“Anything that can go wrong, will go wrong” - do you know this sentence? It is “Murphy's Law,” named after Edward A. Murphy Jr.
Anyone who deals in real estate, and in overseas real estate, should know this sentence/law well (and I assume some have even experienced it themselves). The big problem is that most people bury their heads in the sand, or ignore warning lights or even the warning of their lawyer, and undoubtedly ignore Murphy's Law when they carry out transactions overseas. Whoever follows our stories knows that every week we bring you stories of successes or disappointments in real estate investments abroad, but Alon's case is a classic example of Murphy's Law.
Alon, a veteran and experienced investor, owns about 10 apartments in Israel and himself manages properties in Israel for foreign residents, so when he came and told me he had been offered to invest in a new project abroad at the pre-sale stage, I was sure he had studied the matter well, researched the developer and his experience, and done the preparatory work just as I had come to know he does before buying any apartment in Israel.
Alon was offered to buy a villa in a project that was supposed to be built on the shore of a beautiful lake in Hungary. The payment terms were attractive: 10% on signing, another 10% when the building permit was received within about 6 months of signing, completion to 50% upon completion of the structural frame and the balance on delivery. We checked the developer's ownership of the land, we checked the zoning plans of the locality where the project was supposed to be built and we also saw the permit application that had been filed. Everything looked in order from a legal standpoint. We insisted that a priority notice be registered in the local land registry to secure Alon's rights, and after haggling with the developer's lawyer we reached agreement on that as well.
And then everything started going wrong.
4 months after the agreement was signed, Alon told me that the developer had sent him a document purporting to be the building permit, and asked to come to a meeting at my office to discuss it.
“The developer is in financial distress, and I have cash. He offered me a discount of 20,000 euros on the villa's price if I pay him the balance now in cash,” he said.
“And how exactly does he get the cash into the Hungarian company?” I asked innocently.
“Honestly, that's not my business,” he replied. “What's more important to me is to lock in the discount and get rid of my cash.”
“I really don't like deals like this, and it worries me that you say he is in distress. I suggest you reconsider.”
Alon paid the developer the balance of the consideration in cash, less the 20,000 euros he received as a discount.
Two months later the COVID pandemic broke out and the developer announced that he could not operate at this stage and therefore announced that he was postponing the delivery date, and that a new date would be given once he could come to Hungary and manage the project. At the end of COVID, in 2022, he announced that the building permit had expired and had to be renewed. In early 2023 he announced that although the building permit had been renewed, the banks in Hungary had dramatically raised financing costs and that he was unable to raise funds to build the project. Toward the end of the year Alon received a notice that following several attempts the developer had made, he had managed to reach understandings with an investor who would inject funds to build the project, and any moment now they would move onto the land. However, in mid-2024, when there was still no movement on the ground, Alon asked me to initiate a meeting with the developer and try to understand what was happening with the project. I explained to Alon that I didn't see how this project would get built, after nothing had happened since 2019, when he signed the deal and paid the consideration, and I recommended that he announce cancellation of the agreement and demand his money back.
After difficult haggling with the developer and quite a few meetings in which voices were raised and insults were hurled, we managed to reach an agreement under which Alon would get his money back in bi-monthly installments (despite my objection. I tried to persuade Alon to insist that upon cancellation of the agreement he receive all the money back within 30 days). The developer made only 2 payments and stopped paying.
“He (the developer) had a heart attack and has not been functioning for a month,” Alon told me in our last conversation. “I no longer know what to do to get my money back. How did you get me into this mud?”
“What????” I roared into the phone. “I got you into the mud? Did I tell you to give him all the money in cash? Let me remind you, you wanted to get a 20,000 euro discount. And even when I told you to insist on getting everything back, you softened and agreed to receive the money back in installments. How exactly is it my fault?”
“You shouldn't have let me enter this deal,” he replied.
Beyond Alon's frustration over the failed investment, Alon's story holds several important insights for real estate investors:
- “All that glitters is not gold” - The developer's offer to Alon to pay in cash in exchange for a discount was a clear warning sign. Never pay large sums in cash, especially in real estate transactions abroad. Payments should be made in an orderly and transparent way, through official bank accounts, so that there is clear documentation of all transfers.
- What is true today is not necessarily true tomorrow. The real estate market can be volatile, especially in international markets. It is important to be prepared for unexpected changes, such as pandemics or changes in financing policy. Changes in the real estate market can affect any construction project, even if it looks promising at first.
- Damn well listen to the professional team accompanying you. Do not ignore warning signs, and act on your gut feeling, especially when it comes to large investments.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית