Part II

In the last article I discussed how Mr. Slomowitz came into our offices very upset. He had just been notified by a municipal building inspector that he might be prosecuted for a building offense related to the apartment he had just purchased. Additionally, he had just been notified by his bank that he had not received an approved mortgage loan he desperately needed for the full value of the apartment. This was all caused by a building offense related to the apartment he had purchased.

In this article, I will explain how building offenses can actually reduce the appraisal of a property and directly affect the value of the mortgage loan.

Pensive and concerned, Mr. Slomowitz listened attentively as an associate at Epstein & Co. explained the complexity of his predicament. He began to realize why the bank had not approved the mortgage and you can read below to better understand his situation.

The Bank Will Not Approve a Full Mortgage

Because of the potential legal complications arising from building illegally, the value of an apartment built without a valid permit is often significantly lower than an apartment built according to a legal permit. This in turn influences the value of the mortgage that a bank will provide to the buyer.

An Israeli mortgage bank will not readily provide a mortgage for an apartment that does not have a valid permit. Even if the bank approves a mortgage for such an apartment, when calculating the mortgage amount, the bank will take in consideration the apartment’s bank appraisal value and not a value that is based on the purchase price. Note: The bank’s appraisal will not include value added to the apartment that includes additional illegal area. Not only this, the bank will deduct the cost of correcting the infraction when evaluating the mortgage amount it will offer the buyer.

For example: A buyer purchases an apartment for 2,000,000 NIS that has a 10 m² illegal addition added to its kitchen area. Years earlier, the seller had “improved” his kitchen by extending it into an unused portion under the building’s foundations that is adjacent to his apartment (often called a “challal” in Hebrew). He was able in this “empty” area to build an extended and spacious kitchen.

The seller considers his addition as one of his central selling points and requests a premium of 200,000 NIS on his selling price. He believes that he significantly “improved” his apartment by adding on unused and “lost” area.

Yet, the bank will not consider the so-called “added value” of the apartment. On the contrary, in this case three things will affect the appraised value of the apartment:

1. 1. The bank will appraise the value of the apartment at only 1,800,000 NIS as the bank will not include the illegally built 10 m² kitchen area.
2. 2. In addition, the bank will deduct from the appraised value the cost (100,000 NIS) of destroying the illegal extension and rebuilding the wall that had been removed illegally.
3. 3. Finally, the bank will deduct the cost of rebuilding the kitchen in the legal part of the apartment (another 70,000 NIS).

Thus, a person who was approved on a mortgage of 50 percent of the value of the apartment will be surprised that the bank will appraise the apartment for only 1,630,000 NIS (2,000,000 – 200,000 – 100,000 – 70,000), which allows a 50 percent mortgage of only 815,000 NIS.

Betterment Levy Tax

An additional risk of purchasing an apartment that has building infractions is the requirement to pay a Betterment Levy Tax (Hetel Hashbacha) on the illegally built area. If the municipality discovers the illegal areas, you might be required to request a proper building permit. In this case, you might be charged the Betterment Levy Tax. The extra efforts and costs of getting a building permit might make the purchase not realistic economically. About this and other considerations please refer to our articles Mortgages in Israel Made Simple and Purchase Breach of Contract.

What Should You Do?

One of the first questions you should ask a seller is if any parts of the apartment have been illegally built. If needed, you should hire a professional to evaluate if there is any illegal construction. If there is, this professional can also help you evaluate how much it will cost and how long it may take to get a building permit and to what degree it will affect a potential mortgage.

Moreover, at the time of executing the contract, your lawyer should have the seller declare in writing that there are no illegally built areas in the apartment and flowing from this that there are no demolition orders and/or legal proceedings against the apartment.

Breaking this declaration is considered a breach of contract, and if necessary can allow the buyer to claim and receive the agreed-upon compensation from the seller. The buyer should also be aware that although there are currently no caveats on the apartment in the TABU, this might be because the legal procedures in this respect have not yet been completed. Alternatively, there might have been a demolition order but for various technical reasons no warning caveats were registered, among other possible explanations.

Because of the intricacies of this matter and other directly related issues, I recommend that when looking to purchase an apartment, you engage an experienced real estate lawyer (and not a lawyer just because he is your friend’s friend). When necessary, other professionals should be employed to undertake all the actions that need to be done to protect you, before the transaction takes place. This will save you much effort, aggravation, money and possible legal complications. Be smart, be careful and plan ahead.

And now for the conclusion of the story with our client Mr. Slomowitz.

After explaining all the available options to Mr. Slomowitz, our associate decided on the following actions:

1. 1. He applied for a proper building permit for the illegally built part of his apartment. He was fortunate that the conditions in his building allowed him to do this. Although this was expensive to do, it was worth the cost, as it was better than having to rebuild part of his apartment.
2. 2. Regarding a mortgage: I contacted a mortgage broker with whom we worked and arranged that the buyer receive a bridge loan to make his last purchase payment. The idea was to replace this loan as soon as Mr. Slomowitz receives his building permit with a much cheaper mortgage.

Mr. Slomowitz’s case is not uncommon. Unfortunately, too many buyers do not do the appropriate due diligence when purchasing an apartment. For this and other reasons, I recommend to always seek experienced and professional legal services when purchasing an apartment.

This information is not intended to constitute legal advice and should not be relied upon in lieu of consultation with the appropriate legal advisors in your own jurisdiction.

By Yaacov Epstein

Yaacov Epstein, attorney at law, practices in Jerusalem, Israel. He specializes in real estate and contracts law, and is a popular lecturer on real estate and the author of the series “The Ins and Outs of Real Estate in Israel.” For comments & additional column suggestions, please email [email protected].