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, they become an owner of 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 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, no board approval is necessary for new units.

And unlike a pre-owned condo, there is no potential need for a gut rehab or significant overhaul, which could potentially spiral into a money pit.

The flip side is that purchasing a new unit can sometimes feel like a roll of the dice—with many 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

To begin selling condo units, a developer 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 review 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 and 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.

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 cautious about, isn't it.)

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 the feedback been from buyers in prior projects that development team members were involved in?

In analyzing your findings, remember to evaluate the development team as an individual entity and 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's requirements.

Some financial lenders also won’t provide loans until at least two years of complex financials, including how much owners pay in standard charges. As a result, the earliest unit buyers tend to pay in cash.

That might be problematic if you need a mortgage to purchase your unit.

Fortunately, particularly in New York, a condominium developer will align itself" with a “preferred"' ender,”’ who can provide loans until the building meets various Fannie Mae requirements.

Having a dedicated lender also tends to be easier for buyers than seeking 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 the building’s units are sold—rather than 51%.

But, of course, waiting longer to apply for a loan also means fewer housebuilding options.

The presence of a pre-approved lender can also be viewed as a positive sign regarding the stability-building’s sales process—and demand.

Possible closing delays in new construction

There can be a massive wait between signing a contract and closing on a unit.

The building is literally 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 a "led an “outside"eIt'se is.”

It’s the date you can legally get back your down payment if construction on the building and your specific isn’t completed.

While buyers can negotiate an earlier outside date for their 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 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. 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 developer's "eloper’s projected date of completion).

If this does not happen, all homeowners in the contract can cancel and get 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 AGeneral'seneral’s office confirms that a sponsor is not putting up a bond and that the offering plan and project description aliAG'sthe AG’s office does not delve into whether or not a developer has adequate funding to complete its construction project, to give it the green light to move forward with building.)

However, using a developer who fails to deliver is rare because it is challenging.

You may want what's in the offering plan.

An offering plan consists of promises and sketches. That said, as previously what's, 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 on one completed (but unoccupied) apartment known" as the “mod'modelt.’ 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 objective 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).
• Before closing, do a walk-through and compile a "punch list” of all the issues that must be repaired or resolved first.
• This may sound wild, but it's" not uncommon for 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

Compared to existing housing stock and most real estate acquisitions, one major downside to new-development condos is high closing costs.

The buyer—not the sponsor—is expected to pay most of the closing costs, even taxes and fees, that the seller typically pays in all resales.

This includes:

• 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 standard charges) to cover opening costs for the building's operations

As mentioned, some buildings require condo owners to pool to purchase the super's unit. If a mortgage is involved, this may be billed monthly in the standard 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 in need for a long time. Perks or benefits may also be offered for early or premarket buyers.

Some buyers might be unable to afford such high closing costs, so factor this in when purchasing, evaluating, and planning accordingly.

High common charges

Monthly standard 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 vast—and permissible—field to get creative with the numbers.

Once the baseline of the first year's actual operating costs is established, standard charges typically increase by 5% to 10% within the first two years.

Also, please take a look at the core expected costs themselves. A building with many amenities will have higher prices scheduled by default.

Ask yourself if they're worth it to you. If not, is that a suitable building for you?

The first-year real estate costs in the offering plan can also be underestimated. Rather than reflecting your unit's actual real estate cost, 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, meaning your 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 reductions.

Not long ago, developers of luxury condos in New York could apply for a tax abatement, which benefitted the condo buyers.

This was a program through the 421a tax exemption/reduction program. Condo owners could pay low taxes for 15-20 years (the last few years paying increased staggered taxes).

However, the City of 2018 changed the rules, making it highly unlikely that most developers could take advantage of this program.

Today, very few buildings can offer tax abatements under 421a, and the numbers will dwindle year after year.

The J51 tax reduction is still alive, although not considered "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 always to check the monthly or annual property taxes.

Other caveats

Among the buyers' remorse that haunts some condo owners is the infamous one of the "disappeared view."

Several changes can snatch away a former beautiful view. Clever real estate tips have been floated on ways to counter this problem potentially—including buying a unit facing 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 their apartment for at least a year after closing.

The same rules can apply to resales—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 development's first closing date to complete all the building's amenities.

There are many "in-the-know" aspects to navigating new-development purchases, including that some developers sell to family and friends before opening up assets to the public.

Someone connected to the developer could help you land a plum, first-mover opportunity.

A buyer's broker can be beneficial for this and other savvy ways to navigate the new construction process.

Zolan also said, "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 lovely to have an agent aware of the uniqueness of new construction.

They will be able to ask about unique 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 whether they will start closings on a few floors first, etc.?).

The buyer's agent can research the developers and advise their clients on their past buildings and 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 that it 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 compelling for the typical buyer, with the most compelling 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.