New Construction in NYC: What Every Buyer & Seller Should Know
New Construction in NYC: What Every Buyer & Seller Should Know
Buying a new construction condo in New York City can be an exciting prospect, offering modern amenities, fresh design, and a home that no one has lived in before. However, the process is notably different from buying a resale apartment, particularly when it comes to closing costs and potential risks. Understanding these key differences is crucial for a smooth and successful purchase.
What Are New Construction Closing Costs in NYC?
While closing costs for a resale condo in NYC typically range from 2% to 4% of the purchase price, new construction closing costs are significantly higher, often ranging from 4% to 6% or more. The main reason for this difference is that the buyer, not the developer (known as the "sponsor"), is responsible for paying a number of fees and taxes that are typically the seller's burden in a resale transaction.
Here is a breakdown of the key closing costs you'll encounter when buying a new development condo.
1. Real Property Transfer Taxes
In a standard resale, the seller pays the New York State and New York City Real Property Transfer Taxes (RPTT). In a new construction deal, this responsibility is almost always passed on to the buyer.
New York State Transfer Tax (NYS RETT): This is a flat rate of 0.4% on the sale price.
New York City Transfer Tax (NYC RPTT): This tax is tiered based on the purchase price.
1% for properties priced at $500,000 or less.
1.425% for properties priced over $500,000.
The combined cost of these two taxes alone can add nearly 2% to your closing bill. For example, on a $1.5 million new construction condo, you would be responsible for paying approximately $27,375 in transfer taxes.
2. The Mansion Tax
The Mansion Tax is a progressive transfer tax paid by the buyer on any residential property sale of $1 million or more. The rate starts at 1% and increases incrementally with the purchase price, reaching up to 3.9% for properties valued at $25 million or more. This tax applies to both new construction and resale properties.
Purchase Price Range | Mansion Tax Rate |
$1M to < $2M | 1.00% |
$2M to < $3M | 1.25% |
$3M to < $5M | 1.50% |
$5M to < $10M | 2.25% |
$10M to < $15M | 3.25% |
$15M to < $20M | 3.50% |
$20M to < $25M | 3.75% |
$25M and over | 3.90% |
3. Mortgage Recording Tax
If you are financing your new construction purchase, you will pay a mortgage recording tax. This tax is calculated on the loan amount, not the purchase price.
1.80% for loans under $500,000.
1.925% for loans of $500,000 or more.
This can be one of the single largest closing costs for buyers who are taking out a substantial mortgage.
4. Sponsor-Specific Fees
Developers often pass on other costs to buyers through the offering plan. These are unique to new construction and can include:
Sponsor's Attorney Fee: The buyer pays a fee to cover the developer's legal costs.
Working Capital Contribution: This is a one-time fee, typically equal to one or two months of common charges, paid at closing to establish the building's reserve fund.
Superintendent Unit Contribution: In some larger luxury buildings, the buyer may be required to contribute to the purchase of a unit for the building's resident manager.
Understanding the Risks of Buying New Construction
Beyond the financial considerations, new construction purchases come with a unique set of risks that buyers must be aware of.
1. Construction Delays and Unfinished Amenities
One of the most common issues with new developments is that they are often completed much later than the initial timeline provided by the developer. It is also not uncommon for certain amenities advertised in marketing materials to be unfinished or not fully operational by the time you close. Your purchase contract and the building's offering plan should outline the project timeline and what is included. Your real estate attorney will be critical in reviewing these documents for any red flags.
2. Potential for Higher-Than-Expected Common Charges
Developers often set the initial common charges at a low, attractive rate to entice buyers. However, these charges are based on a projected budget and can increase significantly once the building is fully occupied and the board takes over from the sponsor. This can be a rude awakening for new owners who may see their monthly costs jump by 5% to 10% in the first few years.
3. The "Non-Warrantable" Condo
A new building is considered "non-warrantable" by lenders like Fannie Mae and Freddie Mac until a certain percentage of units are sold and a homeowners association is fully established. This can make it difficult for buyers to secure financing, as many conventional lenders will not provide mortgages for non-warrantable projects. This is a risk you should discuss with both your real estate agent and mortgage broker.
4. Construction Defects and the "Punch List"
While new construction is often perceived as flawless, defects can and do occur. After you close, you'll typically have a period to identify and report any issues—a process known as creating a "punch list." It's important to have a clear understanding of the warranty and what the developer is obligated to fix. Issues can range from minor cosmetic flaws to more serious problems with plumbing or HVAC systems that may not become apparent until months after you've moved in.
Tips & Takeaways
Buying new construction in NYC requires an extra layer of due diligence. By understanding the unique costs and risks, you can make a more informed decision.
Budget Accordingly: Always factor in the higher closing costs when determining your budget. A good rule of thumb is to set aside 5% to 6% of the purchase price for closing costs on a new development.
Research the Developer: Look into the developer's track record. What other buildings have they built? Do they have a history of delivering quality projects on time? Your broker and attorney can help you with this crucial step.
Hire an Expert Team: Work with a real estate agent and an attorney who specialize in new construction. Their experience and insights are invaluable in navigating the complex offering plan and negotiating on your behalf.
Don't Assume: Never assume that the beautiful marketing renders or model unit represent the final product. Read the offering plan carefully, as it is the legally binding document that outlines the building's finishes and features.
Ready to explore the best of NYC's new developments or find your perfect home in the city? The expert team at Yeo Real Estate is here to guide you every step of the way, from understanding complex closing costs to identifying the perfect property. Contact us today to get started!