The New York economy is generally in recovery mode. The financial industry is back on its feet, and this segment has always helped to power NY sales, even at the lower end on the theory that a rising tide lifts all boats.  As well, foreclosures (never enough to cause a drag on the Manhattan and Brooklyn markets in the first instance) are nevertheless falling, in part because of self-imposed bank moratoriums compelled by the robo-signing scandal.  This will reverse once the banks clean up their act, but Manhattan and Brooklyn have been pretty much immune to the foreclosure effect anyway, except for a not significant negative psychological impact on purchasers who, once they think about it, distinguish what’s going on elsewhere from the reality in New York.    

Both the pace of sales and the price of units is accelerating in NYC  when comparing month-to -prior -month (January ’11 to December ’10) and year-to -prior -year (January ’11 to January ’10) statistics. This continues a trend which began in June 2010.  Moreover, as the economy recovers further there will be far fewer new units coming to market than in the past. There was a dearth of new building permits issued in 2010 – 95% fewer than in 2008. While it will take a few years ( probably starting in 2012)  for the effect of this slowdown  to be felt  (we’ll need to  wait for new projects currently  in construction or still unsold  to finally sell out),   it  augers  well for the future value of units currently on sale.

One drag on the market will be financing costs which will inevitably rise from their historic low levels.   Moreover, while the current proposals  rolling around Washington to phase out Fannie Mae and Freddie  Mac  (the  government –controlled entities which for decades  have been the foundation and lubricant  for housing finance) will take a while to be adopted (assuming they will be adopted  at all),  a number of industry experts  believe that  the proposals  will likely effect borrowers even before  changes are made.  This could result in higher financing costs as well as more limited financing choices, especially when it comes to the 30 year fixed mortgage.  This is because some of the proposals in Washington such as lowering loan limits and raising the insurance premium along with raising certain fees on Fannie and Freddie loans need no Congressional approval. Consequently, borrowers can expect to see these costs and fees, which are added to the interest rate of the loan,  to result in an effective rise of the rate.

However, approximate square footage of an apartment is no more than that- an approximation. It is often a very rough approximation indeed and may not provide as accurate of a guide as you might expect.

First, many measurements are taken today by laser measuring devices the accuracy of which is only as good as the person wielding the device.  Second, different professionals use disparate measuring standards to derive their approximations.  Some will measure between the interior walls and include bathrooms, kitchens, closets, foyers, shafts, ducts, risers and columns in their calculations. Others may use the same interior perimeter measurements but present the calculation based on only what they consider to be usable space, excluding all or perhaps some of these elements.   Yet others may measure between the exterior rather than the interior walls of a unit, and, again, either include or exclude some of the very same elements. Third, and for many pre-war units, hard-to-measure areas attributable to oddly shaped rooms, reconfigurations, turrets or alcoves can further confuse the measurement. Fourth, when comparing the price per square foot for the unit being evaluated against the average or median price per square foot for comparables in the building or neighborhood, there will inevitably be inconsistencies among the measurements for the units comprising the average/median calculation as well as inconsistencies between that measurement and yours.  

Simply put, there is no legal standard which defines a square foot in New York real estate to which professionals need subscribe.   While condo developments and conversions are required to disclose how they calculate square footage in their offering documents, they are free to adopt any standard so long as it is disclosed. Co-ops are not required to make any disclosure at all because when you purchase a co-op you are purchasing shares in a corporation, not real estate.  So in co-op offering plans which contain floor plans with measurements, you may not even be able to ascertain the criteria used for their calculations.

As a purchaser, if you want a reliable calculation of footage ask the seller to provide the criteria used to arrive at his or her figures.  Ultimately, you may need to have your own professional measure the space and explain to you the criteria on which his or her measurements are taken.  Most sellers will not do this for you and the cost will be yours. So you might not want to engage in this exercise unless you are seriously considering making a bid and that bid is to be contingent on a price per square foot calculation.  You might instead want to focus your bid not on square footage but on what similar units have sold for in the same building or neighborhood and simply accept the fact that buying a home is more art than science.

But what if you  don’t have the wherewithal to make a cash offer but nevertheless want the negotiating leverage that buying for cash provides?  A mortgage pre-qualification is the way to go. With a pre-qual, you’ve already submitted a mortgage application to a bank and have gone through its underwriting approval process even before you‘ve found your new home. You’ve provided the bank with income, assets and debt documentation, and based on that information the bank has sent you a qualification letter which you can show to a seller, assuring that the money is there to complete the purchase.  Note that you want to obtain a “pre-qualification” rather than a “pre-approval” which is often provided by a loan officer without documentation of your financial position having been submitted and without the bank’s underwriting committee having met and  considered your request.

 Note that when it comes to the recitation of your legal obligations as written into the purchase agreement, a cash offer doesn’t necessarily preclude the possibility that you can nevertheless obtain a mortgage.  It depends on how the contract is written. In this regard the standard form of purchase agreement in New York  contains three financing options, only one of which will be applicable to each deal. 

The first option is what is known as a “mortgage contingency” which specifies that within a specified time the purchaser will apply for financing with the sale being contingent upon the purchaser’s receiving a mortgage commitment for  not less than a stated amount at prevailing market rates.  If the purchaser cannot obtain a mortgage by a specified time, he or she may cancel the contract and recover the downpayment which was placed into an escrow account at the time the purchase contract was signed.

 The second option is what is known as “non-contingent”.  The purchaser may (if he or she wants to) apply for financing but the sale is NOT contingent upon the purchaser receiving a mortgage commitment.  If financing cannot be obtained, the purchaser will forfeit the contract downpayment if they are unable to come up with the balance of the purchase price. The seller is then free to re-market the property and sell to anyone else, with no obligation to refund the forfeited downpayment to the original purchaser.

 The third contract option is a cash offer or “all cash” as discussed above.  In this instance, the purchaser is not even permitted to apply for financing which could appreciably slow down the deal.

When a deal is struck the selling and buying brokers agree to a “deal sheet”. It contains pertinent contact information for everyone involved in the deal (buyer, seller, brokers, lawyers, management company, mortgage broker or loan officer) and specifies the main deal points (price, target closing date, cash or mortgage, special agreements).   The deal sheet should be clear as to which financing option applies, particularly where the purchaser’s offer is non-contingent or all cash.

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.  Move-in & 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)

 According to the Residential Sales Report of the Real Estate Board of NY,   the  market showed increasing  and continuing strength. And this while other areas of the country were not as fortunate, dealing as they were  with the expiration of the first time home-buyer’s tax credit, loss of momentum in the recovery and the drag of foreclosed properties.   The first  time credit and foreclosures are not a significant element of the the city’s market, particularly not for Manhattan, although the credit did have some impact on the market for Manhattan studios.

 According to REBNY, in the 3rd Q ’10, total consideration paid for NYC residential property  was up almost 11% over the prior quarter and  up in excess of 26% compared to the prior year.  Manhattan and Brooklyn (particularly  Williamsburg and Park Slope) set the pace. Sales volume in Manhattan was  up 25% over the same time in 2009, and in Brooklyn year-to-year volume increased by 32%. Although there was a small decrease  in pricing when  2nd Q ’10 is compared  to   the 3rd Q ’10,   average sales  prices for Manhattan condos increased by 5% year-to-year and increased by  14%  year-to-year for co-ops.

Forward looking indicators   appear to be on  a strengthening course in NYC   although the typical seasonal buying cycle  will assert itself where sales  generally decline in the late fall and winter. A note of caution is in order because activity in September  (when there’s generally a seasonal uptick)  was slower than had been expected, likely due to hesitancy created by the  general turmoil surrounding the recovery.

 With that in mind, the  future outlook  is somewhat tempered.  It  does look, however,  to be strengthening in that luxury retail sales are on the rise in the city, commercial rents are following suit and are on  an upswing, employment has steadied somewhat  and the financial sector (employing 1 of 7  New Yorkers) is doing  well, with bonuses  (which invariably find their way into the city’s housing market) expected to follow.

Ownership of real estate in New York City can be one of four distinct legal types – traditional home ownership  of a townhouse or three different  forms of ownership for apartments in multi-unit buildings: a co-op, a condo or a condop.

Townhouse (brownstone) ownership is no different from ownership of any traditional single-family or duplex home. Legally, it’s called “fee simple” ownership and permits the owner ( a single person, a married couple, or a group of people) all of the traditional rights of owning property that you might think of – you can sell the property to whomever  you want (within the confines of non-discrimination laws) and can alter it as you wish (subject to zoning laws or landmark restrictions).

Co-op ownership was traditionally the principal way of owning an apartment in New York City until about 30 years ago when New York caught up with the rest of the nation and permitted the condominium form of ownership.  As a legal matter, when you own a co-0p you do not own real estate. Rather, you own stock in a corporation whose principal (and usually only) asset is the building in which  the apartment is situated. Each apartment has stock allocated to it according to the size  of the apartment .  As owner of the the stock you have right to exclusive occupancy of the apartment to which the stock is allocated, and you are a tenant under a “proprietary lease”.  In many ways this lease is no different from any other residential lease except that it does not have a finite term of occupancy. Rather, the right to occupy lasts for such time as you remain a stockholder in the co-op corporation.

As does any corporation, the co-op operates under its by-laws which in most cases requires the board of directors to approve any new owners of shares so that all purchasers need to be approved , most usually after submission of financial information and an interview. The board (answerable to the shareholders) generally sets the minimum financial requirements for ownership, although all of the stockholders could be asked to approve  changes at a shareholders meeting.  A board can reject a  purchaser for no reason or for  any reason at all, except for legally prohibited reasons (e.g., race or religion). However, since a board is not required to articulate reasons for rejection,  it’s often difficult to determine  if a rejection was, in fact, legal.

Because a co-op shareholder does not own real estate, he pays no real estate tax to the city. Instead, the co-op corporation as the building owner  pays tax on it and then allocates the tax among all of the apartments based on shares owned.  The allocated charge is then included in the monthly maintenance charge for the apartment.   At the end of the year each shareholder receives a statement of the real estate taxes paid and obtains a  deduction against income.    If the corporation has a mortgage on the building,  it also allocates the interest paid on the mortgage to each stockholder/tenant.  These interest chares are included in the maintenance and reported to the shareholder at tax time so that he can take the appropriate tax deductions. The shareholder can, of course,  also deduct any interest on his own mortgage.

Several financial consequences arise from the fact that cooperative ownership is not ownership in real estate.  First –and all else being equal – co-ops generally sell for less than condos because of the restrictions traditionally imposed on sales of co-op shares by the boards of directors.  These restrictions often result in a built-in market discount of price because  the pool of purchasers acceptable to the board is somewhat  restricted, and a portion of  potential purchasers just won’t pass muster. Even those that may be acceptable to the board often self-select and don’t even shop for a co-op because of the intrusive nature of the approval process.  On the other hand this is not always the case as many purchasers actually seek the exclusivity of a co-op ownership.   Second, when purchasing a co-op a buyer need not purchase title insurance  (although there may be reasons for doing so). Instead, he relies on the title insurance held by the corporation which insures the entire building as a single entity. Third, many banks charge a higher interest rate for mortgages on co-ops. They do so because in the event of default and a foreclosure the coop boards’ restrictions on sales may make recoupment of the bank’s loss that much more difficult than it would otherwise be . Fourth, there is no mortgagee recording tax on co-op mortgages because these are not  mortgages on real estate to which the tax applies. The tax savings can be substantial, especially on mortgages of $500,000 or more where it is assessed at $2.80 per $100 of mortgage amount (a small portion of the tax is actually paid by the lending institution).

As distinct from co-op ownership, condo ownership is , in fact, ownership in real estate. The purchaser actually owns his individual unit. As well, he owns a percentage of all parts of the building which are used in common by all unit owners, such as the lobby, elevators, hallways and amenities such as a gym, pool or  rooftop terrace.  As a real estate owner  you pay real estate taxes assessed directly on your property so that unlike a co-op there is no real estate tax element included in your monthly common charges. This often results in lower monthly charges for condos than for co-ops.  Also,  for various reasons condos generally have no  mortgage or only a small mortgage on the underlying building so that there is  no  allocated mortgage interest charge included in your  monthly common charges. An exception to this occurs where a condo association owns the superintendent’s apartment, in which case it may be mortgaged, with the debt service costs being allocated to the  individual owners.

Like a co-op, a condo is managed by a board, but it is called a board of managers rather than a board of directors. The board is answerable to the Condominium ( or Homeowners)  Association in which all unit owners  are members with  an equal vote.

For the reasons alluded to in the above discussion of co-ops, market  prices of condo apartments relative to co-ops are often  higher, and closing costs include mortgage recording taxes and premiums for title insurance,  which can be costly items (especially the mortgage recording tax). Like co-ops, condos operate by their by-laws. These are traditionally- but not necessarily-  less restrictive on sales than are the by-laws of co-ops.  Condo boards typically do not have the right to reject a purchaser, but  almost universally require the submission of financial statements and, sometimes, even an interview.  Instead of rejection, Condo boards can prevent a sale by what is known as a right-of-first refusal. This allows the board a period of up to 30 days to match a purchaser’s offer to buy a unit and, by doing so, prevent a sale to an “undesirable”.  But to exercise its right the board on behalf of the condominium association  has to come up with the money to buy the unit at the same price and on the same terms and conditions as the applicant-purchaser . These rights-of-first refusal are virtually never exercised because of the cost and complexities involved, but it has  been known to happen.

A condop is a hybrid of a co-op and condo. The term is used to describe two different concepts. One is a purely legal description where a building is conceptually (and sometimes physically)divided into a condo portion and a co-op portion. Typically this occurs when there are residential units in a tower portion of a building and retail or institutional spaces (for example, a school) at the lower levels. Ownership in the retail or institutional portion might be retained by the developer in a condo form while the residential units are owned by a co-op corporation all the shares of which initially are owned by the developer and sold to individual purchasers of units. The respective  management boards of the condo and co-op portions are represented on a master board of directors  of the two units.

The second use of the condop appellation is a short-hand description of  a co-op legal structured entity  which has adopted by-laws resembling those of a typical condo association.   Often,  buildings with land-leases (i.e., the building actually sits on land owned by a third party and pays rent to the owner of the land) are condops because under New York’s condominium law  a condo cannot lease the land on which it is situated but must own it.  Where the underlying land is not owned the entity adopts the co-op legal structure but operates as a  condo under condo rules.  The principal operating  distinction is that the co-op’s  resales rules are not nearly as restrictive as a co-ops and the board has no right to blackball a prospective purchaser.  Rather, the board  instead has the  the right-of-first –refusal   typical to a  condominium.

Depending on the time in the life cycle of the sales effort, all or some of the proceeds from a unit’s sale will either go to repay the developer’s bank loan (and interest on the loan) or will be retained by the developer as profit on the unit. When a lender receives its release price, it releases the lien it has on the unit so that the developer can close the sale and give unencumbered title to the purchaser.

So, developers of new projects are not entirely free to negotiate prices. If the developer goes below the release price he can do so only with the consent of the bank because that revenue is reserved for the bank in exchange for giving a lien release.

Often, in exchange for lowering the release price to attract buyers the bank will extract a price and require that the developer provide either additional equity or interest, bring on additional partners or take out more loans (with resulting interest charges) to cover the bank’s reduced revenue. And in today’s credit environment, interest on additional loans is more expensive as credit has dried up.

The situation becomes even more complicated because banks themselves are under a lot of pressure these days. If a bank’s “capital reserves” (required by government regulation and accounting standards) are insufficient, the banks are restricted in agreeing to lower release prices because their balance sheets could be adversely effected , in turn causing a higher capital reserve to be established. This winds up costing the bank money in one way or another.

It’s all very circular and interconnected. Necessity rather than profit-motive is to some extent dictating the pricing in many new developments.
The dilemma this raises for buyers is that your price negotiation becomes a bit more complicated. You just can’t gage whether price resistance you encounter is because the developer has elected, in his wisdom, to concede no further or, alternatively, whether he’s actually precluded by his bank from being more accommodating and is unable to meet your terms even if he were inclined to do so. If the developer’s wanting to maximize profit is the driving force behind the negotiations, then the more you resist the purchase the more you might be able to squeeze further concessions; if, however, the bank’s requirements are driving the negotiations, then there just are no more concessions to be had.
Given all of that, new development prices declined on average by 14% in the second quarter of ’09 compared with the same quarter last year. The 2009 first-to second quarter price decline averaged 5%. Still, sales fell about 65% year-over-year, not only because of release price restrictions prohibiting developers from meeting the market, but also because purchasers find it hard to obtain financing for new buildings. Mortgage underwriters are loath to finance purchases in buildings with too few sales on record, because of uncertainty as to the building’s financial stability when few sales have occurred.
When negotiating for a unit in a new development be very independent in order to best assure the lowest price you can obtain. At the point where you hit a wall in price negotiation, be creative in asking for concessions other than a reduced price ( e.g., free storage space; sponsor contribution to monthly maintenance charges for a period of time; ask the sponsor what concessions he’d recommend); and be ready to walk if you’re not satisfied with the counter offer. If you do walk, tell the agent that you’re ready to do the deal if the developer can meet (or come close to meeting) your terms. Let them know that you’re open to being contacted if the developer sees his way clear to softening his terms or increasing his concessions and that you’re committed to signing a contract if your demands are met. If the developer is free to lower his price, he just might do so. And even if you don’t get a call don’t be embarrassed to initiate one yourself and ask if the developer has come around.
The bottom line is that in order to test the true bounds of the deal, you must be ready to move on. While this is no different from advice for any purchase ( after all, there are the laws of supply and demand at work), it’s particularly cogent in this market when dealing with new developments which have many units on the market, very few of which are particularly unique so that you need not fear of losing that once –in-a lifetime opportunity. Don’t be afraid to walk. You can always come back. In the end, the option to proceed or not is up to you.