Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.
New development apartments sometimes represent a challenge for buyers. Everything gets brand new, and they often include luxury amenities you can’t find in older buildings. it’s not hard to buy a home. But buying into a new building development in NYC comes with crucial differences and increased costs compared to a typical “resale” transaction. We wrote you a guide about new housing developments in NYC:
The definition of new development seems like a simple question, and however, NYC real estate always finds a way to complicate things. Imagine a vacant lot on which a sponsor builds a tower; that’s a glaring example of new development.
But what about a gut-renovated townhouse? Is that new development? The NYC Department of Buildings (DOB) has precise rules about when an “alteration” becomes a new building. For example, the DOB will determine how much floor area got added.
If it increased by more than 110%, it’s a new building. Let’s apply that to the townhouse example above. If they gutted it – they removed all the floors, and just the exterior walls remained, it would be a new development.
On the other hand, a beautiful renovation that maintained the floors would be an alteration. Also, “sponsor” and “developer” are used interchangeably, representing the company that owns and built the project.
Whether a project is an “alteration” or “new development” has big-time implications for both sponsors and buyers. A sponsor would always prefer an alteration; if they’re developing a vacant lot, that isn’t possible, but sprucing up an existing structure has significant advantages.
Once a project tips into new development, the sponsor must comply with all current building codes.
Alterations, on the other hand, get grandfathered. The distinction remains less critical for buyers; they’re just buying the finished product and aren’t concerned with how it got there. However, buyers have substantial differences regarding purchasing a new development apartment In NYC.
Before checking out properties, you should know a couple of things. Closing costs can be significantly higher than a resale transaction. We will get into the details below, but for now, be aware closing costs remain about 2% higher, primarily because of transfer taxes.
If you use a buyer’s agent, make sure they reach out to the listing agent on your behalf. New projects have agreements about paying commissions, and it can be challenging to bring in an agent after a few independent viewings.
If you’re buying a standard resale apartment, a good rule of thumb is it’ll take 2-3 months to close. For new development, though, that can be pretty much anything. Projects start selling long before the building is complete, and listings often go up before construction.
Buyers usually “buy off the floor plan” with a rough sense of what the sponsor will deliver and when. Even buying as construction is underway exposes you to a certificate of occupancy delays. However, if the building completes, you can usually close fast as there is no board approval.
Getting a mortgage can be tricky. Many banks require a new building to be at least 51% sold before they’ll lend. For this reason, a “preferred lender” usually exists for the building, and the preferred lender gets familiar with the construction and usually makes loans before that 51% threshold is reached.
While you remain free to use whatever lender you want, the sponsor will often require you to apply to the preferred lender.
Now that you’ve got a good sense of the costs and timeline, what else should you know? If it is early in the construction process, you won’t be visiting the actual building. New projects usually have an off-site sales office. There you will be able to see some of the materials and fixtures that will get used.
Depending on the building, there will be life-size examples of the kitchen and other rooms. As construction wraps up, your visit will be no different than a resale, and you’ll be able to walk the specific apartment under consideration.
You’ll also usually discover more apartments than listed online, especially for large buildings. There’s no point in marketing twenty identical one-bedrooms simultaneously, and you can learn what other units may be available at the sales office.
New development purchases also have one extra walkthrough. Before the usual walkthrough, you’ll have a “punch list” walkthrough, and it’s here where you’ll note all of the apartment’s defects. You’ll ensure the sponsor made the requested repairs at the usual walkthrough.
If you’re considering making an offer, you should ask a couple of questions. Perhaps most importantly, you will want to know when deliveries will start, especially when construction has just begun.
You can expect typical closing costs, including transfer taxes, the sponsor’s attorney, and working capital contribution. However, there may be other smaller costs that can add up. Every dollar of closing costs increases the price, so you want to make sure you know what you’re getting yourself into.
Down the road, you must pay particular attention to property taxes because those are estimates.
Ask how the unit’s square footage gets calculated. The offering plan details this calculation. While condo square footage remains much more reliable than co-op, different calculation approaches can result in different results.
For example, sponsors allocate common areas to individual units, and some sponsors measure the outside of the walls if it gets disclosed. This is one of the many reasons it’s always ideal for comparing pricing within a building.
An offering plan provides details about the building and the apartment’s future features delivered to the buyer. It is a legal document and must comply with the Attorney General’s regulations. Your attorney will review the offering plan before you enter a purchase contract.
Apartment items specified in the offering plan include:
There will also be details about the building, such as its facade, roof, and shared amenities. Even the number of trees to get planted outside. You can think of the offering plan as a promise from the sponsor for your protection. For example, if a landscaped roof deck was in the offering plan, the sponsor can’t decide they’re cutting it because it’s getting too expensive.
In our post about buyer closing costs, we mention how the bill can easily hit 5% of the purchase price of new development, and that’s far more than a resale transaction. In the past, sponsors worked their magic to convince buyers they should pay the transfer taxes and the sponsor’s attorney.
On resales, the seller almost always pays for both. With transfer taxes usually 1.825% and the sponsor’s attorney around $2,500, this represents a high cost. You’ll also have to contribute to the building’s working capital fund. These come all in addition to typical average closing costs like the mansion tax, mortgage recording tax, and title insurance.
New development closing costs remain negotiable, though, and most sponsors will be indifferent between a higher price where they pay the transfer taxes and a lower price where the buyer pays. However, when viewing new development listings online, you should know that the actual asking price remains about 2% higher because of these costs.
If you’re looking for a way to reduce closing costs, check out the cashback commission rebates offered by NestApple. You’ll receive part of the commission the listing broker provides, along with an agent to help navigate everything we’ve discussed.
Most new development purchases will be 2% of the purchase price! Say goodbye to those transfer taxes!
Buying a New Development Apartment in NYC has many implications, and we hope this guide will be helpful in your future real estate purchase.