Buying a pre-construction condo in New York City involves a certain amount of risk. You'll want the quality and size of the finished product to match the slick renderings or the model units you’ve been able to tour. You’ll also be asked to put some money down to reassure the sponsor of your commitment to the deal. That deposit is usually between 10 and 20 percent of the asking price.
Sometimes this is structured as an initial deposit of 10 percent, followed by additional payments as the building gets closer to completion. The amount of leverage you have to negotiate that deposit can depend on whether you are an early buyer or what kind of market it is. Luckily for buyers right now, you are more likely to be able to negotiate than at any other recent time, says Micheal Xylas, a real estate attorney and partner at Abrams Garfinkel Margolis Bergson.
Slow sales give you bargaining power
Xylas says you’ll have more leverage “if you have a developer who is sitting on product and needs to be a little bit more pliable.” Similar to the negotiability on transfer tax or the payment of the sponsor’s attorney fees, a reduced deposit “may be brought up as a carrot to incentivize the buyer,” says Xylas. It won’t go below 10 percent but you may well be able to negotiate it down from twenty or spread out the payments.
On buyers side, Xylas says, currently "more things are in play and negotiating the deposit is certainly one of them."
Getting in early gives you leverage
Your bargaining power might also depend on how early you get into the building says Craig L. Price, a real estate attorney with Belkin Burden Wenig & Goldman. "The early bird gets the worm and oftentimes the worm includes some special features like a reduced deposit to help the building take flight,” he says. A sponsor wants to meet certain sales thresholds and early buyers are often more likely to get the perks.
Negotiability will depend on the building
Some new developments are just not interested in negotiating on the deposit. Andrew Gerringer, managing director at The Marketing Directors, has residential projects like 77 Greenwich in Fidi under construction, and says he isn't aware of "any negotiating on the deposit of new construction condos and for sure not the ones we are working on."
Another factor might be that developers have a mandate that they will not negotiate on the deposit says Xylas.
Few developers are prepared to show their hand when it comes to the deposit, but Neil Garfinkel, real estate partner at the law firm of Abrams Garfinkel Margolis Bergson, says it's a “fragmented marketplace.” The new development marketplace is overbuilt with closings at an all-time low. Garfinkel says some developments are hot, while others are struggling. It can vary from neighborhood to neighborhood, block to block, and from development to development. "In some places, you can make the argument it’s a buyer's market, in some cases it’s a seller's market," he says.
"There are a lot of different projects and a lot of different sponsors and the underlying lenders are typically more concerned with the release price, the minimum price they want the unit to trade for—that is more their concern," says Xylas. The takeaway is that you might have more luck negotiating the deposit than the asking price.
Where does the deposit go?
If you're wondering what happens to your deposit, it doesn't go into the developer's pockets immediately Garfinkel says, "so it’s not like [the sponsor] is being paid in advance. The deposit is kept in escrow, so it’s protectionary." Whether you get your deposit back is going to be a function of what is in your contract; on the buyer's side it will depend on your mortgage contingency and on the seller's side it will depend on the developer meeting various construction milestones.
For buyers wanting to negotiate the deposit, Garfinkel says you need to analyze the development, see what’s sold, see what leverage you have and get an agent who can help you better navigate a pre-construction purchase.