For a few years there was intensive marketing to Israelis of real estate located all around the world. Both religious and nonreligious Israelis were invited to invest in buildings that were "guaranteed" to return a lot of money every year. Many people advised caution. Now it seems that the advice was well-taken.
Real estate industry sources say that demand by Israelis for apartments overseas has plummeted by dozens of percentage points, with property management companies saying that this trend is due mainly to the bitter experience of many Israelis who purchased apartments and lost a lot of money on their investments.
Some industry sources say that many of the failures were caused by the buyers' hasty decisions, ignorance and a lack of understanding of the real estate markets where they bought apartments in the late 1990s and the early years of this decade.
The purchase of apartments abroad by Israelis began in the 1990s, after the foreign currency reforms that allowed Israeli residents to invest overseas.
In addition to the economic reasons for investing in foreign real estate, there was also a deep recession in Israel, the bursting of the high-tech bubble, the outbreak of the second intifadah and the war in Iraq. All these led to a rush to buy apartments abroad as a possible alternative to living in Israel.
The first wave of buyers bought mostly in United States and Canada, two countries that were considered as having less risk of deception and the loss of the investments. Eastern European countries were the next big destination.
Now, from sales of 300-1,000 apartments a year, the market has sunk to fewer than 100 sales annually in the past two years according to a recent report in Ha'aretz.
What caused this market to crash? The usual problems in investments of this kind: false presentations and promises by a few of the companies, and insufficient investigation by the buyers.
In the book A Guide to Real Estate Investments Abroad (in Hebrew), four main reasons are given that investors in real estate lose their money: greed, insufficient knowledge or ignorance, reliance on unworthy people and bad luck.
"In all the cases brought to me," says Rosenheim the author of the book, "the investors' downfall had nothing to do with bad luck, but was caused by a combination of greed, ignorance and reliance on untrustworthy people."
These activities that Rosenheim describes as "fraud" are mainly promises by companies that investors would receive annual profits of 10 percent or more.
One typical example concerns an Israeli company which sold 25 apartments built by an Israeli investor in Manhattan, at prices 30 percent higher than local market prices, at the same time promising buyers 11 percent profits in the first year. When the year was over, the buyers discovered that their properties had achieved only half the promised yield, and when they tried to sell their apartments they learned they had purchased them at particularly inflated prices.
Three years ago, M.A.N. Properties conducted a study for the international real estate chain CB Richard Ellis. The survey covered 100 Israelis who had purchased properties abroad in 2000-2002.
About half of the buyers said they had encountered various difficulties. Many apartment buyers, for example, had paid 15 percent more than local market prices. Also the overwhelming majority of projects offered to Israelis were under construction. The prices of some of the apartments rose before completion, due to alterations made during construction.
The survey found that sometimes the high yields were delivered via high rents in the initial rental period, which were sometimes fictitious.
People discovered that the real market prices in those locations was much lower than what they had been promised.
In many cases apartment prices did not rise as had been promised, the costs to the buyers — such as management fees and taxes — were much higher than had been presented, and the selling of the properties involved even more costs. The management and maintenance fees, in addition to the taxes on the rental income, eroded the profits by dozens of percentage points, and in many cases made the investments totally unfeasible.
Experts said that realistic projects offered yields of 4-6 percent, but investors were lured with promises of two and three times that amount.
People bought apartments based on photographs. They did not fly to the location, did not visit it and did not ask non- interested parties about it.
In some cases, Israeli investors in places such as Las Vegas, for example, did well. Israelis also profited handsomely in Eastern Europe if they bought during the big price rises in Prague, Budapest and Warsaw.
The first Israelis to buy in Poland, Hungary and the Czech Republic had come from there, had relatives in those countries who could check out the projects and the market via local real estate agents, and take precautions against risks. Still, there were cases in which Israelis fell victim to con men in those countries.