If you own your apartment, you may have been told you have to pay a “flip tax” if you live in a co-op building, or less frequently, a “transfer fee” if you live in a condo, when you eventually sell. This means that after the sale, you must pay the board a certain amount, based on either a percentage of the sales price, or a set amount per share if you are in a co-op. (It is not a government tax, so there are no deductions for it.)
Introduced when rent-stabilized buildings were converting to co-ops in order to discourage buyers from “flipping” apartments (buying and selling after a short period of time to make a quick profit), today they are mostly used to raise revenue for co-op buildings rather than increasing maintenance costs or instituting assessments in order to fatten up reserve funds, says real estate attorney Adam Stone of The Stone Law Firm.
However, these days, there's not a lot of apartment flipping going on. Manhattan co-ops and condos spent about three months on the market in the third quarter, according to Douglas Elliman's most recent report, hampered by sellers who are clinging to outdated price expectations. And if sellers are still stuck, what about co-op boards? Have they adjusted to the buyers' market? Have they lowered their flip tax to encourage buyers? Nope. In fact some buildings are raising the tax in order to generate more revenue, or even adding one for the first time.
While the amount of a flip tax can vary, for most buildings it’s 1 to 2 percent of the sales price, however some experts Brick spoke to said they’ve seen a few ranging from 3 to 5 percent, while buildings with special circumstances, such as an affordable HDFC co-op, can have one as high as 20 percent, or even more. (Learn more about HDFC co-ops here.)
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Some buildings in the past year have increased their flip tax from 1 percent to 2 percent, “in order to increase their reserves and take advantage of appreciating property values,” says Mike Simmon-Pappadakos, associate broker for Mirador Real Estate.
Both Stone and Richard Apell, controller with the property management company Argo Real Estate, are seeing more buildings that don’t have them in place trying to pass them.
“They’re having difficulty, especially in cases where there might be a sponsor involved, who is exempt from paying the flip tax. But if there’s no sponsor, then it becomes an issue of how long the shareholders will be in the building,” Apell says. In other words, if someone plans to move soon, they’ll vote it down. But if they’re staying in the building, “in most cases they’ll understand it’s a financially good move for the building.”
Apell is also seeing more creative ways to assess the fee. Rather than a fixed percentage or a flat fee per share, it’s calculated on a sliding scale, based on how long you’ve lived in the building. So if there for several years, it might be 1 percent. If there for five years, it might be 2 percent. If shorter, then it could be 3 percent.
Historically, mostly co-ops have had flip taxes, but now some condos are beginning to add them.
“I’ve been surprised by the amount of condo buildings adopting transfer fees. There hasn’t been a sharp rise, but it’s become more popular in the past two years,” says Dylan Pichulik, CEO of XL Real Property Management, which specializes in managing investment properties, particularly condos, for absentee owners. “Up to 1 percent has been pretty popular.”
Who pays—the buyer or the seller—is one of those points for negotiation. Most buildings state that the seller pays, but a few stipulate that it’s the buyer’s responsibility. It also could be split between the two. In the end, the board doesn’t really care so long as someone pays the fee. In the current market, we’re “seeing sellers paying more often than buyers,” Pichulik says.
“You can view the flip tax as part of the purchase price. In this softer market, sellers are accepting lower offers in general, which makes the flip tax lower and reduces the overall package price to the purchaser, it basically folds into the overall final number at closing,” says Dolly Hertz, associate broker for Engel & Völkers. “But one thing is certain—the flip tax never fails to be a bone of contention.”
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