Hidden costs when buying an apartment from a contractor

One of the common mistakes made by home buyers in general, and by those purchasing from a contractor in particular, is an incorrect calculation of the apartment's cost. Inexperienced buyers might mistakenly think that if, for example, the purchase contract states one and a half million shekels, then they will pay the contractor one and a half million shekels. Well, the truth is quite far from that. When purchasing an apartment from a contractor, there are many hidden costs. Relying on the price listed in the purchase contract as the total amount of money that will leave your pocket until you move into the apartment can lead to a severe financial crisis, especially if you took out a mortgage based on the amount written in the contract.

For the sake of example, let's assume an Israeli couple who want to buy the apartment above have half a million shekels in equity and planned to take out a mortgage of one million shekels, and naturally, this is what the Israeli couple requested from the bank.

In practice, the couple will have to pay additional funds. If they do not include these in the apartment price, it will cost them dearly as they did not prepare sources for these payments.

Additional costs for contractor

• Payment for the contractor’s attorney. Many contractors typically pass on the cost of their attorney to the buyers. In the past, this payment was a percentage of the apartment’s price (0.51%–2.1%). Today, the law limits this payment to 5,000 Shekels. It's important to remember that the contractor's lawyer represents Only the contractor Even if the payment is incumbent upon you. You must also hire a lawyer on your behalf. And this is even if the contractor's lawyer, or the contractor himself, is your father's cousin.
• Costs of changes and additions: For the sake of discussion, let's assume 15,000 Shekels, although of course it could be much more.
• Link to index Construction inputs. Let’s say the contractor is asking for 500,000 upon signing the contract and another million in two years. For the sake of example, the 3% rate will apply to that million over two years, which in shekels would be: 30,000 Shekels. As a side note, this amount should not cause you To pay the contractor in advance. I wrote extensively in another article about Construction Input Cost Index and Consumer Price Index.

Total additional costs for the contractor: 50,000 shekels.

Mortgage costs

• Mortgage application fee – 0.25% of the mortgage amount – 1,000,000 * 0.25% = 2,500 Shekels.
• Additional costs – appraiser, notary, land registry, registrar of pledges, etc. – approximately 1,000 Shekels

Total mortgage costs - 3,500 shekels.

Acquisition tax

The acquisition tax depends on the price of the apartment and whether it is the first apartment for both spouses or for one of the spouses (i.e., the wife, for example, owns another apartment and the husband does not).

In our case, if the apartment is the sole property for both spouses, they will not pay purchase tax. However, if one of the spouses owns an additional apartment that amounts to more than one-third, they will have to pay. 60,000 Shekels. If both have an additional apartment, they will pay 120,000 Purchase tax shekels.

The full purchase tax calculator can be viewed On the Tax Authority website

Personal expenses

• Lawyer – As mentioned, you must hire a lawyer to represent you. Trying to save money here could end up costing you much more due to a poorly drafted contract. A lawyer’s fee is typically half a percent of the apartment’s price – 0.51% * 1,500,000 = 7,500 Shekels.
• Moving, furniture, etc. - this is of course a personal matter, but for the sake of example, let's assume 20,000 Shekels.

Total personal expenses: 27,500 shekels.

 Total costs

Section	Sum
Contractor	50,000
Mortgage	3,500
Personality	27,500
Total	81,000

Summary

The Israeli couple is in serious trouble. He bought an apartment for one and a half million with a down payment of half a million and approval for a mortgage of one million. In the end, additional expenses of about 80,000 shekels arose with no sources to fund these expenses. The couple will start their shared life in the new apartment with a mortgage plus loans from various sources to finance this large sum (80,000 shekels) – a bit from the credit card company, a bit from the bank as a regular loan, an overdraft on the current account, begging parents, etc.

This is a very bad estimate for moving into a new apartment. Please note that the expenses listed above are minimum estimates. For example, if one of the spouses owns a 50% in another apartment, a purchase tax of 60,000 shekels will be added to this amount.

What can be done?

First of all, plan. Learn, plan, and rely only on those who have your financial well-being in mind when they give you advice. For example, the bank will profit if, in addition to the mortgage, you also take out additional, more expensive loans. The contractor will profit from closing the deal regardless of your situation after the deal is done. On choosing the right advisor for you, one can Read here.

You can request a larger mortgage and ultimately not withdraw the full amount from the bank. You will actually only pay interest on the amount you actually withdrew and not on the full mortgage amount.