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 completed brand new, and they often include luxury amenities you can’t find in older buildings. 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. 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 look at how much floor area gets added. If it increased by more than 110%, it’s a new building. Let’s apply that to the townhouse example above. If they genuinely 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” get used interchangeably. They both represent 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 needs to 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, there are substantial differences for buyers as regards purchasing a new development apartment In NYC.
Before checking out properties, there are a couple of things you should know. Closing costs can be significantly higher than a resale transaction. We get into the details below, but for now, be aware closing costs remain about 2% higher, primarily because of transfer taxes.
If you plan on using a buyer’s agent, make sure they reach out to the listing agent on your behalf. New projects have their agreements about paying commissions. 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 gets complete. Listings often go up before construction has even begun. Buyers usually “buy off the floorplan” with a rough sense of what the sponsor will ultimately deliver and when. Even buying as construction is underway up 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. The preferred lender gets familiar with the construction. It usually makes loans before that 51% threshold gets 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, sometimes there will even be life-size examples of the kitchen and other rooms. As construction wraps up, though, your visit will be no different than a resale. You’ll be able to walk the specific apartment under consideration. You’ll also usually discover more apartments available than what’s listed online, especially for large buildings. There’s no point in marketing twenty identical one-bedrooms at the same time. At the sales office, you can learn what other units may be available.
New development purchases also have one extra walkthrough. Before the usual walkthrough, you’ll have a “punch list” walkthrough. It’s here where you’ll note all of the apartment’s defects. At the normal walkthrough, you’ll make sure the sponsor made the requested repairs.
If you’re considering making an offer, there are a couple of questions you should ask. Perhaps most importantly, you’re going to want to know when deliveries will start, especially when construction has just begun.
You can expect closing costs to include 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.
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 very different results. For example, common areas get allocated to individual units. Some sponsors do measure to the outside of the walls if it gets disclosed. This is one of the many reasons why 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 on new development. 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 closing costs like the mansion tax, mortgage recording tax, and title insurance.
New development closing costs remain negotiable, though. 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 you’re viewing new development listings online, you should be aware that the real asking price remains about 2% higher because of these costs.
If you’re looking for a way to reduce the closing costs, make sure to check out the cashback commission rebates offered by NestApple. Along with an agent to help navigate everything we’ve discussed, you’ll receive part of the commission offered by the listing broker. On most new development purchases, that will be 2% of the purchase price! Say goodbye to those transfer taxes!
Buying a New Development Apartment in NYC has lots of implications, and we hope this guide will be helpful in your future real estate purchase.