Glossary of US Real Estate Terms for the Israeli Investor

The US real estate market operates under terms and conventions that do not always have a clear equivalent in the Israeli market, and even when they do, the legal or practical meaning usually differs. An Israeli investor encountering expressions such as Title, Escrow or FIRPTA for the first time may feel that he needs to learn a new language before he even reaches the negotiation stage. This glossary gathers the most important terms, divided by topic, so that you will know exactly what is meant when they come up in a conversation with the broker, the attorney or the title company.

1What property types exist in the American market?

Single-Family Home (Single-Family Home) - a detached house intended for the residence of one family, standing on a separate lot and not sharing walls with other units. This is the most common type of property in American suburbs, and usually also the simplest in terms of management: one tenant, one lease and one maintenance.

Multi-Family Property (Multi-Family Property) - a property that contains more than one residential unit under one roof or in one structure, from a duplex (two units) and a triplex (three) up to apartment buildings of dozens of units. The essential difference for an investor: a multi-family property spreads the risk among several tenants, but also requires more complex management and sometimes financing on different terms than a single property.

Condominium (Condominium / Condo) - a privately owned residential unit within a shared building, in which common areas (lobby, garden, gym) are managed jointly by an owners' association. The owner pays monthly association fees (see HOA below) that cover the shared maintenance.

Townhouse (Townhouse) - a ground-level house that shares one or two walls with neighboring houses, but usually has a separate entrance and its own floors, and sometimes also a small yard. In terms of structure it is an intermediate between a detached house and an apartment in a building.

Homeowners Association (HOA - Homeowners Association) - a body that manages shared areas and infrastructure in condo and townhouse projects and sometimes also in neighborhoods of detached houses. It collects monthly or annual member fees and sets rules (sometimes quite binding) on the appearance of the property, renovations and rentals. It is important to check the amount of the HOA fees and its rules before purchase, because they directly affect the return.

2What are the main terms in the transaction process?

Title (Title) - the proven legal right of ownership of the property. A “title search” (Title Search) is a check that ensures there are no liens, attachments or hidden claims on the property before it passes to the purchaser. It largely parallels the checking of a land registry extract in Israel, but is carried out by a private title company and not a government authority.

Title Company (Title Company) - a private company that serves as the neutral party that actually leads the closing of the transaction. It conducts the title search, issues the title insurance policy, and often also holds the escrow account and coordinates all the signatures, funds and registration with the local authority on the day of closing. In certain US states this role is performed by an attorney and not by a title company, and it is worth finding out what is customary in the state where the property is located. For an Israeli investor who is not physically in the US, the title company is in practice the party that makes sure the transaction closes properly even without his personal presence at the closing.

Title Insurance (Title Insurance) - a one-time insurance policy purchased at the closing of the transaction that protects the purchaser (and sometimes also the lending bank) against problems in ownership rights that were discovered only after the purchase, for example an error in a prior recording or an old ownership claim that was not found in the search. Unlike ordinary insurance, this is a policy that covers events from the past and not from the future.

Escrow (Escrow) - a neutral trust account held by a third party (an escrow company or an attorney), in which the funds and documents are deposited during the transaction until its completion. The mechanism ensures that both parties meet their obligations before the money or the title actually passes, a principle similar to trust mechanisms also known in other international real estate transactions.

Closing Costs (Closing Costs) - all the costs accompanying the closing of the transaction beyond the price of the property itself: the title company's fees, title insurance, recording fees, bank fees if there is financing, and sometimes also local taxes. In the US it is customary for these costs to run in the range of a few percent of the property price, and they are divided between the parties by agreement and according to the custom of the specific state.

Settlement Statement (HUD-1 Settlement Statement) - an official summary form detailing all the receipts and payments in the transaction (the property price, all the components of Closing Costs and credits between the parties), signed by the purchaser and the seller on the day of closing. For years this was the standard document in every US real estate transaction, and it is still common in cash transactions and in some commercial transactions.

Closing Disclosure (Closing Disclosure) - the document that replaced the HUD-1 in most ordinary mortgage transactions (standard residential loans). It contains similar information in an updated format, including details of the terms of the loan itself. An Israeli investor may encounter either document depending on the type of transaction, and it is worth asking in advance which of the two is expected to be used in his specific transaction and not assuming it is always the same form.

Deed (Deed) - the legal document through which ownership of the property is actually transferred from the seller to the purchaser, and it is recorded with the relevant local authority after the closing. There are several types of deed in the US, which differ in the level of protection they give the purchaser against future claims. It is worth checking this with the accompanying attorney and not assuming that every deed is identical.

Due Diligence Period (Due Diligence Period / Inspection Contingency) - a time window agreed in advance in the contract, during which the purchaser may carry out professional inspections of the property (structure, plumbing, electrical, pests) and withdraw from the transaction or renegotiate if problems are discovered, usually receiving part of the deposit back. This period is one of the main tools for protecting the purchaser in the American market.

Appraisal (Appraisal) - a professional and independent valuation of the property, required almost always when there is bank financing, because the bank will not lend above the appraised value. Cash buyers too sometimes use an appraisal to verify that the agreed price matches the market value.

Multiple Listing Service (MLS - Multiple Listing Service) - a regional database in which almost all the properties offered for sale by licensed brokers are listed, and which includes price history and dates of previous sales. This is the main tool through which brokers and purchasers find properties and check market prices, and it is significantly more transparent than the information available in the Israeli market.

3Which financing and holding terms are important to know?

Mortgage (Mortgage) - a loan to purchase a property secured by a lien on the property itself. Foreign investors, including Israelis, are usually required to put down a higher down payment and on different financing terms than US citizens and residents, and not all local banks lend to foreigners at all. It is worth checking this early in the process, not after a property has already been found.

Limited Liability Company (LLC - Limited Liability Company) - a very common American corporate structure for holding investment properties, which separates the investor's personal assets from the legal liability arising from the rented property (for example a claim by a tenant). Many foreign investors hold rental properties in the US through an LLC, but this also has tax consequences that are worth examining with an accountant in both countries.

4Which unique tax aspects apply to a foreign investor in US real estate?

Individual Taxpayer Identification Number (ITIN - Individual Taxpayer Identification Number) - an identification number issued by the US tax authority (IRS) to someone who is not eligible for a US Social Security number but is required to report or pay tax in the US, including foreign investors who own rental properties. An Israeli investor who plans to rent out a property in the US will need an ITIN as part of ongoing tax administration.

Tax Withholding on Sale by a Foreigner (FIRPTA - Foreign Investment in Real Property Tax Act) - a federal law that requires, upon the sale of a US property by a foreign owner, withholding of tax at source out of the sale proceeds (usually a considerable percentage of the total sale price, subject to exceptions and to conditions that depend on the value of the property and the purchaser's use). The withholding is made even before the foreign seller files a tax return and receives back what is not actually owed by him. This is one of the aspects that surprises Israeli investors the most upon sale, so it is important to plan it in advance and not to discover it only at the closing of the transaction.

Annual Property Tax (Property Tax) - an annual tax paid to the local authority (county or municipality), calculated as a percentage of the property's value according to a current assessment, and varying significantly between states and even between counties. This is a fixed expense that must be factored into the return calculation, and not a marginal addition.

Tax-Deferred Exchange (1031 Exchange) - a mechanism in US tax that allows the seller of an investment property to defer payment of capital gains tax, provided that he rolls the proceeds over into the purchase of a replacement investment property within periods of time defined by law. This is a well-known and very common tool among veteran American investors, but its use by foreign investors involves additional complexity that requires specific professional guidance.

5What should you do before signing a transaction in the US?

The terms in this glossary point to several matters worth clarifying before signing: who manages the closing in the specific state (a title company or an attorney), what the amount of the HOA fees is and what the rules and requirements include, whether financing is available to a foreign investor, which holding structure is suitable (personal or LLC) and what its tax meaning is in both countries, and how the future sale will be planned in light of FIRPTA. It is worth carrying out this review with an attorney and an accountant who know both sides.

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The information in this guide is general in nature and does not constitute legal or tax advice on any specific transaction. Every transaction is assessed on its own facts.