They sat across from me and told me excitedly about the offer they had received from a large, well-known development company to buy an apartment in a complex it is building abroad. They are a young couple, referred to me by the husband's father, who asked me in a preliminary phone call to “get them down from the tree.” I have known the father for several years, from a number of investments in properties abroad that our office accompanied. The young couple, who live in Israel as renters and do not intend to move abroad but to buy the apartment as an investment, intend to take all their savings and invest them in buying the apartment.
They were very enthusiastic about the sales pitch of the developer's salespeople. They were promised that this was an investment that would yield passive income, with a promise of significant capital appreciation within a few years. The figures presented to them showed an annual yield of 12%. Too good to be true. It is a sought-after project to which locals are flocking in droves. The husband, who was very excited, said that according to the salespeople more than 100 Israelis had already bought apartments in the project.
I began by explaining to them that there is really no such thing as “passive income” from renting out real estate. I explained that even if they hire the services of a management company to manage the property, if they do not follow it and operate it from time to time, they will very quickly find that the yield is eroding.
“It's okay. I understand,” the husband said, “I'll stay on their case and check them every month or quarter, as needed.”
I also explained that this is not a hotel project or a location that allows short-term Airbnb-style rentals, but long-term rentals to locals. At this point in the conversation I realized that the penny had not yet dropped for the young couple, and I asked them: if the marketing people say that locals are flocking to the project, why does the developer need to sell to Israelis at all? Why not sell all the apartments to locals? Why was it so important for the salespeople to stress that more than 100 Israelis had already bought apartments in the project? Do you understand what will happen to rental prices when more than 100 Israeli apartment owners put their apartments up for rent?
The herd phenomenon is the behavior of people in a group who act collectively without a clear, central goal, behaving as a single body and giving up their separate objectives. Herd behavior is, at its core, the imitation of the decisions of others while ignoring relevant information that the decision-maker has.
“The ‘herd’ phenomenon in real estate abroad is expressed in the tendency of many investors to buy properties in the same area or of the same type, without examining the investment and its risks in depth.” Shemi Shoval, Shoval Yazamut.
When you are about to buy an apartment in a new project abroad, there are several warning signs to keep in mind, among them if the developer or marketer tells us that locals are buying apartments in the project, but in practice the marketing effort is aimed mainly at the Israeli public, or at non-residents in general.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית