5 ways NYC buyers can lower their closing costs
- Get a closing credit when you buy a condo in a new development
- Use a purchase CEMA to save on the mortgage recording tax
- Negotiate a price just below one of the mansion tax thresholds
For many people, being able to buy an apartment or townhouse in New York City is a financial stretch, especially when interest rates are on the rise. Plus co-ops typically require ample cash reserves on top of a down payment. So it's important to first factor closing costs into your total output and then to make all best efforts to reduce that amount.
Depending on the type of property you are buying, closing costs can run from 2 to 4 percent of the purchase price—more like 5 percent for brand-new condos. (Read Brick's closing costs guide for a breakdown.) That's a possible $40,000 in closing costs for a $1 million co-op or $50,000 on a new condo construction.
Because closing costs are highest for brand-new developments, simply limiting your search to existing buildings can help shave off a percentage point or two off the bat.
Otherwise, brokers and attorneys can help mine opportunities to lower certain fees and taxes at the bargaining table.
"A knowledgeable broker with lots of experience can guide buyers to negotiate and take advantage of all the available savings," says Kayla Lee, a real estate agent at Serhant. "Whether it's a buyers' market, slow market, or the project is down to the last few units, there are often opportunities to negotiate closing costs." (And remember: The seller pays your broker's fee too!)
Read the following to be an informed and empowered buyer.
1. Avoid or reduce your exposure to the mansion tax
The mansion tax kicks in at $1 million, triggering a 1 percent tax for the buyer. At $2 million, the tax goes up to 2 percent, rising in stages until it reaches 4.15 percent on units at $25 million or more
"Buyers can avoid or at least reduce paying this tax by sticking to properties that are below the different thresholds," Lee says. "For example, that $950,000 vs. $1.05 million property has a larger difference than meets the eye." Go with the former and you can save $10,000 at closing. Likewise for a $1.99 million vs. $2.05 million loft.
You might be able to convince a seller to lower the asking price in a soft market, but not if there are other buyers lined up behind you. Just don't expect to convince a seller to pay it for you—the math never adds up.
2. Try not to buy directly from a developer
Besides having a higher price tag, a newly built condo comes with higher closing costs than your average co-op. That's because buying directly from the developer (or sponsor of a brand new co-op) means paying as much as 1.825 percent of the purchase price in transfer taxes imposed by the city and state to the tune of $18,250 on a $1 million condo (not to mention other costs some developers heap on to help run the building).
Lee's advice? Buy an almost-new (pre-owned) unit instead. "When it's a resale, the seller takes on various closing costs, including transfer taxes and the seller's attorney fees, which are usually passed on to the buyers for NYC new construction."
That said, in a soft market, you might convince some developers to cover at least some of these taxes.
Shaun Pappas, a partner at Starr Associates, says concessions have begun to creep back into the market with the high-interest rate environment. "Sponsors are more aggressive with the negotiations and are offering certain incentives to purchasers, such as free common charges for a year, transfer taxes paid on behalf of purchasers, and interest-rate buy-downs for a period of time."
Daniel Gershburg, an attorney with Konner Gershburg Melnick Darouvar, says the negotiability of closing costs often depends on how well sales in the building are going. Specifically, for a building's plans to be declared "effective" (or officially approved by the state Attorney General’s office), the condo needs to reach a certain percentage of sales.
Along those lines, Vickey Barron, a broker at Compass (who has represented many luxury developments), offers this tip: "Buy when the developers need a sale to meet the 15 percent occupancy rate for a pre-construction plan to be deemed effective or at the tail end of the sell-out when they have mentally moved on to their next building."
3. Save on the mortgage recording tax
Condo and townhouse buyers who take out a mortgage must pay a state and city mortgage tax of 1.925 percent on loans over $500,000 or 1.8 percent for loans under $500,000 (note the tax is based on the loan amount, not the purchase price).
But get this: If the seller has an outstanding balance on the original mortgage, you might be able to use a little-known tool called a purchase consolidation extension and modification agreement, or "purchase CEMA." This legal maneuver involves combining the seller’s mortgage with the buyer’s mortgage and then modifying the terms to current rates.
You'll need to work with an attorney to suss out the details. "A purchase CEMA can be the most effective way to save on closing costs, but the circumstances of your deal have to line up correctly in order to use it," Pappas says. "The seller must have a high enough principal amount left on the mortgage to make it worthwhile. Both seller's and buyer's banks have to agree to it. And if all goes, depending on the loan amounts, there is the potential to save tens of thousands of dollars."
For example, if the seller has an $800,000 mortgage balance and the buyer is getting a $1,000,000 mortgage, then doing a purchase CEMA can save around $15,400 in mortgage taxes. Bear in mind you may have to deduct $1,000 to $2,000 in extra fees to achieve those savings, but still.
And Pappas says most sponsor sales involve a purchase CEMA as part of the negotiations, which can help make buying a brand-new condo more doable.
4. Buy new—and ask for a closing credit
New condo developers may be willing to pay buyers a closing credit rather than reduce the asking price of their units.
Gershburg says he’s aware of a building where the developer is offering a $500,000 concession on a $4 million cash purchase (it happens!); $200,000 is being offered to cover the closing costs and the rest is a closing credit.
This way the sponsor can get the sale without bringing down the purchase price and negatively impacting prices for other units. Call it big-picture bargaining.
5. Buy new—in a building with a hefty tax abatement
Finally, assuming the apartment fits within your budget—and the savings aren't canceled out by covering the developer's closing costs—buying into a building with a heavy tax abatement can significantly lower the cost of your monthlies for years to come.
Just be sure you can afford the monthly taxes once that abatement period runs out lest you end up having to sell it—and start the closing cost cycle all over again.