Tag: תשלומים לקבלן

You’ve worked hard and found what you were looking for. You've found an apartment that suits you and have begun negotiations with the contractor. One of the first things that will come up will be the timing of payments for the apartment. The contractor will usually offer you three options:

A. Pay a lot of money today and you'll get the apartment in two years (as an example).
Pay a small down payment today, and as construction progresses, make additional payments at pre-determined dates.
c. Pay a deposit today and the balance upon receiving the key.

The contractor's proposal to pay the majority of the money upfront includes a seemingly logical reason – if you pay today, you won't be exposed to an increase in the apartment's price due to the construction input index. When paying above One million shekels Regarding any product, especially if we don't have the money and are taking out a loan for many years, another price increase is a frightening thing. Is there a reason for this fear? Are there other factors that could cause a price increase even higher than the construction input index? This article will try to clear the fog surrounding the concept of the construction input index and show that despite the natural fear which the contractor's salesperson and the bank's mortgage salesperson will try to amplify, each for their own reasons, the monster is not so terrible.

What are the construction input index and the consumer price index?

Input is an economic resource used to create something else of economic value. For example: The inputs required to produce a chocolate milk cup are: water to irrigate the hay eaten by the cow, fuel to power the tractor that harvests the hay, property taxes on the barn, wages for the milkers, electricity to operate the milking parlor, and then additional inputs for the production itself (sugar, flavorings, more electricity), production, transportation, and sale.

In the same way, the inputs for building an apartment are blocks, rebar, cement, labor wages, fuel, electricity, etc. Consumer Price Index Calculated based on the average prices of goods consumed by households (milk as mentioned, lettuce, tomato, DVD, and more according to the Central Bureau of Statistics). The construction input index is the average of the prices of the goods (inputs) required to build an apartment.

So the contractor's logic is: if you give me the full cost of your apartment today, I'll be able to buy all the necessary iron and blocks today, and then I won't care if their prices go up. On the other hand, if you don't pay me the cost of the apartment in advance, I'll have to postpone the purchase of, for example, the doors until the final stage of the apartment, and then if the price of a door changes, I, Moshe the contractor, will be in trouble. Therefore, if you want to postpone payments, you must guarantee me that if the prices of doors and windows increase, you will compensate me for this price increase.

Prepaying due to indexation can be expensive and not worthwhile.

I am not currently going into all the pros and cons of making advance payments to a contractor. For additional considerations You can read about the pros and cons of early payments here. But from an economic perspective, it is worth knowing that the damage from an increase in the construction input index is often lower than the damage from early payment.

Let's consider a couple buying an apartment for 1.5 million shekels and they have two options:

A. 20% of the apartment's current price and 80% of the apartment's price in two years upon receipt of the keys.
B. 80% of the apartment's current price, 20% in two years when the keys are handed over.

That couple is not one to believe every salesperson, so they conduct their own research on the Central Bureau of Statistics website and examine the two graphs below, which compare the increase in the construction input index to the general index (Consumer Price Index).

The Consumer Price Index and the Construction Input Price Index in 2021

Month	Consumer Price Index	Construction input price index
6/2021	0.1%	0.6%
5/2021	0.4%	0.7%
4/2021	0.3%	0.8%
3/2021	0.6%	0.5%
2/2021	0.3%	0.2%
1/2021	0.1%-	0.6%
Total 2021	1.6%	3.4%

Please note that the Central Bureau of Statistics has not made it easy for us to compare the graphs; the bars in the top graph represent 0.5%, while those in the bottom graph represent 1%. Let’s move on to comparing the last few years (all percentages are approximate based on the graphs above):

2013: Consumer Price Index – close to 21% year-over-year, Input Price Index 1.51% year-over-year – those who feared the Input Price Index Lost.
2012: The price index was approximately 1.6%, and the input index was approximately 3.4% – those who feared the input index Earn.
2011: The price index was approximately 2.1%, and the input index was approximately 3.8% – those who feared the input index Earn.
2010: Consumer Price Index (CPI), approx. 2.81% | Input Price Index, approx. 41% – Those who feared the Input Price Index Earn.
2009: The price index was approximately 4%, the input index was approximately 0% (!) – those who feared the input index Lost.
2008: The price index was approximately 3.9%, and the input index was 3.4% – those who feared the input index Lost.

Actually, why do I recommend not to fear the cost index if in most of the past years, those who feared it "profited"?

The comparison between the two metrics is based on two simplifying assumptions that are not actually met in practice:

A. I don’t earn anything on my bank savings other than indexation to the Consumer Price Index. This is true for short-term deposits, but it is definitely not true for savings of hundreds of thousands of shekels, such as those held by someone preparing to buy an apartment. For example, if I withdraw from a study fund—which yields a modest 5.1% per year—to make an advance payment to a contractor, the index rates above show that this is never a good idea.

B. I don’t pay interest on my credit. In practice, if I add 1.51% annual interest to the Consumer Price Index, as is done with actual loans, the differences between the indices—even in years when the Input Price Index supposedly has an advantage (2010–2012)—become negligible, or the trend reverses entirely.

Numerical example:

Let's take the year 2012, when there was a preference for bettors on the construction input index. A couple who will be called Inputs They purchased an apartment for 1,500,000 shekels with a mortgage of 1,000,000 shekels. The couple chose to pay 80% upon signing the purchase contract and another 20% upon Entrance to the apartment A year later.

The couple's total expenses this year:

— Loss of indexation on 200,000 NIS (300,000 = 20%, which he would have paid the contractor anyway under the second option) for one year – 2,900 NIS.

— Let’s assume that the couple’s repayment capacity is 6,000 NIS, so they took out an 18-year fixed-rate mortgage at an interest rate of 3%. Over the course of the year, they paid the bank 29,400 NIS in interest. In total, the couple will pay the bank 1,295,400 shekels For their mortgage.

On the other hand, the couple known as the Meddis decided to pay the contractor 20% upon signing the contract and another 80% upon moving into the apartment

The trading of indices looks like this:

A payment of 300,000 and continued holding of 200,000 in an index-linked deposit which yielded them 2,900 shekels.

A monthly saving of 6,000 shekels (they are not yet obligated to mortgage payments and therefore can save the repayment amount each month).

— Upon moving into the apartment, the couple took out a mortgage to pay the remaining 80% of the apartment’s price. This 80% was indexed to the construction input index, but the couple also saved 6,000 shekels each month. To simplify the calculation, I assumed that the monthly savings did not yield any return. The mortgage the couple needed to take out was 965,900 shekels (as mentioned, the debt to the contractor was indexed, but on the other hand, the couple had accumulated Equity (added during the year). Assuming the indexed couple's mortgage will be under the same terms as the taxed couple's, their total payments to the bank will be 1,237,054 Shekels.

So, should I prepay the contractor or not?

 Well, we saw that even in the year when there was supposedly a clear preference for paying the contractor in advance, the person who paid upon entering the apartment and absorbed most of the construction input index linkage still ended up paying less money than the one who chose "not to take a risk" with the construction input index.

Many couples do not have the ability to pay a mortgage at the same time as rent, and then if they choose To pay the contractor in advance They "benefit" from higher damage – they are forced to take out a balloon loan until they move into the apartment (eviction from their current apartment). This balloon loan accrues compound interest, and thus, eventually, even on the day they move into the apartment, and not just at the end of the mortgage, they may find that they have paid more than those who chose to pay later, despite the construction input index.

The example above compared two scenarios where the difference between early and late payers is only one year. In most cases, the difference is at least two years when buying an off-plan apartment. Of course, as the time period lengthens, the advantage for those who chose to pay later increases. The advantage for those paying later will grow even more if, for example, their savings over those two years cause them to fall below one of the mortgage price thresholds. For example, they will move from a loan-to-value ratio of 65% to a loan-to-value ratio of 59% of the apartment’s value.

In addition to all of the above, one must also add the risk inherent in any transaction where you pay a vendor a large sum of money in advance. However, as mentioned, this has already been discussed elsewhere on this site.

Why do so many people actually pay contractors in advance, paying more, and risking that if the contractor has any problems, they will have to manage without the money paid for years?

Unfortunately, many people have not internalized the simple fact: There is no free advice! When you consult with a bank's mortgage officer or a contractor's salesperson, it is not free advice. Although you haven't paid directly, you will pay much more by receiving biased advice: the contractor's salesperson naturally aims for the contractor to get the money as quickly as possible (why should they pay interest to the bank if the customer is willing to pay interest to the bank instead and give them a million-dollar loan with no interest at all). The mortgage officer, of course, wants you to take out a mortgage today and not in two years (by then you might notice that there are other banks and compare conditions, or worse, learn which mortgage tracks to avoid, thus becoming less profitable customers, God forbid).

In summary  Despite the opinions of various "experts" representing the contractor or the bank, the numbers show that there is no solid basis for concern regarding indexation to the construction input index. Paying in advance did not actually save us money, but it did put the money we paid upfront at risk. In my opinion, it is best to pay the contractor as late as possible.

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 contractor

Despite 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.