At a conference for building contractors about six years ago, Nachshon Kivity, the chairman of BSR Engineering & Development, which manages property purchasing groups, took the stage to lambaste unknown purchasing-group organizers who appear out of nowhere and give prospective purchasers a raft of contracts to sign.
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“No one is really capable of reading these agreements, which can be as long as 500 pages,” Kivity said, adding that in the absence of adequate oversight of amateur organizers, buyers could be at risk.
No one paid much attention to the remarks, apparently. It was the heyday of the purchasing groups, when inexperienced organizers promising eager buyers a cheap and easy route to a new apartment flourished.
In a purchasing group, several buyers jointly acquire a building lot and hire contractors to put up an apartment building that the buyers take possession of when the project is completed, often using an organizer or manager to locate suitable properties, navigate the logistics and oversee the process.
One of those organizers was Inbal Or, whose real estate empire collapsed last week when a court ordered the dissolution of her companies. Or is under investigation for numerous financial offenses. The court-appointed liquidator, Eitan Erez, has requested permission to sell equipment from company offices in Tel Aviv’s Azrieli Center and to move to cheaper digs.
Or, a young woman with outstanding marketing skills, acquired a sophisticated public relations operation and growing status as a local celebrity.
“The agreements that apartment buyers signed for Or’s projects were amorphous,” says Yehoshua Shuali. A lawyer, he represents buyers in one of Or’s projects in Ramat Gan. Left without their money and without apartments, they are suing Or.
“Nothing was definite: not the date of occupancy, not the means for safeguarding funds or commitments to obtaining building permits,” Shuali says.
Tel Aviv District Court Judge Eitan Orenstein found that proceeds from the sale of apartments in Or projects were commingled and used for unrelated purposes, including Or’s personal use.
Shuali alleges that Or relied on a team of salespeople with slick promotional materials who would harangue prospective to sign up on the spot.
“They would say that only a few apartments remained and there were many interested customers, leading the buyers to understand that if they didn’t decide immediately they would lose a golden opportunity,” Shuali says.
It was a mess of the kind Orenstein described in the handling of funds by Or’s group that contributed to the collapse of Heftzibah Construction in 2007.
Both companies would allegedly use income from one project to bail out another that was in trouble. In the case of Heftzibah, which did not involve purchasing groups, there were abuses of sales practice, but the situation is less clear in Or’s case due to the absence of regulations for purchasing-group transactions.
According to Orenstein, some of Or’s misconduct was the developer’s equivalent of an airline’s overbooking flights. Contracts were signed with buyers for more apartments than actually were planned or approved for building. The system presumably was intended bring in cash quickly, but rather than holding the buyers’ funds in trust, they were apparently deposited into a single, general account.
Or didn’t stop there. The court heard of the case of two sisters, with the last name of Siboni, who bought two apartments in one of Or’s projects in Ramat Gan for 1.5 million shekels ($396,000). The lawyer for the sisters, Maimon Avitan, says the sales contract they were presented with at the signing was different from the document they received by email for their review.
Or did not act alone. She had a team of lawyers and accountants who worked with her and ostensibly represented the buyers in the purchasing groups. Erez, the court-appointed liquidator, called them “gatekeepers” and warned that their conduct, along with the methods used by sales representatives, will also be scrutinized. The failings that he uncovered in a week had not been disclosed over a period of years by the “gatekeepers,” Erez claims.
Shuali, the lawyer for buyers in one of the projects in Ramat Gan, claims the lawyer who handled the project received 27,000 shekels from each buyer despite representing the interests of the company, not the buyers.
Sources in the property sector who spoke on the condition of anonymity said the serious allegations against Or could ripple throughout the purchasing-group phenomenon. Several purchasing-group managers who were approached by TheMarker refused to talk, which may be an indication of distress they are facing.
Asked if the purchasing-group approach provided an opening for corruption, Shuali says the method wasn’t the problem. “The method is excellent,” he says, adding that the government needs to regulate the sector and protect buyers.
The groups are designed to enable buyers to save on the purchase of a home by pooling their resources. They jointly pay for the land and the construction along with a commission to the purchase group organizer, which is usually much less than the profit a developer or contractor gets. Purchasing groups began to become popular in Israel in the early 1980s, but really took off over the past decade with the jump in real estate prices.
The main risk that members of the groups face as buyers is that they, rather than the group organizer, become the developer of sorts for their project and if a problem arises, they have to deal with it. In addition, however, purchasing groups are not subject to the regular consumer protection laws in the industry, their purchase proceeds are not protected and they get no iron-clad legal commitment on a date of occupancy or the price, although responsible group organizers do manage to see to it that projects are completed on time and on budget.
In the absence of any regulations, purchasing group organizers can enter the business without any training or experience. Or’s case may be exceptional, but there are others whose conduct has been problematic, industry sources say.
Roy Makov, a lawyer who has specialized in organizing purchasing groups for the past 30 years, says the approach caught on because it provides clear advantages to the consumer, including the absence of a middleman. The organizer, he says, helps manage the process and charges a much lower fee than what a contractor would get. If a contract would generally make a 17% profit on the sale of an apartment, purchase group organizers in the best of cases would get 10% he says, depending on the extent of their involvement and the product they are offering.
But Makov adds: “Even seven or eight years ago, I said a dangerous phenomenon was developing in which anyone who thought he could make a few bucks became a developer.” It was known that things could blow up as they did with Or, he said, “Unfortunately she is not alone. There are other dangerous amateurs operating in the market.”
Asked whether the Or case could be a watershed that could change or even put a stop to purchasing groups, Makov stated frankly that this was a possibility, but he expressed the hope that purchasing group organizers who act fairly and professionally will continue to be able to function.
Kivity, whose company is in the middle of eight purchasing group projects going up at a total cost of about 800 million shekels, said it is undoubtedly the case that Or’s approach to purchasing groups was highly flawed. “I’ve said in the past that purchasing group organizers need to be regulated,” he said, citing the example of categories of construction contractors as a parallel. “If a renovation contractor can’t build a multistory building and a contractor who has built three or four floors isn’t authorized to build a 50-story skyscraper, someone without training also can’t organize purchasing groups.
“There are a lot of amateurs in this field, some of whom come from the field of law or accounting,” Kivity says. “They don’t have a minimal understanding of construction and they have decided to make the easy money fast and on the fly. These are people who get up in the morning and say: ‘We’ll make easy money, we’ll get an option from the owner of land, we’ll market the project in advance, we’ll reap easy benefits and then the purchasing group with have to rack their brains.’ Organizing a purchasing group is a profession that needs to be specialized in, and that’s why regulations have to be imposed.”
When asked what will happen now to the field, in the wake of the Or case, Kivity said he thought “the small amateurs” will disappear “and it will open the public’s eyes.” So why not regulate the industry or simply outlaw the method? Kivity said the regulation must only be directed at the purchasing group organizers. Purchasing groups, he said, should not be outlawed, “because it’s an excellent method.”