Buying real estate abroad can be an amazing investment opportunity, but it is important to remember that this is a high-risk investment. One of the most important tools for protecting your investment is security, and since quite a few clients and readers of this column turn to me with questions about the security offered to them by the developer/contractor when buying an apartment abroad, I decided to put things in order.
What is security?
Security consists of legal mechanisms intended to guarantee that the developer fulfils his obligations toward you, the investors/buyers. If the developer does not meet his obligations, the security allows you to exercise your rights and limit the potential damage.
It is important to remember that the mechanisms we know from Israel are unique and took shape over the years as a result of various events in the local real estate world (the Investment Assurance Law for apartment buyers, which requires the developer/contractor to collect the consideration according to construction progress or, alternatively, to give guarantees to the buyer, was enacted following the collapse of the Hefziba company and the harm caused to apartment buyers whose money was not secured). It is important to understand that every country has different laws and regulation, and in most cases the security familiar to us cannot be implemented in every country, and to this one must add the matter of culture, practice and local custom. Take, for example, Romania, where in certain cases and under certain conditions a priority notice can be registered (as opposed to Greece, for example, where this is not possible), or the US, where the transaction can be insured with title insurance in case of error or fraud.
Common types of security:
- Priority notice: A registration in the local land registry of the sale of the property, which restricts its sale to third parties, so that in the event of a breach the rights in the land remain yours.
It is important to remember that in not every country can such a registration be made.
- Bank guarantee: The bank financing the project undertakes to complete the construction or to refund the investment money if the project fails.
It is important to note that in most countries this practice is not customary.
- Personal guarantee: The developer personally undertakes to refund the investment money if the project fails.
- Lien on assets: The purchased property or assets of the developer (for example, other properties he owns) are pledged in your favor, so that you can realize them in the event of a breach of contract.
It is important to emphasize that few, or more precisely very few, of the developers we know are willing to give a personal guarantee backed by their own property or properties.
- Deposit/trust: A sum of money deposited with a third party (for example, a lawyer) and serving as security for the investment/purchase, and transferred to the developer/contractor in accordance with the agreement or construction progress.
In such a case it is important to examine who the trustee is and what the conditions are for releasing the money to the developer/contractor.
- Shares: Receiving shares in the development company, which grant you ownership rights and a say in the company's decisions.
Remember that this practice is customary mainly in investments and not in apartment purchase processes.
- Insurance: An insurance policy covering various risks related to the project, such as construction delays or damage to the property.
It is important to note that in most countries this practice is not recognized or customary as security for the apartment buyer.
The importance of security:
- Risk reduction: Security reduces the risk involved in investing in real estate abroad.
- Protection of investors'/buyers' money: In the event of problems in the project, security helps ensure the refund of the investment money.
- Building trust: Providing security demonstrates the developer's seriousness and strengthens trust between the parties.
A 2021 Harvard University study examined the effect of the use of security on the residential real estate market in the US. The study found that the use of security contributes to stabilizing the real estate market and reducing price volatility.
A 2019 World Bank study examined the use of security in developing countries. The study found that the use of security contributes to the development of the real estate market in these countries, and that it increases foreign investment in real estate.
Security is an essential component of every real estate purchase transaction, and not only abroad, although in our view, when buying abroad its importance and necessity grow. Not in every country and every project can the desired/preferred security be obtained, but it is important that some security be given to guarantee your money. It is important to examine carefully the type of security offered, its advantages and disadvantages, and to make sure it suits your needs and the level of risk you are willing to take. In addition, it is important to understand the relevant legislation and regulation in the country where the transaction takes place, and to make sure the chosen security meets the requirements of the law.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית