The newspapers are full of articles about the real estate market in the US. Friends may tell you what a great time it is to invest here. And you may have even looked into deals that you’ve seen advertised, whether it’s that cute condo in Miami for $50,000 or a private home in Detroit, which may cost less than a new car in Israel. Here is a look at some of the basics of the residential contract process in the US, and how it differs from Israel.
Sellers, Buyers and Agents
In Israel, you deal directly with the seller, in everything from first seeing a property – which can include tasting the owner’s fragrant chicken soup, to negotiating and then signing at a lawyer’s office. The US custom is to keep buyers and sellers separate, with real estate agents, handling most of the communication, culminating in a “closing”, where buyers and sellers are in separate rooms of a title company, with attorneys shuttling between rooms. This makes a real estate agent a central part of the transaction, from the search process through the MLS (multiple listing service), to pricing (through CMAs) and throughout the negotiation process, up until the closing.
Realtors use the MLS to sift through properties that are for sale, and the vast majority of properties are listed through an agent. The MLS allows the agent to enter your search criteria and email you a list of properties. Initially, you can learn a lot online, by viewing pictures, school district information, and property tax records. Home sale prices are recorded in property tax records, which are accessible to all, so it is relatively easy to get an understanding of the market prices. But, there is no substitute for seeing an area, in person, or through someone you trust to make investment decisions for you. Wandering around at different times of day and talking to neighbors can tell you a lot about an area.
Once you have found a property that you want to buy, it’s time to start the offer process. This is actually a negotiation, done via an exchange of written offers and counter offers, which sometimes ends in an “accepted offer.” This is completely different from the situation in Israel, where you would normally negotiate the price with the seller. Of course, the buyer’s lawyer would get a Nesach Tabu (title extract from the Israel Land Registry). Israeli lawyers finalize every detail of the contract and when you go to your lawyer’s office to sign, you have already lined up your financing, checked title and ironed out the kinks. All that is left after signing, is to make the first payment and drink a le-chaim.
The US offer and contract process is lengthier and has more paperwork, which you will be directly involved with. It goes like this:
The Offer and Contract
1. You make an offer on a standard form, through your agent and/or with the representation of an attorney. You pay “earnest money” at the time you make this offer.
2. Your agent holds the earnest money check in trust. This is often just a few thousand dollars.
3. You and seller exchange offers and counter offers, on standard forms, which enable you to negotiate the price, terms and other conditions of contract.
4. When you finally agree on everything in a particular version of a written counter offer, you have an accepted offer.
5. Now you have a contract, which includes a timetable of issues to check (remember these are the same things that in Israel you have already checked prior to signing the contract). This is a typical list of issues:
-Attorney review of the contract
-Inspection of the property by a property inspector
-Obtain mortgage financing at a certain rate
-Have a survey done
-Have well water checked
-Have city inspections done
All these bullet points are known as contingencies; which means that if the property doesn’t pass the inspection, or your attorney doesn’t approve of the contract terms, you are free to walk away from the contract. This provides a buyer with a lot of flexibility, though when it’s your turn to sell it is a major headache to go through an offer and contract process, only to have a buyer suddenly exclaim that their mortgage financing didn’t come through.
Real estate attorneys often substitute many sections, which they draft themselves, rather than use the standard form. For example, an attorney might rewrite the provision on inspections to give a buyer wider latitude to exit the contract, if a property inspection isn’t to your satisfaction.
Title Insurance and Taxes
Title insurance: The Israel Land Registry (Tabu) is a centralized computerized land recording system, which reflects the ownership, mortgages and judgments liens on a property. It is an accurate real time picture of ownership. Land recording in the US is handled differently from Israel, and is even different from state to state, with a variety of recording statutes. Title examination is complicated and a number of “indexes” have to be examined (grantor, grantee and plat). Judgments may be recorded in a different place. For this and many other reasons, title to any property you might invest in may be more difficult to ascertain than it is in Israel, with a simple online order of a title extract (Nesach). The US solution to this recording conundrum is a product known as “title insurance” and it’s a critical part of any real estate transaction that you obtain the best title insurance. Your agent and real estate attorney will make this a primary part of the contract process and ensure that you have title insurance at closing.
Tax Implications: Israeli non-residents who invest in real estate in the US must consider their complete tax exposure as part of an investment strategy. You have tax liability in both Israel and the US, for the rental income and then the capital gain, if the property appreciates. The US Israel Tax Treaty empowers the US to impose tax on US real estate first. Then it is up to you to get a foreign tax credit via your Israeli tax reporting, so as to avoid double taxation. You will also need to consider possible Israeli Betterment Tax (Mas Shevach) exposure.
In addition to income tax and capital gains, US owners of real estate pay an annual property tax. This can be a substantial amount of money and the owner pays this, rather than the tenant, if the property is rented out. Compare this situation to the Israeli landlord, whose tenants will pay municipal taxes (Arnona) and regular monthly house committee payments.
A last word: Before you take the plunge, get to know the area you want to invest in and take a trip to see it in person, if possible. There is nothing like wandering around to get to know an area. In addition to using an experienced real estate agent, who regularly represents individual investors, make sure to have a real estate attorney to review your offer and guide you through the contract process, and to advise you about the benefits of owning as an LLC (limited liability company).
1.MLS - Multiple Listing Service: An MLS is an organization that collects, compiles and distributes information about homes listed for sale by its members, who are real estate brokers. Membership isn't open to the general public, although selected MLS data may be sold to real estate listings websites. Your agent can set up search criteria so that you receive email info on homes being sold and price changes.
2.FSBOs – For Sale by Owner: meaning the seller is not represented by a realtor. Unlike in Israel, where this might translate into a saving for the buyer (if they too don’t have an agent), there is no real advantage for the buyer in this situation, since the seller pays the realtor costs. FSBO transactions are often more difficult than deals in which realtors are involved and an attorney must represent each side.
3.CMA - Comparative Market Analysis is a report that shows prices of homes that are comparable to the seller’s home and that were recently sold, are currently on the market or were on the market. These reports have pictures, property tax details, school district locations and make it relatively easy for the seller to price correctly and the buyer to know whether the price is reasonable for the market.
4.Contingencies (in the framework of US residential real estate offers) – a condition of the offer that must be met, such as the buyer obtaining mortgage financing at 4.5% for a 30 year fixed, before that buyer is obligated to fulfill its obligations. If the buyer can’t get this type of mortgage, the offer is withdrawn and, typically, the buyer would be entitled to a refund of any earnest money.
Short Sales: This refers to an owner selling their house for less than the amount that they owe on a mortgage. For example, the house is listed for $100,000, but they owe the bank $150,000. Bank approval is necessary for a short sale to close. Short sales are listed on the MLS and your agent can tell you if it is a short sale or not.
5.Inspections: full internal home inspection, radon, termite, well and septic are just a few of the typical home inspections in the US.
6.Realtor Fees are paid by the seller and typically (though not always) run between 5% to 7% of the sale price. The seller’s agent normally works for a real estate company (such as Coldwell Banker or Century 21, to name two large national real estate companies). The real estate company actually receives the fee. Half is then paid to the real estate company, representing the buyer. Each company then divides their share between the company and individual realtor.
7.Condo By-laws: this is similar to the “house committee” (vaad bait), by-law, but condo by-laws, can prohibit rental or hardwood flooring, so it is critical to have an attorney review them. The financial wherewithal of the condo association can also be important, when purchasing in areas such as Miami, ridden with condo foreclosures.
Please Note: This article is intended as general information and should not be deemed legal advice.