Purchasing Property in the US from your armchair in Israel- by Simon Seitz,Adv.
The newest craze in Israel seems to be using the services of a company here in Israel in order to purchase cheap property in the US with the aim of selling it within a short amount of time with a good profit margin. The adverts in the papers allude to huge profit margins and at face value it looks good.
The real questions are: Is the transaction safe? What are my obligations? How do I know a property actually exists? The aim of this article is to see how it works and what rights you have.
The aim of the transaction:
The stated aim of the companies is to purchase a property at a low cost and sell it within a designated amount of time at a profit. The profit is shared with the company
How does it work?
1. The investor deposits funds into the account of the company which depending on the amount will either make him joint owner with the company of a property or more likely in the case he is investing a smaller amount of money, a joint owner with the company and other investors like himself. This results in the creation of a partnership (LLC). The LLC purchases the property and becomes the registered owner of the property.
2. Each investor has a liability which explained in the contract signed. In some cases it equals the total sum of his investment. The company becomes a general partner and has extensive and exclusive power to make certain decisions which will bind the partnership. As a limited partner, the company will not disclose the identities of the other limited partners. The advantage is no one else will necessarily learn of your investment (though there are ways and means) . The disadvantage is you cannot contact other members of the partnership if problems arise with the company. Instead you shall have to rely on the company keeping the terms and conditions of the contract. The limited partners do have certain rights IE to call a general meeting, sack the general partner etc. The contract should list all the rights of the limited and general partners.
2. What are the risks?
The primary risk is the company pays too much for the property, resulting in very little profit or none at all. If it overpays by a very large margin a case of negative equity may also arise. It is essential to demand to see the track record of the company. Ask to see figures for past investments. The other risk is that the company has bought a good property but cannot sell it, this manes that an investment term of six months may be extended.
3. What happens if I want to withdraw my investment?
Certain companies allow you to sell your share subject to a few conditions. For example, you may have to bear the cost of any expense, you may be limited to the legal entity to whom you can transfer the investment. Some companies do not let you withdraw the investment.
How do I know the property exists?
The company will be able to show you a title deed in the name of the LLC. The company will also keep accounting books here in Israel and you will be entitled to view those books.
Taxation?
Upon sale, the profit will be subject to a tax in the US. When transferring that profit to Israel you may find yourself with another tax bill form the Israel authorities. It is therefore imperative to seek the advice of an accountant familiar with such transaction in order to assess the tax implications.
CONCLUSION
The above is a first step information guide on the purchase of property in the US. From experience of my clients the transaction looks like a good quick way to make some money. However, there are a lot of pitfalls and it is therefore essential to seek the advice of an attorney familiar with such transactions.
Questions may be emailed to Simon@seitzlaw.net.