Thursday, April 20, 2006

Costs of a pre-construction condo

My lawyer called me yesterday to check in and tell me that the offering plan for my condo has been declared effective. Basically this means, I guess, that the condo now exists legally, as well as in its physical, almost-complete state, which is important, since the purchase couldn't go through otherwise!
With the recent boom in condo construction in New York, I'm sure a lot of people are considering buying this kind of property, as opposed to an existing condo or co-op. Although New York has a lot of beautiful old buildings, for many buyers, a brand-new, modern home is an attractive option-- but there can be some downsides. Here are a few issues to consider:

The asking price for a not-yet-finished condo will most likely seem low compared to an existing comparable unit. One reason for this is that you will have to give them a 10% deposit that will be tied up for as long as it takes to close, which could be anywhere from a few months to a year or more depending on the development. The money will be held in an interest-bearing account, and you'll get a credit for the interest when you close, but it might not be as much as you could have made on the cash otherwise.
There are also some other significant costs that you have to factor in that don't apply to other properties:
Seller's attorney fee-- it's pretty typical that you'll have to pay the seller's attorney as well as your own
NY City & State Transfer tax-- The city tax is 1% of the selling price of $500,000 or less, 1.425% if more than $500,000. Then on top of that the state tax is another 0.4% of the selling price.
Working capital-- since the condo is just coming into existence, there is no reserve fund that has built up from the common charge payments. So the first buyers have to contribute an amount, maybe around $1,000, or a couple months' worth of common charges, depending on the building.
I believe that these extra costs can be considered part of your cost basis for the property. They can certainly be factored into the value of the property, as they are costs that the buyer would not have to pay when you sell the place. But be forewarned that you'll need more cash up front to close.

Building quality-- no one has lived there yet so it's hard to say if maintenance problems could crop up. Some issues could take time to show up, like cracks in walls from the building settling. If there are serious problems, you could find yourself in a legal mess for years. With an older building, an inspector is more likely to be able to detect existing problems. And you can figure that if it hasn't collapsed after 50 or 100 years, something drastic would probably have to happen for it to collapse right after you move in.
Building management-- there won't be any financial records for you to review to see how the building operates.
Building as it's supposed to be built-- I've known people whose brand-new condos turned out to significantly differ from the floor plans they were shown. Your contract will probably have a clause in it that says, more or less, "anything the broker told you may be a lie, even if it was in writing." But though the broker's listing sheet may be meaningless, legally the condo is supposed to conform to the offering plan, which includes a floorplan and specifications about the finishes. The contract may still try to tell you that the finished product can be different, but make sure your lawyer tries to rein that in. Mine added a provision that the finished condo would differ by no more than 3% from the measurements in the floorplan. That could still mean there will be some weird surprises when the place is done, but it's better than giving them carte blanche to build the apartment however they felt like that day!

For me, a new condo seemed like a good choice-- I'm not a DIY-er, really, and as a single person, I really didn't want to deal with waiting around for contractors and the overall stress of renovation, so I wanted a place in move-in condition. I factored the extra costs into the overall price and decided it was still a good deal. But make sure you consider all these factors before you make an offer, and hire a lawyer who has experience dealing with new developments. I'll continue to report on how my purchase goes over the next couple of months, hopefully without too many cautionary tales of how things can go wrong!


FR said...

Regarding the association fee... it should be noted that even though the condo may have a set fee that it starts out at, it will most likely be changed over time. My ex's condo association fee started at $135 a month, which is partially what drew us to the place. Four months later, the fee had to be raised to $225 because it turned out that at $135, we had to dip into the reserves every month. I guess it is common for the seller ( of flip or new condos) to list a low price solely for the purpose of bringing in buyers.

Peachy said...

I've heard the same about the association fee as Fr said. I've also heard they include such area as the closests when calculating the floorplan space. Just more things to be aware of.

Caitlin said...

Wow, really good stuff to think about. We'll need this if we go the Cali route since we'd most likely be looking at new construction condos.

Anonymous said...

I'm in the process of purchasing a new condo in NYC myself, and the City and State transfer tax is a killer. In new construction, if you purchase from the sponsor, you have to pay the transfer tax when you sell your condo as well. The state really gets you when you buy and sell property. On the other hand, the property tax is relatively low. Good luck!

Anonymous said...

capital contribution to condo is not included in cost basis for tax purposes. only actual cost plus cost of improvements.

Anonymous said...

I agree with the comments above, in that the HOA fees will most likely increase over time. I suggest that you get actively involved with the HOA and try to keep their expenses down. If they suggest a big summer against it !

I made a post on the same topic in my blog today. If you would like to check it out, visit

Madame X said...

good points, everyone. I was hoping someone would weigh in on what goes to the cost basis, as I wasn't too sure about that, so thanks Anon!

James L said...

There's also the reimbursement fee for the offering plan, for the sponsor to recover the cost of preparing it.

Not just for new construction, but a major closing cost in NYC is the Mortgage Recording Tax. Ouch!

Madame X said...

James L-- it's funny, I was supposed to pay $100 (I think) for the copy of the offering plan that was sent to my lawyer but the selling agent told me at the time that he'd take care of it... but I wonder if that cost will show up again at the closing.
Try2-- I do plan to stay involved. That was the nice thing about living in a small coop, which I did some years ago. Every resident was on the board and we all wanted to keep costs low by doing little things ourselves (like using pliers to turn on the washing machine when the knob broke, instead of fixing it!)

Anonymous said...

if i were you, i'd flip it.

Anonymous said...

i'd consider flipping it too... Even the NYC mayor budgetting in 10% price decline (property taxes).

hey - if you can make a 50K profit, how many months of rent will that cover in your current space? Meanwhile, instead of borrowing money at 6% to pay for an investment that will appreciate at max 3% a year, you can get a higher return elsewhere with your down payment money.

on the other hand, you like NYC and like the idea of owning a home, and have stable employment and other assets, so unlike most people you can actually afford to purchase a declining property. and it does provide some protection against the possibility of rising inflation.

Madame X said...

I'm not going to flip it. I'm prepared to ride out a decline over a few years, and plan to own this place for a while and eventually rent it out.

Madame X said...

Also, given that I do seem to be buying just past the peak of the market, I'm not sure I could really flip it for enough money to make it worthwhile. It sounds like buyers are thinking more cautiously now.

Anonymous said...

Flip it is a wonderful TV show! I TiVO it often in my basement apartment.