You just visited a sales office in Brooklyn where you toured a model apartment for a new condo building currently being built. The amenities are unbelievable and the price is more than reasonable. There is a tax abatement in place, significantly reducing the common charges for the next 15 years. The listing agent tells you the Sponsor expects to complete construction in about six months and there are only a few units available at the moment. This all fits perfectly into your plans and seems too good to be true, so you decide to make an offer. What happens next?
Initially, if you have not yet hired a real estate agent, it is a good idea to hire one before you make the offer. It may be difficult to bring an agent in to the transaction later. If your offer is accepted, you will be given a purchase agreement. Now it’s time to hire an attorney to represent you in the transaction. It is important to hire an attorney who is familiar with new construction in New York City. New construction differs from resale in many significant ways. Let’s go over some of those differences.
Whether you are buying a condominium or shares in a cooperative apartment building, the offering plan is a document which discloses information about the condo or co-op to prospective buyers. This info includes the unit pricing, the by-laws, house rules, initial budget, floorplans with square footage calculations, and architectural plans and notes.
Once the offering plan is submitted to and approved by the attorney general’s office (specifically the Real Estate Finance Bureau), sales may begin. The Sponsor is obligated to deliver on every unit detail, amenity, service and item identified in the offering plan.
Before a single unit can close, the offering plan must first be declared effective by the attorney general’s office. If construction has been completed, a certificate of occupancy issued, and at least 15% of the units have been sold, the AGs office will likely sign off on the project. However, unexpected delays are not uncommon.
When purchasing a resale, 2-3 months to close is normal. For new construction projects, there is no normal. Projects start selling before construction of the building is complete. In fact, it is not uncommon for listings to begin before construction has started. The six-month period to completion estimated may quickly turn into nine or twelve. If you are willing to wait, once the plan is declared effective, you can usually close quickly as there is no board approval process when you buy from the Sponsor.
If you decide you do not want to wait, it will not be easy to exit the agreement without losing your downpayment. Your attorney will be instrumental in protecting your rights and taking appropriate action when necessary.
Closing costs on new construction can be 2-3% higher than a resale transaction. Certain expenses commonly paid by sellers in resale transactions are routinely allocated to purchasers in new construction purchase agreements. The most notable are state and city real estate transfer taxes and the sponsor’s attorneys’ fees. The purchaser will also be required to contribute to the project’s working capital. Therefore, a prospective purchaser should realize the actual sales price is effectively 2-3% higher. Of course, the purchase price and these expenses are all negotiable.
Getting a mortgage on a new construction project can be difficult. Many banks require a new building to be at least 51% sold before they’ll lend within it. For that reason, the sponsor will usually designate a “preferred lender” for the project. If you are unable to get a loan from another lender, the sponsor will require that you apply to the preferred lender. The preferred lender is familiar with the building and is willing to make loans before that 51% threshold is reached.
As construction nears completion, you should be able to walk through your actual unit. At that time, you will be asked to identify any condition issues to create a punch list of items to address. Just prior to closing, you will have a second walkthrough to make sure the punch list was completed.
The office of Benjamin Katz, Esq. P.C. offers the knowledge and experience you need to enter into new construction transactions with open eyes. Give us a call today!