If you want signs of the slowing New York City real estate market, you can look to the fact that deals are taking longer to close and concessions are on the rise, and that includes closing credits. Not to be confused with closing costs, these credits are an amount of money that the seller gives the buyer at closing. This perk is typically available these days when you're buying a new condo.
They sweeten the deal for the buyer and keep the official sales price higher for the developer, who has other units to sell. Ka-ching! So how much can you expect to get these days? Real estate attorneys, mortgage bankers and brokers that Brick Underground spoke to are seeing deals with closing credits that range from .5 to 12 percent of the sales price.
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Credits can be offered by sponsors and co-ops
One apartment priced at $5 million is currently under negotiation on the Upper West Side with a $600,000 closing credit on the table. That’s a credit of 12 percent of the asking price and it comes on top of a storage unit at no charge and no carrying charges for 12 months. It’s a real reflection of the current market and a sign of both the building owner’s desire to make a deal but also their unwillingness to budge on the price that gets publicly recorded.
“It’s important to realize that the deals with the large closing credits or even the ones where the seller is paying transfer taxes for the buyer are in sponsor sales,” says real estate attorney Adam Stone with The Stone Law Firm.
Having said that, co-op boards can be equally adamant when it comes to maintaining the sales price of a unit. A closing credit of $60,000 was included in the all-cash sale of a $785,000 Upper East Side co-op resale a few months ago, giving a 7 percent discount on the sales price. Co-op boards get to approve a sale and in spite of a declining market, they don’t want the average share price of their units to take a hit. In some cases, they’ll insist on a particular price or they won’t approve the sale. That’s where the credit comes in.
The timing for closing credit negotiations
No two deals are the same in NYC so some of these credits are seller initiated and others are requested by the buyer, says Ami Rosen, a private mortgage banker with Wells Fargo. “If the seller initiates the closing credit, it will be up-front at the point of sale. When buyers request it, it’s as part of the negotiation, after a number has been accepted,” he says.
In the recent sale of a new development condo Downtown for $2,550,000, Rosen says the buyer was given a credit equal to 3 percent of the purchase price, or around $75,000. Usually, the maximum credit from a seller when there’s bank financing involved is 6 percent. This is a standard industry-wide number and Stone says, “banks who regularly lend on these sponsor sales understand the reasoning of the credit and approve it.”
Transfer tax as a closing credit
At least half of the sponsor or new construction sales coming through the law offices of Jerry M Feeney in the past six months have included closing credits. Feeney says he isn’t seeing numbers above 6 percent of the asking price, in fact, he says it’s closer to 1.8 percent, which happens to be the same as the transfer tax. The transfer tax in new development is often the buyer's responsibility.
“So, on a million dollar deal, it would be $4,000 for the state tax and $1,425 for the city tax so 1.825 percent. The sellers are giving half or all of that as a credit at closing,” he says.
How to approach closing credit negotiations
Closing credits appeal to developers because they keep the recorded cost of the units high. Stone says “the sponsors would rather give a credit than negotiate on price.” He suggests buyers approach these credits as if they were negotiating the price. “They should also have a good understanding ahead of time what they can expect for closing costs so they understand these negotiations.”
If you're thinking of negotiating a closing credit, Feeney says it's a mistake to think you can go directly to the sponsor to get a deal. "This is where a broker can add value," he says because they understand the current market and are familiar with what concessions are being offered.
All-cash deals can mean higher credits
When the deal is all-cash with no bank restrictions, there’s no limit to the credit. That was the case in the sale of a $3 million condo on the Lower East Side towards the end of 2018. The buyer was paying all-cash and a credit of $200,000 was thrown in by the developer. That’s more than 6 percent of the purchase price. When we see numbers over 6 percent with bank involvement, Rosen says, in his experience, it's likely the sponsor is structuring other incentives into the deal, like seller-paid transfer tax, maintenance charges, and other perks like parking and storage.
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