Real estate closing costs can be confusing. These PDFs created by Jerry Feeny, a well known and respected New York Metro real estate attorney, cover closing costs (coops, condos, townhouses-and other real property) for buyers and sellers in New York City , The Hamptons and Westchester & Rockland Counties.
We hope you find this guide helpful in ‘demystifying’ the age-old question of buyers, ‘what are my closing costs?’ And from sellers, ‘what costs do I have to pay at closing and what is left over from the sale price?
Buying a home is the single biggest purchase most of us will ever make. For many, it is a transaction full of fear, worry, and stress. Here are a few secrets to help the stress melt away.
Education. Since most of us fear what we don’t understand, educate yourself. Ask questions, and own up to not understanding something. The only ‘stupid’ question is the one that is not asked. Keep asking until you understand the answer.
Surround yourself with experts. Finding the right people to help you through the transaction can make all the difference. They will help you manage expectations. Board approvals and financial statements are fraught with pitfalls that your Real Estate Agent and accountant can help you navigate.
Be Prepared. Like a Swiss watch, real estate transactions have a lot of moving parts. Any one delay could send the whole timeline into a tizzy. Make sure you plan for delays like attorney reviews and board approval, and add in some breathing room to reduce the stress.
Expect the unexpected. Even when you think you’ve covered all the bases, there can be challenges that will try your patience. The board application can be long and tedious, seemingly prying into every aspect of your life. Requests for clarification give you a chance to fill in the blanks that could mean the difference between approval and denial.
Control what you can. Focus your energy on the parts of the transaction you can control; working on your credit, saving, and finding trusted professionals who will guide you through the process. Having a clear vision of your daily life and personal finances in your new home will help you see past the obstacles to the goal. “An obstacle is what we see when we take our eyes off the goal.” Focus on the goal, and let your trusted professionals guide you through the obstacle course.
Let go of the rest. There’s a big difference between knowing what can happen and planning for the possibility, or dwelling on every possible disaster. If fate throws up a roadblock, take a deep breath, consult your experts, and make the best decision you can.
With an aging housing inventory, new condominiums have quite an appeal in Manhattan. Luxury amenities like pools and play areas, high end finishes add to the appeal.
New condos have a few drawbacks, however: often higher selling prices and closing costs as well as difficulties in obtaining loans. New buildings must have offering plans approved by the state attorney general’s office, detailing important points about the building. This complex document can be intimidating to the lay person.
Bringing in a good attorney familiar with new construction to review the offering plan early in the process can save a client thousands of dollars by identifying taxes and fees that can be negotiated.
Tax abatement is another point that bears close scrutiny. While it is a great selling point because it keeps monthly costs lower for a while, an attorney can help determine the time span of the abatement and what the tax bill could be when the abatement expires.
Closing costs are much higher on new construction. Expect to pay the transfer tax and the seller’s attorney fees in addition to the customary closing costs for established apartments.
Be sure the building has a temporary certificate of occupancy, required before you can close on an apartment in a new building. Check the Building Department Website
Financing a new condo can be difficult. Buyers may be approved for a loan, but it is entirely possible the building will not qualify. Certain FHA and Fannie Mae requirements may preclude the building, such as flood zone or percentage of sold apartments. Individual banks may have their own additional requirements. Many new buildings have preferred lenders and mortgage brokers to overcome this hurdle.
Appraisals must match the purchase price. It is not unusual to have difficulties finding nearby comparables to the new apartment you wish to buy, causing appraisals to come in lower than expected.
Inspections are recommended for new construction. Cost cutting measures like lower-quality windows and problem with floors or exterior stucco may affect the quality of your life. Significant problems can be addressed in the contract. Smaller issues like paint drips or broken screens should be addressed on a ‘punch list’.
Doing your homework now can save you a lot of aggravation down the road.
Making up 75% of all housing stock in New York, Co-ops are the most common type of housing excluding rentals. The average co-op maintenance fee in New York City climbed 19% from 2009 to 2010 to $1.76 per square foot per month, according to Miller Samuel, a Manhattan-based appraisal company that tracks maintenance costs.
Maintenance fees usually cover debt service for the underlying mortgage, property taxes, maintenance, personnel and other items. These fees are usually apportioned per share of stock in the corporation, and are in addition to the owner’s individual mortage (if any). A review of a co-op’s financial documents will give you the breakdown on the expenses.
What’s behind this increase?
Property Taxes: New York City Property Tax revenue increased 9.68% in 2009 according to the NYC Department of Finance.
Utility costs: Natural Gas and heating oil costs continue to increase. Water costs are up slightly.
Building Staff. Salary and benefits, usually renegotiated under union contracts every two to 3 years.
Insurance Costs: Varies by building and location, usually covering liability and disaster damages
Building upkeep, including major repairs to plumbing, electrical, heating and the roof.
What can the Board do?
Cancel or delay discretionary projects
Request several estimates for upcoming projects.
Refinance underlying mortgages.
Impliment a flip tax.
When faced with rising costs, there is little a co-op board can do but pass the costs throught to the shareholders as either increased maintenance fees or temporary (or permenant) assessments. The decision to raise maintenance fees ultimately rests with the co-op boards.
As we reported in May, the Federal Government backed new mortgage lending limits program expired in September, 2011. This week, the U.S. House and Senate voted to restore the FHA loan limits to the previous maximum $729,750. According to the National Association of Realtors, this will help provide stability to communities as credit restrictions continue to prevent some qualified buyers from becoming home owners.
The restoration of the limits only apples to FHA mortgages, not Fannie Mae and Freddie Mac, which also expired at the end of September. The conforming loan limit for these two secondary mortgage market companies will remain at a maximum of $625,500.
While this may be good news for many markets, in Manhattan, where over 70% of the apartments for sale are Co-ops, it probably won’t make much difference. Most co-op boards require 20-50% down payments and higher income to debt rations (25-30% maximum debt to income). Lenders for most condos are asking for at least 20% down payment to qualify for a loan.
At one point during the credit crunch, getting a loan as a freelancer was nearly impossible. While it still remains difficult, the loan approval process is one of the biggest challenges. Be prepared to submit additional paperwork to prove consistent income.
Tips for home-buying freelancers:
Pay off other debts, including credit cards, and build a cash reserve.
Identify the source of the down payment, whether a gift or loan from your 401(k), and be prepared to show statements.
Prepare for a closer examination. Review at least 3 years tax returns. If your income increased substantially from one year to the next, be prepared to explain why and whether you expect it to continue. If your income declined last year, be prepared to explain that.
Check with local banks and credit unions which may be more inclined to spend the time necessary to qualify you for a mortgage.
It is always wise to address any credit problems before beginning the house hunt. With a little preparation and answers to some tough questions, you may be able to get into the home of your dreams.
People tend to find Co-op Board interviews difficult, if not downright stressful. Some co-op Boards are now requiring applicants to submit their dogs for interviews as well. Owner/Applicants can also be required to submit letters of recommendation from dog walkers, neighbors and groomers for their pet.
There are a number of trainers who now specialize in preparing dogs who face the scrutiny by New York City co-op boards. Ms. Renee Payne, owner of Walk This Way , a canine behavior therapist designed an interactive interview process for co-op buildings to evaluate potential canine residents.
Frustration tests to see how easily a dog loses patience and whether or not it acts out if it does not get what they wanted on demand.
Separation Anxiety tests to determine if the dog can remain calm when the owner is asked to leave during the interview.
An Elevator test to see a dog’s response riding the elevator and strangers getting on and off.
Doorbell tests to see how many times the dog will bark when the doorbell is rung.
Beginning January 1, 2013, a new 3.8% tax on some investment income will take effect.
It was passed by Congress in 2010 with the intent of generating an estimated $210 billion to help fund President Barack Obama’s health care and Medicare overhaul plans.
I remember seeing a cartoon in the New Yorker Magazine Cartoon Bank showing two mice talking about the size of their in-wall apartment. One said to the other “Counting the space behind the pantry shelves, it’s eleven square feet.”
Nowhere is caveat emptor more applicable than when referring to the stated square footage of a Manhattan apartment. Many real estate sites have disclaimers like this: “Exact Dimensions can be obtained by retaining the services of a professional architect or engineer.” At best all stated square footage and dimensions are approximate. At worst they are deceptive and misleading.
It is part of the overall marketing plan with most brokers: clean up, de-clutter, professional photos, and professional floor plans. Brokers want to show the property in the most flattering light. A floor plan in black and white (lately I’ve seen 3D color floor plans), provides a visual that shows walls, doors, fixtures and open space.
In addition to the stated square footage, does the floor plan show the whole truth? Are columns shown in the proper location and proportion to the space? Are radiators and moldings shown? How about the thickness of the walls? Sometimes they are, sometimes not. While technically correct, some graphic designers will measure from wall to wall, without taking into account such things as moldings and radiators. But, these things eat into usable floor space. Many times columns and window and door placements, even wall thickness are just estimates based on educated guesses and knowledge of building practices for a particular building.
For more information on how floor plans are created, see the New York Times article here.
ARM (Adjustable Rate Mortgage) were very popular during the boom years, but fell out of favor because the rates were very close to those of fixed-rate mortgages. Recently, because of historically low interest rates for fixed rate mortgages, the difference between fixed and adjustable-rate loans is targeted to bet widest in eight years, according to HSH Associates, which tracks mortgage rates.
Do they make sense?
Ask yourself:
Are you going to stay in the property 5 years or less?
Are you going to be able to refinance within 5 years?
If the rate adjusts upward in 5 years, are you going to be able to make increased payments?
Will you be able to sell for more than the loan balance when you want?
If you are a gambler, betting that interest rates won’t rise or you can sell before they do, maybe. If you will only stay for 5 years or less, an ARM possibly makes sense.
Let’s look at some numbers. One popular ARM loan is a 5/1 ARM. It has a fixed rate for the first 5 years, then adjusts every year thereafter. A recent ARM 5/1 was quoted at 3.4%. The average 30 year fixed rate mortgage is 4.72%. The difference between the two is called the ‘spread’. In this example, the spread is 1.32%, big enough to save thousands of dollars during the first five years of a mortgage.
Although there are naysayers, ARMs are becoming more attractive, and may be an option for some borrowers. Weigh the pros and cons, speak to your financial advisor and make sure the ARM is right for you.
When you buy a house or a condominium, you are getting real property. When you buy a co-op you are not actually purchasing the physical apartment. You’re buying shares in the cooperative corporation which owns the building in which the apartment is located. Here’s more information on coop buying and mortgage process.
Like investing in shares of any corporation you should consider the financial viability of that corporation. As always, I suggest that before buying any real estate you create your team of trusted advisors which should include a broker, attorney/financial advisor and mortgage banker or broker.
General Principles of a Coop Corporation
A coop is a “not for profit” corporation.
The coop’s board of directors has a fiduciary responsibility to operate the building in a responsible manner.
The coop board of directors generally appoints a managing agent to attend to the day to day operation of the building.
Coop corporations, regardless of size, are mandated to publish an annual financial statement that details the nature of their financial affairs. Included in these statements are the following: assets, liabilities, income, expenses
Telltale Signs of a GOOD Building
A building that is in obvious good repair and in immaculate condition.
A condition where maintenance is commensurate with services and sustains a cash reserve commensurate with the impending need of such a fund.
Tax deductibility of maintenance that is under 58%.
Cash flow variance within 5% above or below expenses.
Assessments dedicated to ongoing capital improvements.
A reserve fund equal to two to three months’ maintenance charges.
Low or no instance of shareholder or sponsor default.
A building that owns their land.
A defined land lease escalation as opposed to one based upon an appraisal.
An actual income / expense statement that reflects the budget projection.
Stable or reduced fixed costs.
Exhibits a net loss after calculating depreciation.
Next time we’ll discuss what to look at in a Coop’s Financial Statements.
Recently with the devaluation of the dollar and the uncertainty of investments elsewhere around the world, many more foreign nationals have been interested in purchasing Manhattan residential real estate as an investment.
It is no more difficult for a foreign national to obtain a mortgage than for an American citizens buying in New York City if the residence is to be a primary residence (or at least a pied-à-terre). However, an investor who is not prepared to pay in cash and wants to obtain a mortgage for a property that will be used as an investment (i.e. with rental income), will find it difficult or impossible to find a mortgage with low rates.
For just such an investor, I recently had the pleasure of working with Michael C. Xylas of Abrams Garfinkel Margolis Bergson, LLP. One of the partners, Neil Garfinkel, recently published an extremely informative discussion, very helpful to foreign buyers, summarized below and found in its entirety here.
Foreign investors are lured to US real estate by the stability and security of the US Real Estate market. Generally they can enjoy a steady appreciation of US real property and without the volatility of financial markets, making the prospect of economic gain through rental income and capital growth the strongest attraction. With relative political and economic stability in the US, there are fewer barriers to foreign purchase of US real property. The weaker dollar and lower property prices make these investments even more attractive for foreign investors.
While easy to purchase as a foreigner, real property comes with reporting and tax consequences that must be considered.
“For the purpose of US Income Tax, a Foreigner or non resident alien (NRA) is an individual who is neither a US Citizen, a green card holder nor US Tax resident. The test to determine if an NRA qualifies for the same status as a US citizen or resident individual is based on ‘substantial presence’. This is defined by the number of days that one must reside in the US to achieve such status. For the purpose of US Estate and Gift Tax, the test is more subjective, based on one’s intent of permanency in a particular country. Importantly NRA’s are nevertheless subject to estate and gift taxes on any asset that are actually situated in the US.”
It is extremely important for foreign investors to work with a qualified team of legal, accounting and brokerage/valuation advisors who understand the rules in the foreigner’s home country as they correlate with the laws of the United States; if handled correctly, the transaction will be most suitably structured with consideration for investment, accounting and tax purposes.
Consider the Structure used to purchase the asset while planning your purchase:
Individual owner (Direct Ownership) and Single Member LLC
Real property used as a residence for personal use
Least complex
Required to file US Income Tax return
Estate Tax issues, Federal and possibly State
Shareholder in a domestic or foreign corporation
Domestic Corporation
Provides a liability shield
The Corporation is the taxpayer, eliminating the need for individual annual tax returns
Does not avoid US Federal estate tax liability
Two levels of tax imposed on corporation income:
Corporate level tax imposed
30% withholding tax on dividends paid to individual owner/imposed (this could be lower based on a favorable tax treaty between the foreign investor’s country of residence and the US)
Foreign Corporation
Limits tax liability, mostly used to avoid US income tax as well as US estate tax.
Pass on US real property to estate beneficiaries without paying US taxes
No individual US Tax return, however
30% branch profits tax against the foreign corporation ‘dividend equivalent amount’ (regardless of any current distributions to the shareholders, the tax is imposed on corporation’s taxable income that is effectively connected to a US trade or business.
Foreign corporation which owns a US corporation
More complex structure, both foreign corporation and domestic US corporation are formed
Foreign Corporation owns the Domestic US corporation which owns the real estate asset.
more costly and complicated
Investor is provided a limited liability shield and does not file any US tax return
Federal estate and gift tax are not applicable
Branch Profits tax not applicable
Ultimate investor would be transparent
Income tax would be taxed at a less favorable rate compared to individual ownership
Let’s face it, this is probably the worst time to sell an apartment in Manhattan. This is very good news if you are a buyer.
Virtually all apartments currently on the market-especially during the holiday season- are placed there by motivated sellers rather than sellers just testing the waters. One of the most powerful motivators for sellers is their kids. Kids here or on the way. I call it the crib effect.
As a buyer, keep your eyes open for bedrooms, alcoves or even closets with kids’ paraphernalia. Especially cribs. Quietly make note and negotiate accordingly.
Assuming that you’ve found the property on which you wish to place an offer you’ll find the steps to purchasing a co-op or a condominium in Manhattan are very similar.
By now, to put yourself in the strongest possible negotiating position, you’ve put together your buying team, spoken to a bank or mortgage broker (if financing) and have been prequalified for a mortgage.
Offers are made in writing and/or orally in New York City. When you have found the right property, a bid or offer will be placed through your buyer’s agent. He/she will convey your offer to either the seller’s agent or to the seller directly. The seller may “counter” your offer. This will begin a negotiation process that will eventually lead to a “meeting of the minds,” at which point price, terms, and closing date have been agreed upon.
A real estate attorney is required in all property transactions in New York City. Contact an attorney familiar with real estate in Manhattan to represent you. The seller’s attorney will begin preparation of a contract of sale, and during that time your attorney will begin to examine the financial condition of the building in which you wish to purchase. Your real estate agent can assist you in finding experienced attorneys.
After your lawyer concludes that the financial condition is satisfactory, that the by-laws of the building are acceptable to you, and that the contract of sale is also acceptable, your attorney will allow you to sign the contract. At that time you will usually be required to present a deposit of 10% of the purchase price. The contract plus the deposit will then be forwarded to the seller for signature . This money will be held in the seller’s attorney’s escrow account until closing. It is important to note that until all parties have signed the contract, and it has been delivered, the seller can still entertain and accept other offers.
If financing, you should move forward with your loan application. If you’ve already been prequalified, this process will be greatly simplified.
You will, by now, have received from your real estate agent the board requirements and application materials. The application materials can be similar for a cooperative and condominium. However, the actual process is quite different. You will need to complete all of the required materials which typically include: an application, a financial statement signed by a CPA, all requisite support for your financial statement, three years of tax returns, bank statements, letters of personal and financial reference, letters of professional reference, the contract of sale, bank documents (if financing) indicating that your loan is in place, etc.
When your “package” is finished, it will be reviewed and then, assuming it is complete, it will be forwarded to the seller’s agent or directly to the building’s managing agent for review. Upon determination that it is in order and that credit checks were acceptable, it will be forwarded to the Board of Directors. No applications will be accepted by a Managing Agent unless they are complete.
In the case of a cooperative, if your application meets initial approval, you will be invited to be interviewed by the Board or by an interviewing committee. This is a serious matter and not to be taken lightly. It should be treated as a business meeting.
After approval by the Board, you are ready to begin planning for a closing!
The steps to purchasing a co-op or a condominium in Manhattan are very similar. Let’s assume that you have found the property on which you wish to place an offer. By now, to put yourself in the strongest possible negotiating position, you’ve put together your buying team, http://realestategeezer.com/category/buying-guide/build-your-team/ spoken to a bank or mortgage broker (if financing) and have been prequalified for a mortgage.
In the case of a condominium, there is generally no formal interview. Your application will be reviewed, and if all required materials are included and in order, an approval is typically granted. The entire process can move quickly in a condominium, and assuming a loan can be secured in a timely manner.
If you’re thinking about buying an apartment in Manhattan, this may be a great time to grab the gold ring. Prices are much lower than the last few years – brokers are looking back to 2004-2005 for comparative prices (comps). And mortgage rates are amazing – fixed-rate mortgages have been hovering in the 5% to 6% range, the lowest in the past 20 years except for a stray month here or there. The experts don’t expect them to go lower and aren’t ready to predict when they’ll start going up again.
If you look at listings online, asking prices might still seem high. Sellers hate to let go of the peak value their apartments reached on paper in 2006 and 2007. Be sure your buyers’ broker knows pre-bubble values and is an all-out negotiator for you. Along with purchase price, negotiations can also include terms, asking the seller to pay some of the points, for example, or maintenance rebates or contributions to other closing costs. Think about finding a dedicated buyer’s broker. He or she will negotiate harder for you and shouldn’t cost a dime, as broker’s fees should be built into the seller’s cost.
Start the process by making sure you can qualify to buy a coop or condo apartment:
Can you come up with at least 20% of the purchase price for a down payment?
Will your total housing costs (Mortgage + Maintenance–for a co-op — or Common Chargers + Taxes–for a condo) be at or under about 28 % of your income? This ratio can be somewhat higher for a condo purchase.
Do you have an excellent credit score? The best rates in NYC currently require a credit score of 760 or more. If you’re not there, note that a good mortgage broker can find fairly competitive rates with FICO scores of at least 720. If your score is below that, it’s a great idea to raise your score as much as you can before you start to shop.
Will you have the cash for closing costs and, what many co-op boards and/or lenders require, post closing cash reserves up to one or two years to cover mortgage, taxes, maintenance etc?
Why now? The best answer can be found by asking recent buyers. One new owner bought her one-bedroom co-op (with patio) in Soho in March. She had stopped looking late last fall because the prices were just out of reach. But by early ’09 she could buy a lot more apartment than she’d expected, in a lot more locations. She ended up paying $490,000 a 15% reduction from the $569,000 asking price. As the Time Out New York article points out in this case as well as two other examples, there are closing costs, some perhaps unexpected, beyond the simple purchase of the apartment.
Up-front costs
$98,000
Down payment on Soho apartment (20 percent of $490,000 contract price)
400
Appraisal
3,317
Bank, mortgage broker and closing costs (including credit report, loan origination, commitment and processing fees, flood certification and a document delivery fee)
2,125
Buyer’s attorney fee
1,500
Floor refinishing
1,349
Co-op fees (including building lawyer fee, first month’s maintenance and a not-yet-refunded $250 move-in deposit)
1,654
Interim interest charges(interest on the mortgage paid at closing)
1,250
Title fees (including bank lawyer fees, lien search and UCC filing)
500
Inspection (the seller tagged the sale “as is” before accepting the low offer, but still, “I wanted to know what I was getting into,” D’Agata says)
$110,095
Total
(We deleted $2,500 she’d put on another apartment where she didn’t get board approval.)
Monthly costs
$2,226
Mortgage payment (interest rate: 5.5 percent)
$29
Co-op insurance
$931
Maintenance charges andtaxes
$3,185
Total
If you’re ready to make the move, plan to live in your new place for at least three to five years and have a comfortable cushion of post closing reserves, then it can make good financial sense to buy now. Take a look around. You may be pleasantly surprised at what you can afford.
People tend to find Co-op Board interviews difficult, if not downright stressful. Some co-op Boards are now requiring applicants to submit their dogs for interviews as well. Owner/Applicants can also be required to submit letters of recommendation from dog walkers, neighbors and groomers for their pet.
When you buy a house or a condominium, you are getting real property. When you buy a co-op you are not actually purchasing the physical apartment. You’re buying shares in the cooperative corporation which owns the building in which the apartment is located. Here’s more information on coop buying and mortgage process.
Recently with the devaluation of the dollar and the uncertainty of investments elsewhere around the world, many more foreign nationals have been interested in purchasing Manhattan residential real estate as an investment.
Assuming that you’ve found the property on which you wish to place an offer you’ll find the steps to purchasing a co-op or a condominium in Manhattan are very similar.