August 19, 2007

Purchasing a home in Israel is still a sound investment despite the Heftsiba scandal.With the recent collapse of Israeli construction giant Heftsiba, increased attention is being paid on the overall health of the local real estate markets. This is manifesting itself in the expression of a great deal of worrying – both among homeowners in Israel and many thousands of investors and potential investors abroad. While these concerns are valid and in many ways prudent, with the appropriate protections and insurances in place, Israel should continue to be a place that is heavily invested in and those thinking about purchasing a home here need not be scared off.

Heftsiba, despite having grown to become one of Israel’s most ambitious property development companies, with thousands of units under construction at the time of its collapse, has always operated under some degree of wariness when it came to their business practices. While Monday morning quarterbacking is always easy, there was a considerable amount of writing on the wall that the company was expanding its operations far too quickly for what it would be able to handle.

After failing to secure a 90 percent buyout from an independent investor, the rumors began to fly that the company was in crisis. Within hours, Heftsiba construction sites were being flocked by hundreds of desperate individuals who had purchased homes from the company. Breaking into the yet unfinished residences, these people were acting under the assumption that squatting would be their best protection from losing hundreds of thousands of life savings that they had already paid into their purchases. Israel’s business and real estate worlds have been thrown into flux over the collapse and the company’s owner is as of this writing nowhere to be found.

While great uncertainty remains over the fate of the company and what will happen to these individuals, the consensus in the legal and real estate communities is that with the appropriate measures in place, future such nightmare scenarios can be avoided.

From the purchaser’s perspective, it is important to recognize that the law is largely on the side of the consumer. Contractors are required by Israeli law to provide the purchaser with a way to address a situation where the builder falls into financial difficulties and is unable to complete construction. But in order to ensure that the purchaser has financial coverage for every cent that they pay, they must insist on obtaining a contingent bank guarantee before any payment is made. This contingent bank guarantee should go into effect as soon as money is placed in the project’s bank account and serves to protect the purchaser even before any transfer of funds.

A second important point to look out for, and one which has become a point of considerable consternation for Heftsiba clients, is to ensure that the building company has created a specific bank account for the building project in question. Many customers simply made out checks for hundreds of thousands of shekels to Heftsiba general office accounts and now have no real recourse.

A final issue is that when negotiating with a contractor in regard to purchasing a home, the contractor or their representative will usually inform the potential purchaser of a fee for legal representation that they must pay. Many purchasers assume that the lawyer’s fee includes legal representation that ensures their interests, while, in practice, the lawyer?s fee that they are asked to pay goes to the contractor?s lawyer for services rendered to the contractor. The purchaser should not rely on contractor?s lawyer who will have the contractor?s interests at heart and must make sure to always get a lawyer of their own, whose expertise lies in representation of purchasers in real estate transaction of this sort.

There’s no denying that the Heftsiba affair has inflicted a deep and painful wound on the Israeli market- particularly for the thousands of families whose life savings may have been lost because of the improper practices of a company who mislead its customers.

Yet, it need not be a source of major concern for those looking to invest in Israel who are prepared to do their homework and ally themselves with responsible and informed advocates. In Israel as in any other place else in the world, let the buyer beware is an excellent and critical piece of advice. If heeded, there’s no reason that purchasing a home in Israel won’t be the very fulfillment of a dream the way you always wished it would be.

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Jason Harris

Jason Harris

Executive Director

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