question is this: the contractor wants to charge me for building fees from the day I registered for the apartment, and I argue that the law states that charges begin from the moment the contract is signed with the lawyer. I would appreciate your opinion that could resolve this issue for me, and if you have extensive experience, I could try to approach the contractor and even ask him to waive 3 months of building fees that I have to pay because I paid the full price of the apartment to the contractor. Thank you in advanceReply
Hello to you, First of all, thank you very much. Secondly, the law that establishes restrictions on attachment was only just enacted. When you signed the contract, there was no law discussing how to peg it and what you agreed upon. Your lawyer, along with the contractor's lawyer, is what you have to pay for. Good luck.Reply
Hi Rimon I purchased an apartment within the "Price for the Resident" framework, And I made advance payments to the contractor amounting to approximately 80% of the apartment's price. And the contractor received the payment. After some time, the company called me and said I had made advance payments, contrary to the contract which states that advance payments are not possible. Will I be exposed to the construction input index on the money I have already transferred to the contractor?. And what will be the consequences with the contractor right now?Reply
Hello, Breach of contract allows the injured party to do all sorts of things. Among other things, to cancel the contract and collect cancellation fees. I don't believe the contractor will go there. In any case, the contractor expected to receive an indexation and will likely receive it. Important: I haven't read the contract I am not a lawyer. Good luck.Reply