The Trend That Took Over the Market: Is the “20/80” Deal a Golden Opportunity or a Calculated Risk?
If you’ve been looking for a new apartment recently, you’ve surely come across tempting offers: “Pay only 20% at signing, and pay the balance (80%) only when the building is ready in 3 years. No interest and no indexation!” On paper, it sounds like a dream. In reality, as with any financial transaction, there are no free gifts. At RS Nadlan, we’ve analyzed this model in depth for you, so that you understand exactly what you’re signing.
How Does the Mechanism Work? (And Why Do Contractors Do It?)
Because of the high interest rates in the economy, contractors realized that it’s hard for buyers to take out a large mortgage today. Their solution is to become a kind of “bank.” They let you postpone the big payment, and sometimes they subsidize the interest on the money themselves (a “contractor loan”). The contractor’s goal is to sell apartments quickly and generate cash flow, even if it costs them in financing.
The Big Advantages for Buyers
- Buying with low equity: You can reserve an apartment today, even if you have only a small part of the amount (for example, before you’ve sold your old apartment or before a study fund (Keren Hishtalmut) becomes available).
- Double savings: During the construction period you don’t pay a full mortgage, and you don’t pay double rent either. It’s financial oxygen for young couples.
- Price hedging: You lock in today’s apartment price. If the market rises by 10% over the next three years, you’ve gained that rise “on paper” while having invested only 20% of the amount (enormous leverage).
What’s the Catch? The Risks You Must Know
- Is the price inflated? Many times, an apartment sold with financing terms like these will be more expensive (by 3% to 6%) than an identical apartment sold with regular payment terms. The contractor builds the cost of financing into the price of the apartment.
- The Construction Inputs Index: In most deals (unless agreed otherwise), the balance (the 80%) is linked to the Construction Inputs Index. If the index rises, your debt swells. A debt of ₪2 million can grow by tens of thousands of shekels a year. Tip: look for deals that include an exemption from indexation.
- Future repayment ability: In 3 years, you’ll need to bring the rest of the money (a mortgage). You must make sure the bank will approve your mortgage then, and that you won’t get stuck with a commitment you have no way of paying.
Questions and Answers (FAQ)
Is my money protected in a deal like this?
Absolutely yes, as long as it’s a project with closed bank supervision under the Sale (Apartments) Law. The money you pay goes into a trust account (via a payment voucher), and the bank guarantees it. Don’t pay a single shekel directly to the contractor “under the table.”
Should I take the deal even if I have all the money?
Excellent question. If you have the money in liquid form, and it’s sitting in the bank earning nice interest, it may pay for you to pay only 20% to the contractor and keep earning a return on the rest of your money. On the other hand, paying the contractor early can sometimes get you a significant discount (a “cash discount”). You need to do a simple mathematical calculation and compare.
The Bottom Line
20/80 deals are an excellent tool, but you need to know how to use it. Don’t be dazzled by the low initial payment: look at the final price and at your repayment ability. Here at RS Nadlan, a real estate agency in North Tel Aviv, we know how to analyze the “fine print” in contractor contracts and tell you whether the deal really pays off, or whether it’s an expensive gimmick.
[Errors and omissions excepted: This information does not constitute financial or legal advice. Every deal with a contractor requires individual review and legal support.]
