Ways to Ensure the Security of Your Purchase Group

Purchasing Through Buying Groups, Developers, and Legal Commitments

The unfortunate case of Inbal Or shed light on the complexities and potential pitfalls of purchasing property through buying groups. Chief among these are the uncertainty that can arise during the process—from the initial planning stage to the final handover of keys, at best. While there are certainly buying groups that succeeded and whose members profited from their investment, two main elements typically remain uncertain: the final price of the apartment and the date of delivery.

This uncertainty stems from the legal differences between registered contractors—who are obligated by law to honor the agreed-upon price and compensate for delays—and buying group organizers, who are exempt from these requirements. Furthermore, most contractors are late in delivering apartments and some even go bankrupt during construction, leaving buyers without the property they paid for.

The Risks Involved in Purchasing Through Buying Groups

The primary issue with purchasing an apartment through a buying group is the lack of proper regulation. In response to the Inbal Or case, a legislative bill was submitted to the Knesset to address this matter. As things stand today, some organizers are tempted to advertise prices lower than the actual final cost, make overpriced land purchases using the group’s funds, or oversubscribe the group beyond the number of available units—putting the participants at serious financial risk.

How to Safeguard Your Project

There are several key criteria that, if properly observed, can help secure your buying group project and minimize unnecessary risks in the property acquisition process:

– The organizer’s professional background
Ensure the buying group organizer has a proven background in real estate, law, civil engineering, or accounting.

– A legally binding agreement
A formal agreement should be signed between the organizer and participants, clearly defining the organizer’s responsibilities and obligations under agency law (Section 3), and binding the organizer until the handover of the keys.

– Transparent and verified signing process
It’s advisable for all members to sign the same agreement under identical conditions, in full transparency, and with verification by a licensed attorney.

– CPA oversight
For groups with 50 members or more, oversight by a certified public accountant is highly recommended.

– Legal counsel
Due to the complex coordination required among group organizers, participants, landowners, and municipal authorities, legal counsel is essential. Choose an attorney with at least five years of proven experience in real estate law.

– Bank approval
The organizer must secure full credit approval from an accompanying bank, covering all project-related costs.

– Securing participants’ funds
Payments should be tied to project milestones and submitted via post-dated checks deposited with an escrow attorney. Payments for land should also be handled by the attorney and only against sufficient guarantees.

– Payments to the organizer
Initial payments to the organizer must not exceed 10% of the land value. Additional payments should be linked to project progress, with no bonuses permitted for project overruns. Generally, the suggested structure is:
– Up to 1,000 NIS upon initial registration
– 1% of land cost upon securing land rights
– Additional 2% upon completion of land purchase
– Another 2% upon receipt of a building permit
Remaining payments should be made only after securing bank financing and submission of a “zero report” approved by a recognized bank. At least 2% of the total amount should be withheld until final key delivery.

– Flexibility in organizer replacement
Ensure that the group retains the right to replace the organizer with another project manager, if needed. It is also recommended to appoint a civil engineer on behalf of the participants to guide project oversight and approve contractor payments based on actual progress.

– Apartment pricing and delivery dates
The group should be fully formed within 120 days of signing. A concrete project completion and delivery date must be defined. Any delay exceeding two months should result in a 2% reduction of the organizer’s fee per month. Price deviations greater than 5% from the original estimate at the time of signing must be covered by the organizer.

– Avoid over-subscription
The group must be closed to additional participants once the number of approved housing units is reached. Any expansion must be contingent on the approval of additional units.

– Preventing pyramid fraud
Ensure that all participant funds are held in escrow accounts listing each buyer as the sole beneficiary. Transfers should only occur upon land acquisition and fulfillment of contractual obligations.

– Cancellation policy
A participant who cancels their membership must receive a full refund within 14 business days. If removed by the organizer, the participant is entitled to compensation of either 50,000 NIS or 50% of the registration fee—whichever is higher. Members should also be able to cancel and receive a full refund if the group fails to form or purchase land within four months of signing.

In summary, those who follow these guidelines and recommendations can enjoy the benefits of purchasing property through a buying group with greater peace of mind—regardless of whether or not legislation to regulate this sector is passed in the Knesset.

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