I made myself my morning cup of coffee and sat down at the screen to go through the emails that had arrived overnight, when the phone rang. On the other end was the manager of the marketing company marketing one of the projects abroad that our office is supposed to advise on legally.
“I need your help,” he said, “our developer is making the sale difficult for me.”
He explained that the developer was asking him to have the buyers sign their consent to the use of the funds they would deposit with us in trust to pay the down payment that the developer must pay to the landowners under the preliminary agreement. I immediately understood that we had landed in a problematic situation. Trust funds are meant to secure the buyers' money, not to serve as a source of financing for the developer. It surprised me, since this was not part of the terms of the agreement we had prepared, nor part of the deal structure as agreed with the developer. I asked that we set up a conference call together with the developer to discuss the matter.
“I understand that you want to change the deal structure,” I opened the conference call.
“I'm not changing the structure. I prefer to use the buyers' money to pay the down payment, rather than bring money from home. I already have costs for checks, planning and so on,” he replied.
“I understand,” I said, “and what exactly is the security you will give those buyers? You are only paying a down payment, you don't own the land yet, and it may be that in the end we won't buy the land at all. How will we return their money if the checks reveal problems, or we decide not to purchase, or the sellers simply back out?” I asked.
“There's no reason for that to happen,” he replied.
“I understand, but we still need to think about such a case too,” I answered.
“I'll give them my personal guarantee,” he said.
The marketer intervened: “That won't work. I won't be able to get anyone to agree to give you even 10,000 euros against your personal guarantee.”
The developer tried to explain that he was a man of assets and that there should be no problem. In response I explained to him that even I, as trustee, would find it hard to agree to such a mechanism, and that I suggested he consider providing, as security, a property in Israel that would be pledged in favor of those buyers.
“In real estate, as in any business, trust is the strongest currency.” - Donald Trump
A study by the international consulting firm Deloitte found that 94% of international real estate investors consider securing their money to be of the utmost importance. Do not underestimate the sense of security of your investors.
Developers often come to us with an idea or a project they want to carry out, but they do not have the amount required to carry it out, or they have no intention of “risking” their own money. We see our role, beyond representing the developer, as also protecting the interests of the buyers and making sure that, at the end of the day, their money is secured and they will receive the property they bought. Our role as lawyers in a transaction, beyond verifying that the deal can go ahead from the legal standpoint (a property free of attachments and debts, building permits duly obtained, and so on), is to find the mechanism to secure the buyers' funds in order to give them “peace and security” and to give the developer the ability to sell easily.
This case illustrates how important it is to protect the interests of buyers, especially in international real estate investments. To build trust and transparency, make sure every agreement includes a clear clause regarding the management of trust funds. Remember, buyers who feel safe and protected will be more loyal partners along the way.
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Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית