As a New York City real estate lawyer who has helped (and occasionally discouraged) hundreds of clients buy new condos over the past decade, I can tell you that purchasing new construction is riskier than buying an apartment in an established building.
Risks range from obtaining a mortgage, to getting what you pay for, to closing on time, to the possibility of debilitating construction defects and power struggles with the developer as your new building matures.
Here’s how to reduce the chance that any of this will happen to you:
1. Buy a condo in a medium-sized (20-50 units) or larger building
If you’re buying into a 5-unit building, like some of the projects I’ve seen in Brooklyn recently, you’re going to own about 20% of the building. That’s a big concentration of risk-- especially if you’re the first one to buy (in that case, you don’t even know whether the developer is going to be able to sell the rest of the apartments) or if the developer has little or no track record. What if they disappear—or can’t keep the payments up on their 80%?
2. Buy from an experienced developer with a good reputation
Look for a respected developer with a well-known name—such as Related, Extell and Toll Brothers--with a history of buildings that you can research. Is there any ongoing litigation? Is there a lot of discussion on local blogs about complaints and slow or inept responses by the developer?
3. Negotiate a mortgage contingency AND a funding contingency
In today’s lending environment, mortgages are tough to come by if the developer still owns more than 30% of the units in a new construction or new conversion building. Therefore, many developers arrange for a “preferred lender” to preapprove the building itself and offer financing even if the developer owns more units than what other lenders consider permissible.
Understand, however, that even if your loan is approved by the preferred lender, it’s possible that for reasons having nothing to do with you, the lender may decide not to fund the loan after all due to a change in lending standards after your commitment letter is issued. For example, the lender may decide that it won’t issue mortgages on more than 50% of loans in the building, or it may find that the building’s reserve fund or insurance coverage isn’t adequate.
In such a situation, so long as you have a funding contingency in your contract, you have the right to cancel your contract and walk away with your deposit. If you don’t have a funding contingency, you must come up with the money to buy the unit or lose your deposit.
4. Note how many apartments are in contract, and how many have started to close
Mortgages are difficult to get in a new building where the developer owns 30% of the units. Even if the developer has lined up a preferred lender (see above), you may encounter trouble if you need to sell in a year or two when the preferred lender is gone and not enough units have sold to satisfy other lenders.
There’s another reason to be concerned about the number of units owned by the developer. If it’s more than 50% , the developer will run the building the way it wants—and its interest in making decisions in the building can be different than what you as an owner/resident want. For example, a developer may want to keep costs down as much as possible and not hire that extra person building staff to make sure hallways and lobbies are squeaky clean.
5. Check the offering plan for nontraditional closing costs
Title insurance, mortgage tax, and mansion tax are usual buyers’ closing costs for any condo. On a new condo, add on NYS and NYC transfer taxes. Depending on price of the apartment and amount of the mortgage, all of these can total between 5-6% of the sales price.
But sometimes developers add in some unexpected extras, such as your share of:
- The super's apartment: If your super is allotted a 2-bedroom apartment, the cost could be in the neighborhood of $1 million or more plus closing costs, divided by the number of units.
- The building’s insurance costs for its first year: In a small building, this could total a few thousand dollars per unit.
- The attorneys fees for preparing and filing the offering plan: Some sponsors try to foist this onto buyers, which could add up to a couple of thousand dollars.
- The security deposit on a land lease: If you’re buying into a building with a land lease, you will likely also have to share the cost of the building’s security deposit on the land lease. Depending on the number of units and the cost of the lease, this could total tens of thousands dollars per unit.
6. Compare the renderings to the offering plan
The developer is only obligated to deliver what’s promised in writing in the offering plan. Carefully review the Description of the Property section to make sure it matches any expectations you’ve formed from marketing materials including renderings, websites, and model apartments.
- Take note of the types of finishes, plumbing fixtures, appliances (the washer/dryer shown in the rendering may merely consist of a hookup when referenced in the offering plan), ceiling heights, amenities (including whether there’s a full-time doorman). Note that even if you’ve been able to see an actual completed unit, common areas are often not finished until the end so you want to pay close attention to the details in the offering plan.
- As far as square footage, it’s important to understand that the number in the offering plan is “gross” versus “usable” square footage….meaning it includes things like closets, the thickness of the walls, and risers/ductwork. Moreover, a 5% deviation is generally legally acceptable.
- If you’re buying a unit with outdoor space, make sure the offering plan has designated the space for your unit’s “exclusive” use, or you may wind up with a door leading directly onto a shared roofdeck.
7. Hire an inspector
It's always a good idea to have to an engineer's inspection done of your apartment and, if he or she can gain access, the common areas and building-wide systems. You want to be told that everything looks well done—from the plumbing to the HVAC to the electric—and that everything that was promised was actually done.
8. Try to negotiate a ‘drop dead’ date
If you're buying an unfinished condo, and you need to be into your new apartment by a certain date, this may not be the right transaction for you. That said, you can try to negotiate a “drop dead” date by which you are entitled to cancel your contract and get your money back if the unit is not ready for closing. Most contracts state the date of the deadline for the building’s first closing and it’s frequently possible to set the same date for your closing deadline.
9. If you’re planning to rent out your condo, find out about any restrictions on renting
Fearing competition, some developers prohibit reselling or renting out your unit for up to a year after closing. You will also want to make sure that renters have the same rights of access to amenities as owners do.
10. Ask the right questions about tax abatements
If the offering plan shows the building is going to receive a tax abatement, has that abatement been approved? Is there a preliminary certificate? Usually there is no representation that it will be approved. If it is approved, how long will it last for? What would the taxes be now if there were no abatement?
Many times, taxes increase significantly for the 2nd year of operations because that’s when NYC assesses the building as a completed, new condo building as opposed to a construction site.
11. Leave some wiggle room for common charges
Understand that it is only an estimate. There are no past fiancnial statements to analyze and you can't see the amount of increase in common charges from past years.
12. Bring a complete punchlist to the closing
Prior to closing, the developer’s representative will walk you through your unit. Take careful notes about things like chips in paint, counters, bathtub, doors closing properly, windows closing and opening properly and include everything on a punch list that you bring to the closing.
Know, however, that the satisfactory winding up of your punch list depends largely on how the developer has performed in the past.
Real estate attorney Adam H. Stone, Esq., has been representing buyers and sellers of NYC property for over 15 years. He is a partner in the law firm Regosin, Edwards, Stone & Feder.
Also by Adam Stone:
What's included--and what's not--when you buy a NYC apartment
3 questions you (and your lawyer) should ask before buying a NYC apartment in a post-Sandy world