Buying a condo in a new development in New York is an attractive option for many, but before making a purchase, you should be aware of some of the risks involved.
Just because a condominium is new does not mean that it will be free of construction defects. Some common problems in new construction include exterior leaks, warped wooden floors, and problems with ventilation, heating, and cooling.
It is essential that you hire an inspector to inspect the condo before you close on your purchase. The inspection should be completed before you enter a contract, or the contract should be made contingent on an inspection that is satisfactory to you as the buyer.
You should also do a Google search of the condominium sponsor and its principals to see if there are news articles or litigation regarding construction defects in their other developments.
For most home purchases in New York, it is common to close 30 to 60 days after entering a contract. The time between contract and closing could be much longer if you are an early purchaser in a newly constructed condominium. The sponsor can start marketing the condo units and entering contracts with purchasers when the New York State Attorney General’s Office (“A.G.”) approves its offering plan.
Construction may not be complete when the A.G. approves the plan. You may need to wait for work to finish and for the applicable buildings department to issue a Certificate of Occupancy, indicating that the building is suitable for occupancy.
A closing also cannot occur until the offering plan is “declared effective,” which cannot happen until the sponsor has entered contracts for at least 15% of the units. In other words, if you are the first person to enter a contract to purchase a residential unit in a 20-unit building, you must wait to close at least until the sponsor has entered into contracts with two additional buyers, because 15% of 20 is three.
Once the condominium is declared effective, you may have to wait for the sponsor to clear various administrative hurdles before you can close. For instance, in New York City, the Department of Finance will not assign tax lots until a condominium offering plan has been declared effective.
Being an early purchaser in a newly constructed condominium is not for those who need to close by a certain date. For example, if interest rates are rising when you sign the contract and you want to lock in a mortgage, your rate lock may very well expire before you can close. Purchasers with flexibility as to timing, however, may find that sponsors are more willing to negotiate on price when they first start marketing a new development.
You should also discuss with your lawyer whether your contract should include an “outside closing date,” after which you can walk away from the contract and get your downpayment back, if a closing has not occurred.
When buying a condo from a sponsor in New York City, regardless of whether you are an early or late purchaser, you can expect that your closing costs will be higher than if you purchased from any other type of seller. While state and city transfer taxes are the seller’s responsibility to pay, sponsors typically require their purchasers to pay them.
The city’s transfer tax ranges from 1.0%-1.425% of the purchase price, and the state tax is $4 per $1,000 of the purchase price (2015 figures). It is also common for purchasers to pay the fees and costs of the sponsor’s attorney for the preparation of closing documents.
Finally, when purchasing new construction, you should be aware of any property tax benefits in place and when they will expire. Many new developments in New York qualify for tax benefits under Section 421-a of the Real Property Law. If you purchase in a building with Section 421-a benefits, you should anticipate that your taxes will start to rise ten years after the benefits went into effect, and be ready for the benefit period to end after 15 years.
This article explores a few of the issues that you should consider before you purchase a condo in a new construction development, but it should not take the place of advice from an experienced real estate lawyer.