Purchasing Groups – The Hot Trend in Real Estate

Purchasing groups are groups of people who join together to buy land for building a residential building, without the involvement of a contractor/developer in the construction project. The management of the construction project and all decisions involved, from start to finish, are made by the
purchasing group members, where the role of the appointed contractor is only to execute the decisions made by the group. In contrast, in a “regular” residential building construction project, the contractor makes all the decisions involved in realizing the project.

Given the complexity of the field, when establishing a purchasing group or joining a group, it is recommended to seek legal advice from a real estate lawyer specializing in purchasing groups.

Why are purchasing groups a hot trend in Israel today?

Dozens of residential projects across the country are currently being established through purchasing groups. What causes people to take on the trouble of planning and constructing a residential building, instead of hiring a contractor/developer to do the work for them? The main reason for establishing or joining a purchasing group, and the original reason for the creation of purchasing groups in the first place, is financial savings – the price of an apartment within a purchasing group is 10%-25% lower than the price of an apartment from a contractor.

Another advantage of a purchasing group is full control over the residential project – group members choose who takes part in it, thereby choosing their neighbors in the building. The purchasing group members are the project planners, so they can build their dream apartmentas they see fit (subject to the provisions of the Planning and Building Law, 1965). In contrast, when buying an apartment from a contractor/developer, the ability to influence the apartment’s design is usually minimal, if not non-existent.

The Difficulties and Concerns of Purchasing Groups

Although purchasing groups may seem particularly tempting at first glance, it is a complex field that harbors difficulties that one should be aware of in advance. Therefore, it is recommended to seek advice from a real estate lawyer who specializes in purchasing groups, even at the beginning of the project. It’s important to be aware of the obstacles that may be involved in building an apartment through a purchasing group, and to manage things properly from the start to avoid them.

Members of a purchasing group manage the project and are required to make all decisions involved throughout the project. This role is not easy at all, and not everyone is built for it. A possible solution to this is appointing a project manager.

Additionally, since decision-making is in the hands of all purchasing group members, disagreements may often arise and jeopardize the realization of the project. A solution to this is to stipulate in the agreements between group members how disputes will be resolved. Another concern is that the cost of the apartment is estimated and there is no final price set in advance. Therefore, it is recommended to ensure that the purchasing group is organized professionally and accompanied by a detailed business plan.

Another issue to consider is that tax authorities closely examine purchasing group projects and ensure that there isn’t a contractor behind them who wants to reduce the amount of tax they have to pay for a “regular” contractor transaction. Therefore, it is advisable for a real estate lawyer to examine the transaction and verify that it is legitimate and not intended to evade tax payment required by law.

Amendment No. 17 Official Gazette 1995 No. 1507 dated 2.3.1995 p. 138 (Bill 2293)

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