Purchasing groups have been around for many years, but recently, with the collapse of the purchasing group organizer Inbal Or, they have made headlines and garnered significant interest.

What is a purchasing group?

A purchasing group is a group of people who each contribute a certain amount of money and jointly purchase a plot of land. The group members then hire a contractor and build a building on the plot where each member of the group will have an apartment. The simplest case is as follows: Suppose there are tenders for the sale of dunam plots on which two adjacent housing units can be built in a duplex structure. If my friend and I team up, purchase a dunam plot together, and build both houses at once, the price will be cheaper than if each of us bought half a dunam and built our own apartment. If 10 of us organize and purchase 5 plots, on which we build 10 houses, the price will be even cheaper.

When moving into apartments in a shared building, the advantage compared to buying from a contractor in terms of price may be greater.

Contractor The buyer acquires a plot of land and builds apartments with the goal of selling them and making a profit. In other words, ultimately the customer pays for the "land + construction + developer's profit.".

Group purchase The friends are buying a plot of land and hiring a contractor to build on it. At the end of the day Apparently The friends pay for the land and construction but save the payment for the contractor's profit.

The problem is that there is no possibility to group a set of, say, 25-100 families who would independently band together, form a group, and reach agreements regarding the purchase location, purchase amount, construction style, and the apartment each one will receive. Anyone who is married knows that reaching such agreements, even between two people who care deeply about each other, is not always a simple task.

Here [it/he/she] comes into play Group purchase organizer. The organizer locates a lot for construction, buys an option to purchase it from the current owner, and then begins an advertising and marketing campaign to find enough buyers who will provide the funds to actually purchase the lot. If the organizer succeeds in getting enough funds to purchase the lot (at this stage, it's natural not to need the full group, but rather just enough down payments for the lot purchase), the lot is purchased, and marketing continues to secure funding for construction as well. If the organizer fails to secure funding to purchase the lot, the lot is returned to its owner, and the organizer loses the amount paid for the purchase option.

The group organizer, for their part, does not take risks (option fees and marketing costs) and does not work for free. In fact, we have replaced the contractor's profits with the group organizer's costs. According to the group organizers, their cost is lower than the contractors' profits, therefore a purchasing group provides apartments at cheaper prices. We will return to this point later.

Advantages of a Purchasing Group

First, the advantages of a purchasing group are divided Perceived benefits And to the actual benefits.  Payment advantage Taxes It's a perceived advantage. Building a house is not a real estate transaction, therefore there is no purchase tax on it. In other words, if I purchase a house for 1,300,000 shekels, I will pay tax based on a purchase of 1,300,000 shekels. On the other hand, if I purchase a plot of land for 300,000 shekels and build on it for a cost of 1,000,000 shekels, I will pay purchase tax only on the 300,000 shekels. Therefore, in the past, a purchasing group paid purchase tax only on the land, unlike a regular purchase where the buyer pays tax also on the construction costs. This tax loophole has been closed. And today, a purchasing group pays tax on the full value of the apartment.. Why is this a perceived advantage? Because the public still thinks there's a tax advantage for a purchasing group. It's similar to those who think "manager's insurance" is for managers, that a hairdresser is better than a barber, or that a real estate consultant is better than a broker.

An actual advantage would be obtained if the organizer of the purchasing group truly pockets less than the contractor.

An additional advantage comes from the social aspect. In a purchasing group, like in a kibbutz for example, the members or organizers have the ability to control who joins the group. This way, if it's important to us that the neighbors are Shabbat observers, we can join a group whose settings include two Shabbat elevators and zero elevators that operate normally on Shabbat. When purchasing from a contractor, we don't know at all who our neighbors will be until we move into the apartment.

Disadvantages of a purchasing group

As mentioned, let's return to the simple example. My friend and I are buying a plot of land and building a duplex house on it. Clearly, we are not overly concerned about construction costs, time to completion, or losing our money. We understand that we have a lot of control over the process, and if we are not satisfied with the pace or quality of construction, we can replace the contractor. It is also clear to us that if at any point the cost balloons beyond our means, we can sell the land with what has been built so far or without any construction at all. Therefore, we do not need bank guarantees, for instance. We are paying the contractor only for the actual construction anyway, and we can monitor the progress even on a daily basis. We are also not overly concerned about the apartment specifications, as we agreed on these matters with our friend before starting construction and even sat together with the architect and engineer.

Let's go back to the building with the purchasing group of 100 families in a 30-story building. The first 20 registrants financed the purchase of the lot, and now the organizer needs to find 80 more families. Will it succeed? Great. If it doesn't succeed? We won't be able to start construction. It's also impossible to sell the lot because it's not certain that all 20 will want to sell. Sell only our share? Here we would be the ones needing to find a buyer willing to enter when it's already known there's a problem. So, we wait. Of course, at this stage, we are not at all sure that the municipality will even allow us to build a building for 100 families.

Construction quality risk

When a contractor builds and markets apartments, they are "signed" on them. If the tenants have many problems, the rumor will spread, Facebook groups will be formed, it will reach the media, and the contractor's reputation will be greatly damaged, making it harder for them to sell apartments in the future. Legally, the contractor is obligated to provide the apartment's specifications as part of the purchase contract and then has a significant interest in protecting their name. In a group purchase, the contractor is a "black box." For all intents and purposes, they are hired (often at a cheap price) to perform construction, and the decisions, for example, on the type of aluminum for the windows, are made by the group itself. Naturally, the tenants" representatives and the "group" are ordinary people who wanted an apartment cheaply. They are not necessarily professionals, and their decisions regarding the cost/benefit of the specifications are not necessarily optimal. Therefore, there is a risk of poor construction quality.

Difficulties with partners

Suppose during construction, 20 buyers decide to stop paying the group. If it were a regular contractor, they would evict them from the building, charge them a contract cancellation fee, and sell the apartment to someone else. While waiting to find a new buyer, the contractor continues to finance the construction out of their own pocket. In a buyers' group, there isn't a contractor's fund, and residents pay according to the construction progress. The residents are also the landowners, including those who decided not to pay as a result of commercial sanctions (they didn't agree that the house entrance doors should be burgundy) or due to financial inability. In this situation, the group organizer must initiate legal proceedings to evict the problematic individuals and bring in other buyers. In the meantime, construction stops because there isn't enough money in the fund. To deal with these issues, some organizers use the method of overbooking. This method was associated with Inbal Or, but she is not the only one who operated this way. According to this method, more participation units in the group are sold than there are apartments, with the knowledge that some members will drop out along the way. What happens if, in the end, there are more buyers than apartments? It all works out financially one way or another.

Lack of organizer experience versus entrepreneurs and contractors

So far, one can understand that a group purchase organizer is a sort of policeman, psychologist, social worker, and salesman. Getting a large number of people to agree is a kind of miracle. As someone with a kibbutz background, the voices from general assemblies still echo in my ears. Even the building committee meetings in the building where I once lived were not a pleasant experience, and there were only 8 families there. On the other hand, the organizer doesn't need anything official, and there's no supervision over him. He doesn't sell apartments, doesn't build apartments, and doesn't make decisions regarding construction. Anyone can decide he's organizing a group purchase. Since, according to the law, the residents are the ones who purchase the land and hire a contractor for construction, the organizer remains unsupervised. From the authorities' perspective, he is not a party to the transaction.

Mortgage for a collective purchase group

Part of banking expertise is risk management. Banks know that a transaction with a purchasing group is much riskier, and therefore, providing a mortgage to a purchasing group contains three pitfalls:

• Each group has one pre-selected bank, and only that bank gives mortgages to the group. This way, that bank can foreclose on the entire project together.
• The mortgage terms regarding interest rates for a group purchase are much worse than for a regular purchase. The bank compensates itself for the risk with a higher interest rate on one hand, and on the other hand, it knows it has no competition after being chosen, so it can charge a higher price.
• The financing percentage in a cooperative purchase is lower than in a regular purchase.

Summary