If you have the funds for a down payment, you may be tempted to wade into the NYC market: An oversupply in new development is giving buyers lots of choices and plenty of bargaining power. In addition, asking prices are slipping. According to Douglas Elliman’s first quarter market report, the median asking price for Manhattan new development fell by 41.8 percent year over year. No one can predict the bottom of the market, but brokers will tell you the combination of low interest rates and falling prices make it an ideal time to buy.
Before you head to your mortgage broker, consider the counter-argument that buying in New York City doesn't make a lot of financial sense for many people.
Some experts say that unless you are in it for the long term, what you gain through ownership doesn't balance your losses through sky-high closing costs and sizable property taxes. Add to that, the uncertainty of making a return on your investment, the risks involved in building management and tying up your liquidity in a mortgage and some would argue you're better off ditching dreams of owning in favor of the rental market—you'll be in good company. About two-thirds of NYC are renters, according to the latest census data.
1) Closing costs are high
As with any complicated financial transaction, there are fees and taxes associated with buying an apartment in New York City. Simon Brady, a certified financial planner and founder of Anglia Advisors, calls this the "friction" of the sale.
"When you are lining up the cost of renting versus buying, you’ve got to take that into account," he says.
Buying in New York City recently became even more expensive with increases to the mansion tax and state transfer taxes. When you are comparing the cost of renting to the cost of buying, closing costs and associated taxes are an important consideration.
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"Any two bedroom apartment in Manhattan is going to trigger the mansion tax," Brady says.
2) You tie up your money
Brady says buyers pay a price when they lock up their funds in a down payment. He says, in many cases, it's better to put the money earmarked for a down payment into a low-risk, high-yield savings account until you are absolutely sure you can take on the financial responsibility of buying an apartment.
With the median sales price in Manhattan hovering around $1 million, buyers must come up with at least $200,000 as a down payment. Brady says, depending on the rate of return, if that money was invested it would be expected to double in around 10 years (this is the called the Rule of 72, and is an algorithm used to estimate how long it would take an investment to double). When you put that money into a down payment, Brady argues you pay an "opportunity cost" on the money that could be working harder elsewhere.
More importantly, a down payment plus the associated costs of homeownership can affect your liquidity—the funds you might need to tap into if you lose your job or need to pay unexpected medical bills.
It's fair to say if buying in New York City is expensive, so too is renting and if you have a fixed mortgage, you do at least stabilize your monthly payments. However, there are events that can blindside an owner, like roof damage or repairs from water damage or fire.
3) Property prices don't always rise
There's a stock market adage that goes "don't catch a falling knife." Just because market prices are down, doesn’t mean you are necessarily getting a good deal, or that prices are going to bounce back. A case in point is Brick Underground's report last December using StreetEasy's data that revealed many Manhattan apartments in the $1 to $4 million price range were sold for less than they had been bought for five years earlier.
Brady says buyers have unreasonable expectations of NYC property increasing in value. "It is regarded as a law of physics in spite of the fact that we saw in 2008 that it didn't hold up," he says.
Another aspect of this is that, as a seller, you may not be able to time the market.
"You can, by circumstance, be pushed into a situation where you need to sell, due to divorce or other personal circumstances, at a time when the market conditions are unfavorable," says Brady.
It's worth mentioning co-op boards won't like to see a low-ball sale in their building. Co-op board members even have the power to reject a sale if they think the seller could get a better price. While sellers will have some recourse here, it could slow a deal down or create a legal headache if it were to happen to you.
4) Risks related to construction defects
There are lots of beautiful—and expensive—new buildings on New York City's skyline but you will still need to do your due diligence when buying into one of them. Bruce Cholst, a real estate attorney who specializes in co-op and condo law at the firm Anderson Kill says there are "frequently" defects in new buildings.
"Everyone in the world has got into the development game and there are a lot of people who don’t have the experience or the capital to really build a building that is defect-free," he says.
Cholst reckons buyers should factor the additional expense of the lawyers and architects fees into their purchase price.
"There’s no real way to quantify it but prospective purchasers in new development should plan on contributing to a tenants association to right any wrongs of the sponsor," he says. That's not a small amount of money. We're talking about maybe tens of thousands of dollars if there are real problems. If you don't have the stomach (or funds) for that, it might be safer not to buy.
5) The headache of building mismanagement
Building mismanagement, particularly in co-ops, can be such a nightmare that it's enough to put off would-be buyers. One first-time co-op owner in Prospect Heights told Brick Underground she had such a miserable time in her co-op she was put off property ownership for life. Dede George (a pseudonym) had a similar story about her co-op in Manhattan and vowed never to buy a co-op again.
In most cases, there are actions you can take to save a mismanaged building, even one that faces foreclosure, You should be aware, however, that it'll mean extra expenses, higher maintenance fees, and legal fees to get the building back on a firm footing.