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« previous: You get paid all that money for just 60 Minutes of work?   |  next: Can developers weather downturns in New York City and the global real estate economy? »

Thursday, May 17, 2007

Buying in a new development: the closing costs

101 Warren St., TribecabuyingHow much more will it cost to buy into a new development? Is it worth the difference? Both are questions that will vary depending on the project and buyers. Developers pass along what would traditionally be a seller's closing costs, over to the buyer's side of the deal. In the strictest sense, condos are either new product, or resale. However, there is a middle ground that's emerged of recently developed properties, which may be the best option out there for those wanting many of the creature comforts of new construction, but want value, immediate delivery, and a more traditional re-sale transaction, with lower closing costs. The re-sellers may have a little more margin to work with too, as their cost basis may be a couple of years older, and there has been some room for appreciation. Each case is a little different. Helping buyers find them, and representing the owners of these units for sale or lease, is a niche that I like working in.

Readers have asked for more specifics on closing costs as cited in my recent post Buying in a new development: risk and reward. The story was about how the lag time to a project's delivery, combined with a fluctuating interest rate environment and higher closing costs, create some new risks which might not be quite so obvious to many. Here is a follow up that may help you to evaluate like a broker would, differences in closing costs when purchasing a condominium as a resale, or directly from a sponsor in a new development. I've created a hypothetical scenario for a couple evaluating the purchase of two highly comparable properties. One is being purchased directly from the sponsor at a new development, while the other is from an owner as a re-sale. I've prepared a sheet of typical real property closing costs that you can download here (pdf 324 kb) and save, so that you'll be able to model your own comparisons too.

"The norm in Manhattan and Brooklyn is that developers have pushed most of their closing costs to the buyer's side of the deal"
a closing cost scenario, new development or re-sale?

Brenda and Eddie have been working with me to find a one bedroom apartment with a home office. They are a couple whom both have successful careers, which means that they don't have a lot of time to take on of a renovation project. We began by looking at a visiting a number of new developments. I also set up some technology to identify any home that fit their criteria in re-sale as soon as offered by Corcoran or any other agency in town (we co-broke with all of them). After seeing about 17 potential homes, they were torn between two. One was a re-sale of a loft in a Tribeca property that was converted just two years ago. The other a loft conversion just two blocks away that we were told would start closings in about 9 months. They had the benefit of seeing an actual model apartment there which gave them some comfort as to how the space would feel. Both were selling for exactly one million dollars and had identical taxes and common charges (okay, that's an oversimplification to make this illustration a little easier to digest). Brenda and Eddie are able to put a 20% down-payment, and I helped them to find a mortgage professional who had already pre-qualified them for an $800,000 loan. They are ready to make an offer. Lets look at the closing costs involved:

Purchase Price $1,000,000
{estimated scenario for illustration purposes only, actual costs will vary}

Standard purchaser's closing costs
Attorney $2,500
Managing Agent's fees 500
Credit reports {2 applicants} 200
Lead paint disclosure fee 50
Mansion tax 10,000
Move-in deposit {usually refundable} 1,000
Loan application 500
Appraisal 300
Bank's Attorney 500
UCC-1 filing 75
Mortgage recording tax on $800K {over $500K is 1.925% less $30} 15,370
Title insurance 8000
Building searches 300
Recording charges {$17 per document + $5 per page} 120
Real Estate tax escrow {2 to 6 months} 3,000
Total standard closing costs for the re-sale $42,415

Additional closing costs if purchased from a sponsor
NYC Real Property Transfer Tax
{1.425% of purchase price over $500,000}
NY State Transfer Tax
{$4 per $1000 of purchase price}
Sponsor's Attorney's fee 1,500
Contribution to working capital fund 1,000
Total additional sponsor's closing costs $20,750

Total transactional costs for the new development $63,165

After projecting a few minor variables, I helped them calculate that the re-sale property would have a little over 4% in transactional costs, or $42,415 due out of pocket at closing. The sponsor sale by comparison would have a bit more than 6% of sale price, or $62,165 due. That means that the new development would cost an additional $20,750 at closing, out of pocket. Thats about 50% greater closing costs, the bulk of which are NY State and NY City property transfer taxes, which on a a transaction over $500,000 will be 1.825% of the purchase price. These additional closing costs cannot be mortgaged, which means that they will absorb some of Brenda and Eddie's liquidity, and the bank will look at their total reserves after closing to qualify them for their mortgage.

As we wave Brenda and Eddie goodbye to ponder their decision, they are comfortable in making an evaluation based on timing and the perceived value of buying a home that 's never been lived in before. Since they currently live in a rental, and have a lease for the next several months anyway, it does not mean that they will incur much in additional expenses for temporary housing, or carrying two apartments. The timing is close enough that something could likely be worked out. In their case, they have sufficient savings, securities, and a 401K, which all help them to qualify. Other folks who are dancing on the edge of their approval limits, should think twice about buying in the new development, which already has a soft delivery schedule of over three-quarters of a year later. This could be a problem should interest rates rise and their possible buying power is diminished. Plus, even though New York City is largely unaffected by the melt-down in the sub-prime mortgage market, the lenders we deal with NYC often have sub-prime divisions and are now tightening their underwriting standards across all markets. A prudent step, but one which may affect some buyer's eligibility, rates and borrowing thresholds. Without sufficient funds to fill the gap, and without a mortgage contingency (almost always standard on sponsor sales) a buyer's escrow deposit could be at risk.

There are many variables in the above illustration which I advise my customers about on every deal, and rarely are the comparisons as even as I've made them in this example. It's can be a complex process, so keep focused on how nice that new place is going to feel when you finally get home.

related links:
download: a summary of real property closing costs in New York City (pdf 324 kb)
buying in a new development: the risk and the reward
Buying a luxury condo: the Vertical Living interview
download: Small Promises (tear sheet pdf 320 kb)

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