There are many risks to buying a new construction home in NYC besides being expected to pay
transfer taxes and attorney fees on behalf of the sponsor.
In this Hauseit tutorial video, we will discuss the special risks to buying a new construction
apartment in NYC.
Since you’re buying, you may also be interested in estimating your buyer closing costs in
NYC using Hauseit’s interactive closing cost calculator available at www.hauseit.com.
You can also save money on your purchase by requesting a Hauseit Buyer Closing Credit.
Additional Closing Costs When Buying New Construction
Sponsors typically expect the buyer to pick up a substantial portion of the sponsor’s
closing costs in a new development purchase.
This typically includes the seller’s NY State and NYC transfer taxes as well as the
sponsor’s attorney fees.
You may also have to pay upfront for the superintendent’s apartment if the building will have a live-in
super.
If the building decides to get a mortgage to purchase the super’s apartment from the
sponsor, then instead of an upfront closing cost you may simply have higher common charges.
Either way, this is an additional front-loaded cost to buying new construction as you don’t
really get it back when you sell.
Sponsor Control of the Board
Most offering plans will stipulate that the sponsor relinquishes control of the board
after 90% of the units are sold, or within 5 years of the first closing.
This is market standard, and it means that buyers of new housing developments will at
a minimum be able to take control of their building within 5 years.
However, it’s important to carefully peruse this section of the offering plan because
some sponsors may try to sneak in additional language that lengthens their hold on the
building.
Some condo offering plans will stipulate that the sponsor will control the board as long
as the sponsor owns at least one unit in the building.
Understated Common Charges and Taxes
A key risk to buying a new construction home in NYC is that advertised monthly common charges
and real estate taxes will typically be lower than reality.
There are a couple of reasons for this.
The first is that the NY State Attorney General’s Office which oversees all new construction
offerings allows a 25% variance on what total monthly charges are versus what is disclosed
in the offering plan.
As a result, some sponsors will undoubtedly play around with the proposed co-op or condo
budget to understate the common charges as much as possible.
Perhaps they’ll assume the building won’t need to pay anything for a super and the residents
will take out the garbage themselves!
Second, it’s important to understand that the NYC real estate taxes disclosed in the
offering plan are typically only for the first year.
The first year real estate tax figure is actually an average of the taxes on the under-construction
and finished values.
Since the taxable value of a finished building is higher, your real estate taxes will be
higher than listed in the offering plan.
Variance in Square Footage
A special risk to buying new construction in NYC is that the square footage of the apartment
you thought you were buying can vary or even change from what was advertised.
Offering plans will typically disclose the possibility of a plus or minus 5% difference
in square footage upon completion.
Sometimes the wiggle room disclosed can even be 10%!
Keep in mind that new developments are already very liberal in how they calculate square
footage.
Instead of using interior or usable square footage, new developments sometimes use the
space occupied by walls and even common areas such as elevator banks or hallways.
Delays or Cancellation by Sponsor
The sponsor can cancel the sale at any time before filing an effective amendment.
An effective amendment can be filed when at least 15% of the units are in contract.
Once this is done, the project is declared effective and there is no turning back for
the sponsor.
However, sponsors will wait until the last possible moment to file an effective amendment,
typically right before the first closing takes place.
Sponsors want to retain the right of cancelling your deal, even if you have a fully executed
contract, if the market crashes.
The Sponsor Can Force You to Close
A quirk of the new construction home buying process is that the sponsor can force you
to close on a whim as long as they have a Temporary Certificate of Occupancy.
You typically won’t have a courtesy 30 days’ notice as you’d see in a normal re-sale
transaction for existing construction.
If you don’t or can’t close, you risk being in default as the purchaser and can
be subject to paying both the common charges and taxes as well as a penalty.
The Sponsor May Not Have Funds to Complete Construction
The NY Attorney General’s office does not check whether a developer actually has enough
funds to complete a project.
All that is required in the new development offering plan is a disclosure that the sponsor
has not put up a bond and is not claiming to have enough funds to complete construction.
Not Being Able to Rent or Sell Post Close
Most new development offering plans will have a prohibition against owners advertising a
unit for sale or rent for a year after close.
This only applies to new owners and not the sponsor.
As a result, investors may have to reconsider their rate of return assumptions if they are
not allowed to rent their units out immediately.
Even buyers who plan to move in will have to consider contingency plans if their circumstances
change and they can no longer use the property as a personal residence.
Building Amenities May Not Be Finished
Sponsors have one year from the first closing to finish the building’s amenities.
Sponsors are technically in default of the offering plan if they don’t finish the amenities
in time, but the reality is that there’s not too much you can do about it even if the
sponsor doesn’t quite finish on time.
Your Views or Windows May Disappear
One of the risks to buying a new home in NYC is that your view may disappear in the future
because of neighboring construction.
Another risk to buying a new construction home in NYC are lot line windows.
A lot line window means the neighboring lot has the right to develop their lot and build
to and above your window.
Has the Sponsor Developed Property Before?
A major risk to buying new construction in NYC is that the sponsor is inexperienced or
that this is their first deal.
There are lots of hurdles and inevitable delays to developing a property in NYC, so you’d
ideally like to see that the sponsor has done it before.
Will the Sponsor Finish the Punch List?
Another risk to buying a new construction condo or co-op is that there is no official
timeline for the sponsor to have to finish the punch list.
The sponsor only has to make commercially reasonable efforts to fix the punch list.