Buying a Home in a New York City New Development Vs. Old: Which is Better?
Like a newly minted penny, a new-development condo is similarly magnetic.
And when a buyer moves into a unit, he or she becomes an owner to some of the latest and greatest the real estate market has to offer.
Or do they?
There are many upsides to purchasing a new-construction condo over a resale property.
While purchasing the former, on average, tends to cost significantly more than the latter, a high-quality purchase (which can encompass everything from location, to architecture, to amenities) can appreciate in value at a brisk clip.
(Some coveted housing stock—like pre-war apartments—are also in short supply and hard to come by.)
In addition, unlike a co-op, for new units, there is no board approval necessary.
And unlike a pre-owned condo, there is no potential need for a gut rehab or major overhaul, which could potentially spiral into a money pit.
The flip side to this is that purchasing a new unit can sometimes feel like a roll of the dice—with lots of potential scenarios where a purchase can go wrong whether in Manhattan or any other borough.
However, with proper due diligence, homebuyers can mitigate such risks.
How to Minimize Risk When Buying in a New Development
Carefully review the offering plan
In order for a developer to begin selling condo units, they must provide purchasers with an “offering plan,” which describes all aspects of that condo development in detail.
First, the developer must receive approval for the plan from the New York State Attorney General’s Office.
This makes the offering plan the developer’s “promise” to the buyer—on which it must deliver.
You can get a copy of the plan from the development’ sales team.
Work with a skilled real estate attorney to go over it with a fine-tooth comb. (Most plans are several hundred pages long.)
Particularly look for aspects of the plan that can add on costs or—if missed during this review period—can make for nasty surprises come closing time.
For instance: Did you know that, collectively, unit owners sometimes have to underwrite the cost of their super’s apartment?
The plan is also where you will find the engineer’s report, as well as things like if the developer reserves the right not to sell some of the units, which can turn it into a mixed residency of condo owners and renters—and potentially depreciate the resale value for owners.
Pros and cons of considering a New York new construction
- Maximized choices: You can have your pick of the litter when it comes to selecting among the possible units
- Early buyers can potentially obtain their units at a lower price for two reasons: 1) Developers need to have at least 51% of their units in contract in order to attract both lenders and buyers (sales can beget more sales). As a result, early on, units are priced to move, and 2) The pricing contained in the offering plan can go through several amendments, and—depending on demand—could increase in price.
- Visually, descriptions and renderings of a unit’s proposed features may not go according to plan—and a buyer may be disappointed. (However, if you wait for units to be built, while you can actually walk through a unit in person, the trade-off may be a higher price.)
- Placing a unit in-contract requires at least a 10% down payment (sometimes 20%). Not only is that deposit non-refundable (as long as the development is completed), the time it takes to close may be lengthy. (Note that buyers may be able to negotiate on the down payment amount.)
- If a unit is in-contract and there are major structural issues with the development or ethical or financial issues with the developer, early buyers are already locked in—and would lose their deposits if they decide to walk away.
Other risk factors
The best way to avoid some of the worst-case scenarios described in the prior section is to do your homework.
Look into everyone involved: from the sponsor--the legal entity, composed of one or more developers, responsible for creating the building) to the architect, sales team, and more.
Is this the first development project the seller has ever done? (That’s something to be very leery of.)
Are—or have—any of the stakeholders been involved in prior lawsuits or involved with pending lawsuits?
Were there any Better Business Bureau complaints? Were there structural problems in prior undertakings?
What has feedback been from buyers in prior projects that development’ team members were involved in?
In analyzing your findings, remember--evaluate the development team both as individual entities and as a unit.
Details on financing a condo in a new development
As mentioned, lenders want to see at least 51% of units sold before they feel secure enough to provide financing. This is in part due to Fannie Mae requirements.
Some financial lenders also won’t provide loans until there are at least two years of hard financials, including how much owners are paying in common charges. As a result, the earliest unit buyers tend to pay in cash.
If you need a mortgage in order to purchase your unit, that might be problematic.
Fortunately, particularly in New York, a condominium developer will align itself with a “preferred lender,”’ who can provide loans until the building meets various Fannie Mae requirements.
Having a dedicated lender also tends to be easier for buyers, rather than their having to seek out a mortgage independently.
Fortunately, interest rates for new developments are on par with other types of mortgages. However, your rate may be higher if you get financing when only 25% of the building’s units are sold—rather than 51%.
But, of course, waiting longer to apply for a loan also means fewer choices among the building’s apartments.
The presence of a pre-approved lender can also be viewed as a positive sign regarding the stability of the building’s sales process—and demand.
Possible closing delays in new construction
There can be a massive wait between a contract being signed and closing on a unit.
The building isliterally under construction, and it can sometimes take as long as 12–18 months to close—contrast that with the 30-60 days it typically takes already-built homes to close.
One safeguard buyers can take is negotiating what is called an “outside date.”
It’s the date by which, if construction on the building and/or your specific unit isn’t completed, you can legally get back your down payment.
While buyers can also negotiate an earlier outside date for their particular apartment than the completion date for the overall building, it’s rarely granted.
Bear in mind that in the time leading up to construction, buyers will have to find someplace else to live—which adds an additional cost.
The developer will alert buyers 30 days before the impending closing date becomes “official.”
So, it would be wise for buyers not to make arrangements to move out of their existing homes until they receive that 30-day alert—as, notoriously, even the best-run construction projects can experience time and cost overruns, relative to original estimates.
In addition, a buyer cannot close on an apartment until the NYC Department of Buildings issues a temporary Certificate of Occupancy and a declaration, demonstrating that the development has passed all relevant building inspections and is ready for residents to move in and the unit has been filed with the city and assigned a lot number and property code.
When it comes to construction running overtime, one form of protection buyers have is that, by law, the sponsor must have at least one closing in the building, accompanied by a Temporary Certificate of Occupancy, by the end of the first budget year (the first budget year runs 365 days, starting from the developer’s projected date of completion).
If this does not happen, all homeowners in-contract have the option of canceling and getting their deposits back.
Cancellation or trying to wrangle concessions from the developer are among the only resources buyers have for developers who fail to make the closing date.
A developer running out of money to complete a building is not unheard of.
(Note, that while the Attorney General’s office confirms that a sponsor is not putting up a bond and that the offering plan and project description align, the AG’s office does not delve into whether or not a developer has adequate funding to complete its construction project, in order to give it the green light to move forward with building.)
However, suing a developer who fails to deliver is rare because it is very difficult to do.
You may not get what's in the offering plan
An offering plan consists of promises and sketches. That said, as previously mentioned, what’s rendered in the offering plan may not be what ultimately manifests come closing.
Here are some red flags to look out for:
- Contracts are often sold based off of the one completed (but unoccupied) apartment known as the “model unit.’ Prospective buyers, ask how your unit will differ from the model unit?
- If your unit isn’t yet built, see if you can get a hard hat tour or a drone photograph of what the view from your completed apartment may look like.
- If, though still under construction, the building does have occupants, see if you can get some unvarnished feedback from them on both the strengths and flaws of the building and its management (try to intercept them in the common areas or walking in or out of the building).
- Prior to closing, do a walk through and compile a “punch list” of all the issues that need to be repaired or resolved first.
- This may sound wild, but it’s not uncommon for there to be a variation between the square footage cited for a unit in the offering plan and the actual dimensions. Below-board developers have been known to calculate external hallway space into a unit’s square footage—or measure the distance from external walls rather than interior ones. Be bold enough to ask how the square footage was calculated? Note that some offering plans are candid in disclosing the possibility of a square-footage discrepancy—ranging as high as 10%. Bottom line: Do your math!
It's not unusual for many buyers to forego an inspection with new construction, typically just walking through the unit with their broker and creating a "punch list" of items to be adjusted or repaired.
However, a savvy buyer will hire an independent inspector as many regretful homeowners of new construction have discovered after moving in.
There's a reason some developers face lawsuits from their customers.
High closing costs
One major downside to new-development condos, compared to existing housing stock and most real estate acquisitions, is high closing costs.
The buyer—not the sponsor—is expected to pay most of the closing costs, even taxes and fees that are typically paid by the seller in all resales.
- The sponsor’s attorney fees (which the seller typically pays in resale situations; such legal fees can range as high as $5,000)
- New York State and New York City transfer taxes (to date, $4 per $1,000 of the purchase price and 1.425% for purchases above $500,000, respectively)
- For those requiring financing, 5–6% of the property price tag is calculated as an additional closing cost
- Condo owners may also have to pay into a working capital fund (the equivalent of several months’ worth of common charges) to cover opening costs for the building’s operations
As previously mentioned, some buildings require condo owners to pool together to purchase the super’s unit. If a mortgage is involved, this may be billed monthly in the common charges.
A buyer might be able to soften closing costs through concessions, such as having the seller absorb the transfer taxes, offering a closing cost rebate, or a perk like free parking or gym access.
Often, a sponsor will be more likely to give concessions if the market is soft or units are on the market for a long time. Perks or concessions may also be offered for early or premarket buyers.
Some buyers might not be able to afford such high closing costs, so factor this in ahead of time when purchasing, and evaluate and plan accordingly.
High common charges
Monthly common charges for new development condos can be very high in addition to all the other high purchasing costs involved.
This isn’t just the developer fudging numbers; the New York State Attorney General’s office legally allows for as much as a 25% variance, compared to what is listed in the offering plan.
This gives developers a very wide—and totally permissible—field to get creative with the numbers.
Once the baseline of the first year’s real operating costs is established, common charges typically go up by 5% to10% within the first two years.
Also, take a look at the core common costs themselves. A building with a large number of amenities will have higher common costs, by default.
Ask yourself if they’re worth it to you? If not, is that the right building for you?
The first-year real estate costs in the offering plan can also be underestimated. Rather than reflecting the actual real estate cost for your unit, they may be an average of the taxes paid on an “in-construction” building and its value, once finished.
Taxes on the latter are higher—which means your actual real estate taxes would be higher. Has your attorney asked how taxes in the offering plan are calculated?
Be aware that buyers can also get saddled with the building’s first-year insurance costs and even the attorney cost for preparing the offering plan!
Property taxes on new construction in New York City
In New York, condo and co-op owners usually pay higher taxes than single-family homeowners.
However, there is a way many avoid this--by applying for tax abatements.
Not long ago, developers of luxury condos in New York could apply for a tax abatement for themselves, which also benefitted the condo buyers.
This was a program through the 421a tax exemption/abatement program. Condo owners could pay low taxes for 15-20 years (the last few years paying increased staggered taxes).
However, the city in 2018 changed the rules making it all but highly unlikely most developers would be able to take advantage of this program.
Today, there are very few buildings that can offer tax abatements under 421a and the numbers will dwindle year after year.
The J51 tax abatement is still very much alive, although not considered as "good" for savings and not applicable to new construction.
The J51 tax program is designed around improvements and repairs to a building, so older buildings take advantage of this tax break.
Remember to always check the monthly or annual property taxes.
Among the buyers' remorse that haunts some condo owners is the infamous one of the “disappeared view.”
There are a number of changes that can snatch away a former, beautiful view. There have been clever real estate tips floated on ways to potentially counter this problem—including buying a unit that faces the street.
Compass real estate agent, Deborah Brener Zolan—who specializes in new-development sales weighed in:
"It is very risky to say that a home facing outward, towards the street, will NEVER have a building opposite it, or that the building across the street will never be built up to a level that parallels the floor of the unit your buyer is interested in purchasing.
Zoning can change—meaning that if it’s changed from mixed-use or residential to commercial, a building may then be erected above the level of the buyer’s building.
However, one can be assured that buying a unit facing an internal courtyard will be safe. If the building you are interested in has a unit that is facing a bridge, for example, nothing can be built under the bridge—so they would not lose that view.
As a real estate agent representing either the seller or buyer, I am very careful not to promise that their views will remain in place unless the apartment faces an interior courtyard, is across from a Bridge or other public utility, or is directly alongside a body of water."
For those considering buying their unit as a rental property, note that many new-development offering plans prohibit an owner from renting out his or her apartment for at least a year after closing.
The same rules can apply to re-sales—in part, to discourage flipping.
Also, note that building amenities may not be available once you’ve closed and moved in.
Legally, sponsors have up to one year from the date of the development’s first closing to complete all the building’s amenities.
There are lots of “in-the-know” aspects to navigating new-development purchases, including that some developers sell to family and friends before opening up purchases to the public.
Someone connected to the developer could help you to land such a plum, first-mover opportunity.
For this, and other savvy ways to navigate the new construction process, a buyer’s broker can be very helpful.
Here, Zolan also chimed in, "Having a buyer's agent when purchasing new construction can be very helpful and as advantageous as it is when buying a resale unit—especially if the agent has experience in new development.
There are different questions to ask, so it's wonderful to have an agent aware of the uniqueness of new construction.
They will be able to ask about special risks and considerations that are outlined in the Offering Plan, concessions that may be available to their buyers, and what closing costs are expected to be paid by the purchaser, (e.g., is there a super's unit that the purchaser will be helping to pay for?).
They will also be able to advise their clients about construction delays which almost ALWAYS occur, what the deposit structure will be, or ask about how the building will be completed (top to bottom or bottom to top, and will they start closings on a few floors first, etc.?).
The buyer's agent can do research about the developers and advise their clients on their past buildings and their reputations. It's always good for buyers to have their interests represented."
While there is usually a higher overall price tag and more up-front costs, the advantage of purchasing a new-development property is a long game.
Under-construction units can quickly appreciate as they’re about to wrap up construction and close.
The tremendous long-term value of off-the-plan properties is undoubtedly a compelling one for the typical buyer, with the most compelling one being that it is a shiny move-in ready unit.
The excellent resale potential, based on quick rises in property value, gives off-the-plan condominiums fantastic investment potential.