Sitting facing the sea, listening to the murmur of the waves, gazing at the horizon - all of these usually fill me with calm and serenity and let me “recharge my batteries,” think and plan the next steps. But there are times when I simply “escape” to the seashore to calm down and find a little peace from all the commotion. That is what I did after the meeting with Noam.
Noam, an amiable and thoroughly honest man, came to my office on a friend's recommendation. According to him, he had bought an apartment in a European country, an investment that looked promising on paper. But a year had passed, and his repeated approaches to the developer had gone unanswered. A land registry extract (Tabu)? A deed of title? Nothing!
After going through the documents he brought and after speaking with him, I simply felt I would burst if I didn't get out of the office. As a lawyer who works with investors and developers in international real estate, I have already seen it all. But Noam's story left me stunned.
“I didn't think I needed to consult before going into the investment. I also didn't pay too much attention to what was explained to me,” he said in a humbled voice. “A friend from work shared with me a golden opportunity to invest in real estate in Europe, and I understood that he was also going into the investment, so I decided to join. I didn't read the documents before I signed.”
“So you signed without reading? Without understanding?” I asked, trying to understand the rationale behind the decision.
“It was explained to me that the investment is 150,000 euros and that the return I would receive upon completion of the renovation would be 8% a year, and I simply signed the documents,” he replied.
“Anyone who promises you such a return, you give him the money without checking? You know, there is an academic study published in the Journal of Real Estate Finance and Economics that found a direct link between not understanding the investment terms and the likelihood of financial losses,” I replied.
“No. Understand... a friend from work recommended the investment to me. I understood from him that it was an apartment in a central European city. What more do you need?”
“To understand a little more. To take a little more interest,” I answered, “to understand who we are doing the deal with, what the contractual commitments are, what we are being sold (a property or shares in a company?), what type of agreement it is - an investment agreement or a loan?”
Noam had been sold participation units in a company that had purchased a building, was renovating it and was to rent it out in the future. The agreement states that he will not receive shares in the company but a right to future profits from renting the property and selling it in the future. Apart from the agreement, which is worded rather vaguely, with a company registered in a European country (which states that any dispute must go to a hearing in a court of that country), Noam has no shares in the company and no registered ownership of the property or any part of it.
Before setting out, you must carefully examine the investment terms and the agreement, at the commercial level and at the legal level. Do not skip due diligence, which includes a legal, financial and physical examination of the property, a check of the developer and the selling company, and confirmation that all the required permits and approvals exist. Noam, like many others, skipped this critical stage.
Legal due diligence is a comprehensive investigation process whose purpose is to gather information and examine all the legal aspects related to a real estate property before purchase or investment. This examination is especially vital for properties abroad, where the laws and regulations may be very different from those familiar to us from Israel. The examination should include:
- Ownership and rights: Ensuring clear and absolute ownership of the property (a certificate of ownership or land registry extract), the absence of ownership disputes, and the absence of third-party rights (including the absence of liens, mortgages and attachments).
- Planning and construction: Conformity with urban planning schemes, building permits, absence of building violations, and more.
- Financing: Examining the financing aspects involved in the purchase, such as mortgages, loans, liens, and more.
- Taxation: Understanding the tax liability on purchase, holding (tax on rent) and sale of the property.
- Contracts: Reviewing contracts relevant to the property, such as lease agreements, management agreements, and more.
- Environment: Identifying potential environmental risks.
- Litigation: Looking into legal claims or legal proceedings related to the property.
A real estate transaction abroad is a transaction with risk - because of the physical distance and the inability (usually) to actually see the property, the contact and dealings are with a management company, and the buyer/investor has large knowledge gaps regarding local law (therefore, in such transactions it is recommended to enlist a lawyer on your behalf who will supervise the local lawyer responsible for carrying out the transaction and its registration). Alongside the risk, it is important to remember that this is a transaction with high return potential, unlike real estate investment in Israel.
A study by the international consulting firm Deloitte found that 63% of real estate investors abroad do not devote enough time to reading the contracts and documents before signing.
I am familiar with agreements like the one Noam signed. These are problematic agreements from the point of view of the buyer/investor, and I recommend that my clients avoid entering into transactions of this type (unless they are experienced and skilled investors).
Noam's story is a painful reminder of the importance of caution and thorough examination before investing in real estate abroad. Don't let your dreams turn into nightmares. Insist on comprehensive due diligence, consult professionals, and read the fine print carefully before you sign a contract.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית