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SMS Projects > Articles > Buying Group – How to do it right

Buying Group – How to do it right

For those who thought that it may be a passing trend, now it is clear – the buying groups have become the most significant force in the real estate market today.
Following are the figures, as of late 2009:
•    20-30% of the residential projects in Israel are currently performed by buying groups.
•    Just last year, over 1,700 residential units were constructed in this manner.
•    Buying groups have been involved in more than 90% of the small and medium construction projects in Tel Aviv in the last year.
•    Most of the transactions involving buying groups are small transactions, in projects consisting of 5-40 residential units.
•    Buying group transactions are popular mainly in areas defined as high demand areas, such as Northern Tel Aviv, or areas with development potential, such as Ramat Gan, Hod HaSharon, Kiryat Ono, Petach Tikva (Kfar Ganim), Kfar Saba (Green) and Rehovot.

What is the great attraction and temptation in a buying group transaction?
Yoram Kraus:  "If, but only if, all saving elements exist in a project, then purchasing an apartment through a buying group guarantees savings of up to 20% of the apartment value.  The savings are comprised mainly of the developer/contractor's profit and the tax benefits enjoyed by buying groups, which do not apply to developers/contractors.  However, as stated, this profit only exists when meeting the objectives planned in advance.  Despite the great temptation and the impressive increase in the number of buying group transactions, it is important to remember that you are dealing with a construction project, which is also complex and full of risks".

Even though there is bank accompaniment for buying groups?
Yoram Kraus:  "The rapid growth in the number of buying groups has led to quite a few problems that have not yet surfaced and which are still hidden under the surface.  This is due, mainly, to the fact that the media tends to report the larger and more impressive transactions, such as the Tel Aviv Wholesale Market, involving a group of 1,800 members, or the Rosh HaAyin project, comprised of a group of 1,100 members.  But the vast majority of the buying group market is made up of transactions conducted by small and medium groups in which, even if there are problems, they are not made public, because they are not interesting enough for the media".

What are the main risks of entering into a buying group?
Yoram Kraus: "As with every trend in Israel, the media exposure and opportunity to profit, led to a market overrun.  People are walking around with open checkbooks and looking for buying group transactions to invest in.  On the other hand, due to the low penetration barriers into these transactions, every realtor has suddenly turned into a buying group entrepreneur and even contractors are now looking for a way to join the party.
"However, with all of the enthusiasm and expectations of rapid gain, few remember that it is a complex issues, which requires a great deal of know how.  And then, when issues get out of hand, and there are quite a few cases of that, the apartment promised at an especially low price, turns into an expensive and unworthy investment.  The difference is eventually covered by the apartment buyers".

How can we protect ourselves and ensure that the transaction will eventually be worthwhile?
Yoram Kraus:  "The great weakness in buying groups is the uncertainty relating to the final cost of the apartment if the costs increase.  When buying an apartment from a contractor, there is a final price and estimated handover date.  On the other hand, when working with a buying group, there are no commitments to final prices or handover dates, just estimates.
"This leads to a simple conclusion – all efforts must be made in order to meet the timetables and budget constraints dictated under the plan.  However, it is not as simple as it sounds, because the buying group goes through a long and complex process and most of the people involved have no experience in the field.  With buying groups, it is not enough to have some background in the field – like a realtor, lawyer or even a contractor.  You need someone with specific experience with buying groups to manage the project".

What should we do?
Yoram Kraus:  "As stated, the key to success in transactions such as these is specific experience with buying group projects.  Therefore, if you want to guarantee success, you must hire a project manager experience with buying groups, who knows how to meet timetables, adhere to budgetary constraints in order to avoid deviations and when to pay the contractor based on predefined progress milestones".

Why do so many buying groups choose SMS to manage their projects?
Yoram Kraus:  "Indeed, dozens of buying groups nationwide have selected SMS as the management company to manage and supervise many different residential projects.  The reason is simple – SMS knows how to meet project objectives in terms of quality, cost, timetables and safety.  It is our specialty.
"In addition, everyone knows that SMS knows how to define rational schedules and adhere to them without compromise, and the fact that SMS has never recorded a budgetary deviation complements the added value of our extensive experience with buying group projects.  This also allows us, through close and professional supervision, to raise the construction standards and thus maximize the customer's value in the project".