Sometimes we hear about an opportunity to purchase an apartment at a price that sounds like a real bargain, in the location we wanted and even our best friends bought in the project. The only risk - on the surface, is the few hundred shekels that could be lost in the event that the association does not win the tender.
But what is a construction association??
Typically, when the state puts land up for auction, it allows contractors, developers, and purchasing associations to buy the land and build on it. The association members organize together, purchase the land, and then contact professionals such as contractors, engineers, and the like to build their homes themselves.
So why is it cheaper to buy from an association??
Unlike purchasing from a contractor, where the contractor is the one who bears the costs of purchasing the land, the association members pay for the price of the land themselves - from their own equity. They pay the cost of construction as construction progresses, thus saving them expensive financing costs, which usually cost the average contractor quite a bit of money, which is ultimately reflected in the price of the apartment. The contractor's profit is also significantly cut when the association is the one who contracts with a contractor who will build for it, instead of a contractor who purchases land, builds houses and markets them himself.
Sounds great. So why did when I consulted with a lawyer he tell me it was problematic?
A construction association can indeed be a risky venture. Purchasing from a contractor is generally safer. For example, when purchasing from a contractor, the "Apartment Sale Law" applies to the transaction, which requires the contractor to provide the purchasers with a "Sale Law Guarantee." The meaning of the guarantee is that if, God forbid, the contractor goes bankrupt or the project gets complicated, the lending bank can step into the contractor's shoes and continue the project itself. In other words, the purchasers are protected in such a way that they do not risk their money. This security is worth a lot. On the other hand, when building through an association, there is no Sale Law Guarantee because the construction is the association's own.
The contractor that the association contracts with is not obligated by the "Sales Law Guarantee." Another example is the delivery date. When you buy from a contractor, you receive a commitment to a date for entering the house. If the contractor is late on the delivery date, he will have to pay compensation by law in a value higher than the equivalent rent for the apartment being purchased. The association does not have a commitment to a date for entering for the same reason mentioned earlier - there is no party from which you buy, the construction is the responsibility of the association members themselves.
So if that's the case, why join the association?
First, it is important to understand that this type of purchase is not necessarily suitable for everyone. Anyone who wants very high certainty and sufficient guarantees such as those provided by the "Apartment Sale Law" will not necessarily be suitable for joining an association. However, this is where another question comes in: How much do we trust the organizers of the association? To what extent are they professionals that can be trusted? The name of the game is reliability and integrity. If you believe that the organizers are honest and professional people, it is definitely worth considering joining, which can significantly reduce costs. It is important to know what the risks are in joining an association, but if everything is laid out in front of you, it is definitely worth investing the time and examining things in depth. The savings at the end of the day may be very significant.
I was interested in an association that had already shown me apartment plans and specifications, had committed to me a final amount, and they seemed really serious!
Indeed, there are very large construction associations, which sometimes market hundreds of units in the form of an association. On the websites, you can see simulations of the project and the apartments, and their marketing process and contracts are somewhat reminiscent of purchasing from a contractor. However, it is important to note a number of points that are important to be aware of if you join this type of association. For example:
Payment to the association organizer:
There is no doubt that the organizers of the association should receive their salary. Apart from the initial investment made by them prior to winning the tender, they continue to accompany the association and constitute a vital and central part until the stage of delivering the apartments to the association members. However, the meaning of the payment to the association organizers for the buyers is the date on which the group organizer (or in larger construction associations – the organizing company) receives his salary.
In most cases, in large construction associations, the organization's member takes the bulk of the salary (60% or more of the organization's dues stipulated in the contract between the association and its members) Immediately after the announcement of the association's winning the tender. In this situation, where the organizer's/organization's salary is not spread more gradually over the project, the association members are effectively taking on the risk that something along the way will go wrong without the association's organizers also sharing in the same risk.
No one expects the association organizers to shoulder equal risk with the association members. However, the risk should be spread between the association members and the association organizers, with the association organizers ultimately responsible for completing the project and delivering the apartments, while the association members are the ones who put their personal wealth (which usually constitutes all they possess) towards the benefit of the project. For example, if some of the association members do not make the periodic payments as scheduled, on time, the association may collapse. In this situation, where the association organizers have already received most of their salary, the risk falls entirely on the shoulders of the association members.
The lawyers:
It should be noted that the security and glittering name of the law firm that accompanies the project (and in fact the members of the association), does not represent the members of the association (or more precisely, the interests of the members of the association) within the framework of the agreement itself with the organizer and the management company, but rather the management company and the organization that hired the firm's services in the first place.
Some associations even emphasize in the contract documents that the lawyers represent the association members only after the signing of the partnership agreement. These are strict agreements that greatly benefit the management company and the organizer, with the latter receiving a handsome percentage for the services that will be provided to the association members. In other words: the association's lawyers do not represent the buyers at the initial contracting stage [and will not represent the association against the organizers in case of any problems], and therefore these contracts require a critical eye on the part of the buyers. It will probably not be possible to change clauses in the contract, but the buyers must know what risks they are taking and where they are going.
Management company:
Usually, in a large construction association, the management company is directly or indirectly related to the organizer. In most cases, the organizing company determines the identity of the management company for the buyers, without the ability to choose or criticize the association members regarding the choice. If you ask the organizer, he will answer you with a great deal of justice that if you want to move forward quickly, you can't start putting everything to a vote, because there will be arguments and the association will get nowhere.
On the other hand, it should be remembered that even before the association has won, it commits itself to a particular management company that will take a lot of money (as mentioned – from the moment of the announcement of the win), even if the association members decide to replace it immediately after they win the land and even before it has begun working. Thus, there are management companies that obligate the association to pay 45% of their salary even if they withdraw from the project at the very beginning!
The more the payment to the management company is directly related to the progress of construction, the more you will know that the contract before you is fair. Also, be aware that there are management companies that require you [again, even before you have won and met once as an association] to pay them a significant amount, should you decide to sell the house to a third party before construction is complete. Be aware: the lawyers also take money for this transfer, so the duplication is not always clear. This is just an example of what management agreements can include and this should be taken into account.
Conflict of interest:
The more money the organization organizer invested before the auction, the greater the conflict of interest between him and the group. For example: If an organization organizes without Advertising expenses; architects; blueprints; etc. The construction costs are zero. However, as soon as an entrepreneur stands behind a huge purchasing organization and invests a lot of money in the elements we mentioned and in marketing complete apartments with renderings and the like, he is already investing in the project with real money, not "wasted time.".
Now let's assume that as the tender date progresses, the association organizer discovers that there are more people interested in the land and more "competing" associations or contractors who are also interested in the same complex intend to submit a bid for the same plot. Therefore, the association organizer is afraid that the initial price offer he thought of offering will not be enough for him to purchase the land and he will lose the tender. For this reason, it is worth it for him to increase the cost of the land at all costs, even at a price that significantly exceeds the price of the apartment that was presented to the buyers in the first place. This is the place to emphasize that most associations are not prepared to commit to a final price and in any case, if they accept such a commitment, one must wonder what such a commitment to a final price is worth in the context of a construction association.
As a rule, buyers know that the price of the apartment may change – there is no guarantee that the price of the apartment in the association will be final and absolute. It is necessary to consider whether the organizers of the association are honest people who will risk their profit and their investment money in establishing the association, in order not to significantly exceed the price at which they marketed the apartments to the association members.
In conclusion, pay close attention to which association you join. Don't rule it outright and don't be reckless. You should examine each association individually, weigh all the considerations [not forgetting the question of taxation, which we didn't address above at all] and make an informed decision.
Attorney Meir Molad From the office Wolfson Weinstein & Co.', Specializes in the field Real estate law.
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