Purchasing a new construction condo is an attractive option for many. Modern designs, the latest technology and materials and being the first occupants are just a few of the benefits of a brand new condo.
Unfortunately, new construction condos come with several risks as well. An informed approach to these risks will help ensure a smooth transaction free of surprises.
Higher Closing Costs
Most condominiums pass on costs to the buyer that are typically paid by the seller. The largest of these are the transfer taxes. In New York City, the total transfer tax ranges is 1.825% of the purchase price when the value is more than $500,000.
Many new condos also pass along other fees to the borrower such as their closing attorney fee, the cost to create the offering plan, and an initial deposit to the operating fund.
These additional closing costs add approximately 2-3% to the cost of a new construction condominium.
Limited Mortgage Options
Financing options may be limited for new construction condos. Most conventional mortgage programs have a presale requirement before they are eligible. Some programs require that the control over the condominium be transferred from the developer to the Home Owners Association. Condominiums that do not meet conventional lender guidelines are considered "unwarrantable." Although financing options do exist for unwarrantable condos, they usually come with more restrictive terms such as higher rates and require higher down payments.
To compensate for these downsides, the first purchasers are usually offered the lowest prices. As more units of a condo sell and the project becomes warrantable, the developer periodically raises the prices.
Purchasers of new construction condos are often in contract for a longer period of time as they wait for construction to be complete. Additionally, the closing cannot occur until the plan is declared "effective" meaning that presale has reached at least 15%. Since developers can start selling early in the construction process, the time in contract can be very long. Estimates of completion can and often are wrong due to delays in construction and other factors. It is not uncommon for these delays to exceed a year after the estimated closing date. During that time, a purchaser's financial situation or the mortgage financing climate may change. Nonetheless, a purchaser may still be required to close when the unit is finally completed or risk losing their down payment. A clause in the contract allowing the buyer to rescind their contract if a delay is lengthy can protect the purchaser in these situations.
Although the developer can get away with delays, the purchaser will be penalized if they do no close on time. Purchasers of new construction are often given 30 days notice of a closing date, time being of the essence. If the buyer can not close on time, they may face a daily penalty that can quickly add up to thousands or tens of thousands of dollars. With long processing times for mortgage applications, it is not uncommon to be delayed and get hit with penalties.
Buyers can be dissatisfied with the final product. Sophisticated marketing materials and model sales offices create images in people's minds that differ from the finished unit. The bottom line is that all of the specs are spelled out in the offering plan and these will be all that the developer is required to deliver.
Unfortunately, new condominiums may have construction defects as well. Since purchasers are the first occupants, any defects will be revealed to them first. These defects may not become apparent until living in the unit for some time. It is not uncommon for Home Owners Associations to sue the developer years after construction is complete. Buyers can do their due diligence by researching a developer's track record in advance and having their unit inspected before they close.
We invite you to schedule a consultation with our attorneys today to discuss the possible risks and benefits of purchasing new condo construction. Call us at 800-722-5250 to learn more about how we help homebuyers and sellers throughout New York City.