The Transaction Costs Of NYC Real Estate

n addition to the purchase price of a property, a buyer of a home in  New York City will incur transactional or “closing” costs which  can be substantial,  ranging from 4% – 6% of the purchase price.  These costs will differ depending upon whether the property is a co-op or  condo ( or brownstone, which is treated the same as a condo for these purposes); whether the purchase is for cash or includes mortgage financing; whether the property is a first sale by the developer of a new building or is a resale by a prior owner; and whether the purchase price exceeds or is less than $ 1 million.

Here’s the scoop:

1. Broker’s fees:  Only sellers pay brokers fees. When the seller’s broker agrees to list the property for sale, a certain percentage is agreed upon as commission to be paid if and when a sale occurs.  The traditional commission is 6%.   If the buyer does not have a broker then the seller’s broker keeps the entire commission. But if the buyer is represented by a broker the commission will be split between the two.  So, buyers incur no fee for using a broker to represent their interests.   Note, however, that at Apartment Buyers Alternative we actually rebate a portion of our brokerage commission to our  buying clients, effectively reducing the price our clients pay for a property.

2. State and City Transfer Taxes:  Like broker’s fees, these items are levied upon and paid by sellers.  The amount is calculated by multiplying the sales price by .004 to determine the state tax and by .01425 to determine the city tax. But here’s the rub:  sponsors of new buildings in New York generally  require that the purchaser pay these costs even though the law looks to the sponsor (seller) for payment.  As far as the authorities are concerned, it  does not matter who pays, so long as the payment is made.  In soft real estate markets some sponsors may bargain away this requirement when negotiating a deal.

3. Mortgage Tax:  This tax can be expensive and is calculated by multiplying .0192 by the full amount of the mortgage (the lending institution also pays a small, additional percentage, but that has nothing to do with you, the purchaser).  The tax is irrelevant   for those purchasing for cash as well as  for those purchasing a co-op, even when a mortgage is involved. The reason  is that as a legal matter when you finance the purchase of a co-op you are not  actually obtaining  a” mortgage”.  By  strict legal definition  a ” mortgage”  applies only to collateralized real property ( e.g. a condo, brownstone or town house). But  when purchasing a co-op you are not   purchasing real property to which a mortgage can apply. Instead, you are buying shares  of stock in a co-op corporation.which owns the building  in which your apartment is located. The corporation is your landlord under a lease which permits you to occupy the apartment so long as you remain a stockholder.  There have been moves in Albany  to extend the mortgage tax to co-ops, and that may well happen in the future.

4. Mansion Tax: This is a state tax paid by the buyer when the purchase price of a property (co-op, condo or brownstone) exceeds $1,000,000. It is calculated by multiplying the entire purchase price (not just the amount in excess of $1,000,000) by .01.

5. Flip Tax:  This is not really a “tax’ in the sense that it’s not  assessed by and paid to the government. Rather, it’s a charge assessed by a building’s board of directors (in a co-op) or board of managers (in a condo) when an apartment is sold. It’s merely a way of raising money for the benefit of the building. The amount differs from building-to-building.  In co-ops it’s generally a set sum (e.g. $5) per share. In condos it’s usually a percent of the sales price.  It could be assessed against either a seller or a buyer, but often it becomes part of the price negotiation with buyers and sellers trying to get the other party to pay it at closing.

6. Title Insurance: There are two basic types of title insurance policies: Owner’s Policies and Lender’s Policies. An Owner’s Policy insures the purchaser or owner against a loss that may arise by reason of a defect in the title or ownership of real property. A Lender’s Policy insures the lender that it has a priority lien on the property. In addition, the title insurance company agrees to defend the owner or lender (as the case may be) in court if there is an attack on the title. It will cover attorney and court expenses and pay a loss caused by the defect in title up to the face amount of the policy subject to the terms listed in the policy.  Although title insurance is normally not obtained on co-op purchases, it may be prudent to do so in certain situations such as when there are outstanding federal or state tax liens against a seller or in cases of divorce proceedings and a divvying-up of property.  Your attorney can best advise you about these.  For condos and brownstones title insurance is always recommended and in any event  will be required as a lender’s policy should you secure a mortgage.  Premiums are regulated in New York State and do not vary from one insurer to another, although “search” fees may.  Examples of title insurance fees for owners and lenders are approximately $2,600 for a purchase of $500,000 with a loan of $400,000; approximately $5,400 for a purchase price of $1,000,000 with a loan of $800,000; and approximately $7,600 for a purchase price of $1,500,000 with a loan of $1,200,000. Finally, an additional cost incurred when you obtain title insurance is the gratuity ($150-$200) which it is customary to give to the title company’s representative who handles the closing for the title company.

7. Financing Fees; If you’re obtaining a mortgage,  bank fees will apply depending on your lender and the program under which you’re securing financing.  Application and processing fees will be paid at the time you apply for a mortgage and at closing you might see tax service fees (where the bank  monitors or administers payment of  your taxes), document preparation fees including the fees charged by the bank’s attorney (typically $750- $1000), appraisal fees (typically $300- $700) and  prepaid interest. As well, if the bank will be administering payment of your  real estate taxes , expect to make  a deposit into an escrow account at closing  sufficient to cover the next tax payment (in NY, taxes are paid semi-annually).

8. Additional Closing Costs:

A.  Your Attorney’s Fees: I’ve seen typical fees of $1,500 to $2, 5000, some more, some less. My suggestion is not to look upon attorney representation as a commodity.  I’ve lost several deals because an attorney either did not pay attention to the matter, did not distinguish between important and unimportant issues, or was too slow in getting the paperwork out, leading the other side to believe that the deal was not real. In this regard you should expect a buyer or seller to continue to respectively view other properties or continue to show a property until a contract is actually signed and the down-payment is  made.  So a slow attorney really can jeopardize your deal.

B.  Movein & Move out Fees: $250- $500 – these are payable to building management and are to cover the cost of supervising and inspecting  the moves. In some cases the payment is refunded if no damage was caused.

C. Lien Search: $250-$350 – If you obtain a title insurance policy this cost is included in the insurance premium. If you do not obtain a policy (e.g., when buying a co-op) you will incur this charge.

D.  Building Management Fees + Building Management Attorney Fees: $500 – $1200 – to recompense the building management company and the building’s attorney for their time in helping to accommodate the sale and process the paperwork.

E.  Various Recording Fees: $100-$200 – to effectuate meeting legal requirements for the public recording of documents.

F. Pro-Rations: As a buyer you’ll reimburse the seller for prepaid maintenance and other similar prepaid charges.

G. Survey Inspection Fee: for brownstones and town houses ($500-$1.000)