Useful Knowledge when Looking to Buy in Pre-Construction Condos

Once in a while our clients are interested in buying an apartment in a pre-construction condo.

When looking to buy pre-construction condos, given the fact that the apartments are not built yet, buyers need to pay attention to a couple of points that are detailed in this article.

We hope that you will enjoy this article and please reach out to us if you have any questions.

RESEARCH ON THE DEVELOPER

Since the apartments are not built yet, it is important to be confident that the developer will be able to deliver on his promises. Looking at a developer's track record and current projects will provide some useful clues about how you should expect the project to evolve.

Some of the questions to think about are:

a)      What is the developer’s reputation?

b)      Does the he usually finish his projects on time?

c)       Does he deliver the quality of finishes he says he can do?

d)      Are there many any lawsuits against the developer?

e)       How many projects is the developer currently working on?

All these questions will provide greater clarity as to the developer’s ability to complete the project based on his plans and could also provide a better understanding of the developer’s financial situation.

READ THE OFFERING PLAN

The offering plan is the most useful primary source to learn about a pre-construction condo. The reason why it's so useful is that in NYS real estate developers need to present to the Attorney General a detailed description of their project. The offering plan is basically the real estate equivalent of a “prospectus” for companies that are filing for an IPO.

The offering plan is composed of few sections.

a)        Special Risk: This section includes all the risks the buyer should be aware of when purchasing a unit in the building. The risks discussed in this section are numerous and some are generic and can apply to any building while others are specific and can be, for example, about the “window treatments” or “the subway tunnel near the building”.

b)       Description of the Property: This section is self explanatory and will provide a description of the property.

c)       Schedule A: In this section, the developer includes detailed information about the apartments. Typically, the information contains the unit number, Bd/Ba, SF, Offering Price, Unit Common Interest, Projected Monthly & Annual common charges, Projected Monthly & Annual RE Taxes and sometimes, allocation of managers unit purchase.

d)      Schedule B: This section projects the budget for the first year of operation. Usually the expenses include:

1)      Salary, wages, payroll taxes and benefits

2)      Heat & Hot Water

3)      Electricity

4)      Water & Sewer

5)      Repair & Maintenance

6)      Contract Services

7)      Insurance

8)      Manager’s Unit

HIGHER CLOSING COSTS

Buyers of new constructions need to be aware that, often time, the closing costs for new construction tend to be higher than for traditional apartment resales. In new constructions, the closing costs can represent up to 6% of the purchase price while for traditional apartment resales that percentage is around 3% to 4%. The most common additional costs are:

a)      NYS Transfer Tax

b)      Developer’s attorney fees

c)      Building working capital contribution

d)      Super apartment contribution in some cases

However, there are no set rules and ultimately the market conditions will dictate what is up to negotiation.

FINANCING

Securing a loan for an apartment purchase in new constructions will often be more challenging than with traditional apartment resales.

Condos can either be warrantable or non-warrantable. Warrantable condos are the ones that meet the requirements of Freddie Mac & Fannie Mae and they have an easier time getting a loan.

To be warrantable, a condo must meet certain requirements such as, for example, having no current litigation or having at least 50% of the units must be owner occupied.

Unfortunately, most pre-construction condos do not meet Freddie Mac & Fannie Mae standards which makes it very extremely difficult to get a traditional mortgage.

Most lenders will not lend until the condo has at least 15% of the units under contract and has been declared effective by the Attorney General. Also, many lenders will require that at least 51% of the units are under contract.

That being said, developers will sometimes work with one or few preferred lenders. These lenders believe in the developer's project and in his ability to deliver. Often time, the preferred lenders will be well known banks (Wells Fargo, Chase....) and will be able to offer competitive rates.

THE OUTSIDE DATE

The outside date is the date on which you can get your down-payment back if the condo has not been completed. The outside date will be in the purchase agreement and sometimes can be negotiated with the developer.

Negotiating the outside date protects potential buyers against long and unexpected delays during the construction of the condo.  

PRICE NEGOTIATION

Usually, developers are more likely to give discounts at the beginning of their marketing campaign, when few apartments have been sold, and at the end, when only few apartments remain to be sold.

On the one hand, at the beginning of the marketing process, developers are trying to reach 15% of sales so that the condo can become effective. On the other hand, when only few units remain to be sold, developers are also more likely to give discounts so that they can move to their next project.

It is important to understand that developers tend to be reluctant to give outright discounts to the units being marketed. From their perspective it makes sense since each sale of these units can be used as a point of comparison for the other units the developer will sale.

Because of that reason, a savvy buyer is often better off focusing on negotiating concessions instead of apartment discounts.

Below is a list of items that can be negotiated:

a) Transfer Taxes: In new development, the transfer tax is often the responsibility of the buyer. That being said, a potential buyer could negotiate and have the developer pay for it.

b) CEMA: In NYC, the mortgagor (aka the person borrowing money) needs to pay a mortgage recording tax on a new loan. However, sometimes the lender of the seller agrees to transfer to another lender a portion of its loan allowing the buyer to saving on the mortgage recording tax.

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c) Common charges and RE taxes: Sometimes, you can also negotiate for the developer to pay during a certain number of months the common charges and the RE taxes.

d) Storage & Parking space: A developer can sometimes offer a free storage unit to a potential buyer. More rarely, a developer can also give a parking space for free to a buyer but it tends to be a little more tricky since it would require giving the parking space deed for free. What’s more likely is that a developer would give the right to use the parking for a certain period of time.