Although the number of new housing units finishing construction continues its steady decline, new developments continue to attract buyers. For a city like NYC, with its high cost of living, that’s not too surprising. New developments offer a chance to pick up a brand-new condo apartment and if you’re are one of the first through the door you can get it for a low price. However, this type of purchase comes with some risks and extra fees that won’t be obvious at first. Here’s what you need to know before signing a contract for a new construction apartment.
They come with higher closing costs
Unlike most real estate purchases in NYC, sponsors expect the buyer to pay most of the closing costs in a new development purchase. Typically, this includes the seller’s NY State and NYC transfer taxes along with the sponsor’s attorney fees. Attorney fees could be anywhere from $3000 to $5000 while the transfer taxes are even more expensive. At present, the NYC transfer tax is 1.425% for purchases over $500,000 while the state tax is $4 per $1000 of the purchase price. For those who are financing, the closing costs range from 5% to 6%. Also, be aware that you might be asked to pay into a working capital fund which will be used to cover start-up costs for the building.
There may be construction defects
Just because the building is brand new doesn’t mean it’s free of any defects. Common problems found in new constructions include warped wooden floors, exterior leaks, and problems with the ventilation, heating or cooling system. Before signing the purchase contract, make sure you have an inspection done by a qualified home inspector. If that’s not possible, make the contract contingent on an inspection that satisfies you.
Also, take some time to research the architect, contractor and sponsor to see if they have a history of litigations from construction defects or other issues. You can learn about who’s behind the project in the Identities of Parties section of the offering plan. Other than checking for previous litigations, check that they each have experience and that this isn’t their first project.
There may be a delay in the closing
If you need to close by a specific date, then new constructions may not be for you. The average closing time for purchases in NYC is 30-60 days after entering into a contract. With new constructions, this can be much longer. NY state law requires that the Attorney General’s Office (A.G) approve the offering plan before the sponsor can begin marketing the condo units. However, construction does not have to be complete before this permission is granted.
Until a Certificate of Occupancy is granted by the buildings department, you’ll have to wait before you can move in.
Adding to all that, a closing cannot occur until the offering plan is “declared effective.” That won’t happen until the sponsor has secured contracts for at least 15% of the units. Meaning that if you were the first person to enter a contract to purchase a unit in a 20-unit building, you would need to wait until the sponsor had secured two more contracts. Each case is different, but it’s not uncommon for new construction apartments to take months or even years before they close.
The sponsor may not have enough funds to complete construction
It may seem surprising, but the Attorney General’s Office does not check if whether a developer has enough funds to complete a project. All that is required for the approval of an offering plan is a disclosure that the sponsor is not putting up a bond and that the project description matches the offering plan.
Being an early buyer in a new construction might seem attractive with the lower rates and chance to pick and choose your floor plan and views. Just keep in mind that it comes with a lot of risks which will need to be weighed carefully before signing a contract.