Closing Cost (a.k.a. transaction fee) - Why you need to know this in advance

NYC Real Estate Closing Costs: A Comprehensive Guide

When you’re buying or selling real estate in New York City, it’s crucial to be aware of the closing costs—additional, out-of-pocket expenses that are often overlooked but can significantly affect your budget. Closing costs in NYC are higher than in many other parts of the country due to a combination of taxes, fees, and other expenses unique to the area. 

Here's a detailed and educational breakdown to help you plan better.

For Buyers:

1. Mortgage Recording Tax:

   • This tax is a significant part of closing costs for buyers purchasing condos or houses. It’s 1.8% on loans under $500,000 and 1.925% on loans above $500,000. This tax does not apply to co-op purchases, as co-ops are considered personal property, not real estate​.

   • For example, on a $1.6 million loan, the mortgage recording tax would be approximately $30,800. This amount is based on the loan, not the purchase price, which makes it a hefty cost to consider upfront.

2. Mansion Tax:

   • Introduced in 1989, the Mansion Tax applies to properties priced at $1 million or more. The tax starts at 1% and can go up to 3.9% for properties over $25 million. This is a one-time tax paid at closing, and it’s a significant consideration for high-value properties​.

3. Title Insurance:

   • Title insurance protects both the buyer and the lender from any legal disputes over property ownership. In NYC, title insurance typically costs 0.4% to 0.5% of the purchase price. This is a one-time payment that lasts as long as you own the property​.

4. Attorney Fees:

   • Real estate attorney fees in NYC usually range from $2,000 to $4,000. These fees cover reviewing the contract, performing due diligence, and ensuring the closing process is legally sound​.

5. Other Costs:

   • Buyers should also budget for appraisal fees, which typically cost $500 to $1,000, and various bank fees, which can amount to 0% to 1% of the loan value. Additionally, there might be fees for property inspections and other necessary services before closing​.

     It is worth noting that co-ops generally have significantly lower closing costs compared to condos due to how they are classified. Co-ops are considered personal property, meaning that when you purchase a co-op, you’re technically buying shares in a corporation that owns the building. In contrast, condos are classified as real property, meaning buyers are purchasing the actual unit, which carries additional costs, such as a mortgage recording tax.

     

For Sellers:

1. Real Estate Commission:

   • The most substantial cost for sellers is usually the real estate commission, which ranges from 5% to 6% of the sale price. This fee is typically split between the buyer’s and seller’s agents​.

2. Transfer Taxes:

   • NYC imposes a 1% transfer tax on sales under $500,000 and 1.425% for sales over that amount. Additionally, the New York State transfer tax adds another 0.4% to 0.65%, depending on the sale price. Together, these can form a significant portion of the seller’s closing costs​.

3. Flip Tax:

   • Co-op owners often face a flip tax when selling their unit. This tax, usually 1% to 3% of the sale price, is designed to support the co-op’s financial health. The specifics can vary widely by building, so it’s important to understand your building’s policies before listing​.

4. Attorney Fees:

   • Sellers also need to account for legal fees, typically ranging from $1,500 to $4,000, depending on the complexity of the transaction​.

5. FIRPTA:

   • The Foreign Investment in Real Property Tax Act (FIRPTA) requires most foreigners who sell or otherwise dispose of U.S. real property to pay capital gains tax on any profits. To make sure the tax is collected, the law also usually requires the buyer to withhold 15% of the purchase price and send it to the IRS. 

Strategies to Manage Closing Costs:

• Negotiate Closing Costs: In new developments, it’s often more effective to negotiate the closing costs rather than the purchase price. Developers are usually more willing to cover some of the buyer’s closing costs, especially if they have multiple units left to sell​. 

I have dealt with many new development sponsor transactions, let me help you negotiate. 

• Purchase CEMA: For buyers, one way to reduce the mortgage recording tax is by negotiating a Purchase CEMA (Consolidation, Extension, and Modification Agreement). This allows the buyer to take over the seller’s existing mortgage, reducing the amount of new financing needed and thus lowering the recording tax.

• Budget Early: Whether you’re buying or selling, it’s essential to factor in these costs early in the process to avoid surprises.

In conclusion, closing costs in NYC can vary significantly depending on the property and the specifics of the transaction. You can’t get rid of the closing costs, but you can negotiate them. Let me assist on how to do so.