Considering New Construction
Photo Credit / Viridian in Greenpoint, Brooklyn
Buying a brand new condo poses some special risks and challenges.
1. Construction defects
New does not mean perfect, and construction defects have been an issue in recent years—both for buildings erected during the recent construction boom (when developers, including many novices, cut corners in a rush to bring their buildings to the frothy market) and afterward (when developers cut corners to make ends meet in a soft market).
The most common problems involve exterior leaks, windows that don’t work, defective wood floors, inferior substitutions of materials and appliances, missing fire proofing, heating and cooling system problems, and bad ventilation.
Complications ensue if the developer (also referred to as a 'sponsor') either doesn’t want to fix a project he doesn’t stand to make any more money on, or can’t afford to. Worst case translation: Two to three years of lawsuits, five- or even six-figure assessments, mild-to-severe inconvenience, and repair work that could wind up costing each owner tens of thousands of dollars.
In light of the uncertainties surrounding the quality of brand-new construction, some buyers these days are opting for “slightly used” condos—apartments in two-to-three-year old buildings that have already had their tires kicked.
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Advice from Our Experts
2. Finding a reputable developer
While buyers of brand-new will never be able to eliminate the prospect of construction defects, the best hedge is to buy from a reputable developer—one who not only builds to a greater standard of care, but can afford to fix things that go wrong and wants to in order to preserve its reputation and be able to sell future projects.
So how do you find the good ones? A good real estate attorney (not one referred to you by the developer) should be able to steer you away from the worst and recite a list of the best.
You should also Google the name of the developer for discussions about problems in past projects. Remember that many developers create a new LLC for each project, so look in the offering plan—a huge telephone-book-sized document that along with its amendments essentially explains everything about the building, from how many units have to sell in order for the sponsor to relinquish management of the building right down to the finish of the countertop in the powder room—to find out exactly which entities are partners in the LLC, and Google those names too.
3. Buying “preconstruction” units
Buying “preconstruction” means relying on renderings (which may be deliberately distorted) to depict everything from the view outside the window, to the spaciousness of the master bedroom, to the finishes in the bathroom.
See How to Analyze a Rendering and How to Buy Preconstruction Smart for some common trouble spots, and always remember that the sponsor is only legally obligated to deliver what’s specified in the offering plan; the pretty pictures are irrelevant, and so is the model apartment.
There are two main advantages to buying off of a floorplan: Securing a unit in a hot market like this one, and typically lower early-bird pricing.
Sponsors release units for sale in several batches, raising prices each time. The spread between the first group and the last is usually 5 to 20%.
Note, however, that while you may get a cheaper apartment if buy early, you won’t necessarily get a better one. Sponsors include a number of the most desirable units in each new batch of units and often save the best for last, when they expect to receive the highest price.
4. Financing new construction
In the skittish modern credit climate, lenders look as closely at the building as at your financial history and income in deciding whether to give you a mortgage.
Building-wise, lenders require that anywhere from 15% to 50% of the apartments in the building must be in contract. The exact percentage is up to the lender, and so-called “preferred” lenders are typically at the lower end of this range. Preferred lenders, named in the offering plan, become intimately familiar with the development and don’t have to start from scratch as an outside lender might. This minimizes the possibility of the loan being denied because of issues with the building though it doesn't rule it out; the lender may decide at some point to put a cap on the number of units it is willing to finance, for instance.
Before issuing a mortgage to a buyer, lenders also require that the building have a Certificate of Occupancy or Temporary Certificate of Occupancy issued by the Department of Buildings.
Most lenders require that you put at least 10% down on your new condo; the average is around 10-20%. If your building is FHA-approved (more and more common in many emerging Brooklyn neighborhoods, for instance), you will only need to put 3.5% down.
5. Tax abatements
Many new buildings offer property tax abatements that range from 5 to 25 years, meaning that you will owe no property tax or only a specified fraction each year until the program expires and you rejoin the highly taxed herd.
A few points about abatements:
- The longer abatements tend to be located in emerging neighborhoods like Upper Manhattan and certain parts of Brooklyn.
- Make sure you understand the phasing-in schedule: You may owe zero taxes for 10 years, then 25% of “normal” taxes in year 11, 50% in year 12 etc. A rapid phase-in can be a financial shock.
- Make sure you have a realistic sense of your actual tax burden once the abatement expires. The dizzyingly high number that the offering plan says will be your tax at the expiration of your abatement is based on current tax rates and assessed property values. Your actual number in 7, 14, or 25 years is likely to be much higher as tax rates and assessed values continue their inevitable climb.
- Don’t assume you are going to sell in Year 7 in the event your income can’t keep up with your taxes. Many of your neighbors may have the same idea—and the competition will make it harder to sell for the price you need.
- As a general rule of thumb, don’t spend up because you have an abatement: Buy the apartment you could afford if there were no abatement.
6. Negotiating with a developer
With demand for new construction outpacing supply in 2013, don't expect to find much negotiability except in troubled projects, at critical moments of a development's lifecycle (see below), and/or if you're paying all cash.
Keep in mind that unlike individual sellers, developers (also referred to as sponsors) generally avoid outright price reductions. Price cuts affect future sales, as each unit’s recorded sale price is a matter of public record. If the sponsor gives you $25,000 off, he will probably have to give every other buyer in that line $25,000 off.
Instead, focus on extracting “off-deed” concessions that the rest of the world will not automatically learn about, such as:
- 3-12 months of common charges paid in advance
- Payment of attorneys fees
- Upgrades to your unit like a better floor (if not yet done) or other finishes and appliances
- Roof rights, rooftop cabanas, storage bins, bike spaces, parking
- Payment of your contribution to the building’s reserve fund (“capital contribution”)
- Mortgage recording tax “splitter”: Not many buyers know about this, and it certainly pays to ask, as it can save you the entire amount of your mortgage recording tax (nearly 2% of your mortgage amount)
- An interest rate "buy-down"
- Furnishings, particularly when you're buying a model unit
In some cases, you may have more leverage at the beginning and end of a project. That’s because during the preconstruction phase, the sponsor will be focused on getting 15% of the units under contract. Fifteen percent is the magic number at which the offering plan is declared effective by the attorney general and closings can legally begin. It is also the minimum threshold at which most lenders will even consider financing sales in the building (some want to see as many as 50% of the units under contract).
If you're paying all cash in the preconstruction phase, you may have the most negotiating leverage of all as far as concessions, if not purchase price.
Conversely, you may have extra leverage at the very end of the project, when a sponsor may be eager to close down the sales office and focus fully on the next project.
Other points of negotiation:
- Deposit amount: Most sponsors ask for 10% down when you sign the contract, but in the preconstruction phase, when the sponsor is eager to hit the 15% mark described above—and is likely to be sitting on your deposit a very long time before delivering the unit—you may be able to negotiate a lower amount, such as 5%.
- Drop dead dates: Sponsors will never offer this up, but most will agree to a reasonable “drop dead” date at which point you are let out of the contract. For example, if you’re signing a contract in August and the sponsor predicts closings will start Oct. 1st when the building is predicted to be 25% sold, you can ask to be let out of the contract if closings are delayed 3-4 months past Oct. 1st.
- Expecting some concessions with your new condo? You may be unpleasantly surprised »
- Concession Update: What developers are giving and how to give it »
- How to buy preconstruction smart »
- How to find--and negotiate--a preconstruction deal »
- How to get your developer to finish your punch list »
- “Splitters” can save you thousands on a new condo »
- Analyzing the “special risks” section of an offering plan »