At the end of this month I will be giving a talk about how to buy in NYC to fellow Andover grads, so I’m dedicating March to talking about buying in the city. The situation here is more complicated and time consuming than in most of the country, and it pays to be prepared. I still recommend you always work with your own buyer’s agent, because it is 100% free to do so. Broker fees are paid by the seller, so if you don’t bring your own person, you’re just giving their agent more money. It’s really, really, really, really not smart. Don’t do it. But so you know what to expect, for the next few weeks I will be sharing some of the info I’ll be going over in my talk.
Today’s NY Value/lesson: how much do I need to have saved to buy an apt in NYC? Because again, it’s different than what you need to purchase a home in, say, rural VA where I’m from. You can’t just plop down $30k in cash and close 3 weeks later with no agents or lawyers involved. Here’s the basic rundown of what you will need for different types of purchases.
$: The Down Payment
Co-ops usually require 20% down. No exceptions. Some are even 25% or 30%. Some, especially if they are HDFC (income restricted) require all cash. In co-ops you own a stake in a cooperative, rather than “real property,” so there are stricter rules.
Condos may allow you to put 10% down, but I do not recommend it. The one exception is if you know you’ll be receiving a bonus or windfall in the next 6 months that you will allow you to put the other 10% down. If you only put down 10% you will end up with a higher mortgage payment — as a combination of a higher rate and more money borrowed — and will also have to pay for mortgage insurance. In the known bonus scenario some banks will waive the insurance fee as long as you put down the extra 10% within six months. So if you do plan to do it this way, speak to your financial advisor and shop around.
Standalone buildings are a separate beast, but you should always aim to put at least 20% down. Again, because it makes your monthly payment lower and keeps you from having to buy mortgage insurance. You don’t live in the purchase price; you live in the monthly payment, guys!
$$: Closing Costs
Compass has this handy guide that shows you what additional money you usually need to close on an apartment. Again, it’s different than in most other markets. I’ve included the full PDF’s and broken down what the different charges mean. Note: If you pay cash, these costs are reduced, as you won’t need to deal with anything related to a mortgage.
Attorney: You cannot buy or sell real estate in NYC without an attorney. And trust me, you don’t want to. You want to make sure the lawyer you choose is one who does real estate transactions in NYC, not your friend’s dad who works upstate doing divorces. It’s simple for someone who is familiar with it, and counterintuitive to someone who isn’t.
Points: Points, or mortgage points, are paid at closing to the lender in exchange for a lower interest rate. They can also be used as bargaining chips in negotiations. It won’t necessarily come up, but better to have cash and not need it than need it and not have it.
Other bank stuff: Loan application and credit check are pretty straightforward, and each bank will have a different fee structure depending on whether you have money with the bank that provides the loan, etc. UCC 1 Filing is just a filing fee related to getting a mortgage. The appraisal needs to be done to make sure the apartment is actually worth enough to cover the loan being sought. And the lien search makes sure the deed is free and clear before purchase.
Building: The bank will run your credit before you get a loan, but the building will run it as well. The building will also charge a fee for processing the massive board package it will likely have you put together.
Mansion Tax: Many apartments in NYC cost above $1 million. In these cases the buyer also needs to pay 1% of the purchase price to the government as a tax on the 600 square foot mansion he just bought. Woooo! To note: if the purchase price is over $950k you may end up having to pay this tax if other related costs/fees bring it above $1 million. So don’t think that by negotiating $999k you’re getting away without paying it!
Non-Deed Transfer Fee: Since in a co-op you are buying shares in a cooperative rather than real property, there is a certificate rather than a deed. So it’s a “non-deed transfer” and you pay $50. Nothing crazy here.
Attorney, Points, Appraisal, and much of the rest of the bank/building stuff is the same. But there are additional charges associated with buying real property. In new development, things are even more expensive. So before you go to close on a not-yet-built property, know you will have to put a couple more percentage points down. At the price points we’re talking about (for new dev) this can be an additional couple hundred thousand bucks.
Homeowners Insurance: Self explanatory. Please insure your home.
Mortgage Tax: This depends on how much the loan is for, but you have to pay a tax on your mortgage. Because come on, this is NYC, guys. Tax city, baby!
Title Insurance: Title Insurance is there to protect you if for some reason the “title” to the property is incorrect at the time of purchase. Say you buy an apartment and are happily living in your one bedroom, until 10 years later the grandmother of the woman you bought it from shows up saying it’s her place. She never sold it or gave it to her granddaughter, meaning the granddaughter had no right to sell it to you (I don’t know how old the people in this hypothetical are). Title insurance will protect both you AND the bank in this situation, and pay any legal fees involved in figuring it out. It will also protect you in the case there are liens or unpaid property taxes somehow missed during the buying process.
Municipal Searches: These are lien searches to make sure the title is clear and checks out. You really don’t want to miss an issue with the title because it’s a pain, even with insurance.
Residential Deed Transfer and Title Fee Closer: Like in co-ops, there is a fee to transfer the apartment over to a new owner.
New Development Condo Fees:
Residential NYC Transfer Tax & NY State Transfer Tax are part of all condo sales, but are generally paid by the seller. In new development the buyer covers these costs. It adds an additional 1.5-2% of the purchase price to the total. Ouch. But at least no one else will ever have used your bathtub before!
$$$: Post-Closing Liquidity
This is strictly a co-op thing, and it’s part of why NYC’s market remains more stable than the rest of the country. While all new developments are condos, co-ops still make up roughly 80% of apartment buildings. Co-ops generally have more rules and can be more frustrating than condos, but they are also more stable. One of the reasons for this stability is higher scrutiny of potential buyers (which can be good when its’ to make sure they are actually in a financial position to buy, or bad when it’s guided by racism and idiocy, something we are trying to regulate). A second major reason is something called “post closing liquidity.”
In most co-ops you need roughly 2 years of your maintenance payments and mortgage payments liquid, on hand (i.e. not tied up in retirement funds or other property), AFTER you close. This protects the building because, in theory, you could lose your job the day after closing and still have enough money to cover your expenses. You won’t have to short-sell the apartment in order to make ends meet. You won’t have to declare bankruptcy.
If you have family members who have enough cash to lend it to you for a few months for the closing, that is often the way first time buyers purchase their first place. But I know that’s asking a lot, and most people do not have parents who can lend them $50k for six months. If it is an option for you, it doesn’t jeopardize the building because, in theory, you would be able to use this cash instead of going bankrupt or having to sell the apartment below market.
Every co-op is different, and some require closer to one year instead of two, but it’s better to be prepared for the worst.
By contrast, in condo purchases you can have $0 left after you close. But I don’t recommend that.
$$$$: “When SH*T BREAKS” Money
If you’re buying an apartment rather than a standalone building, your maintenance payments (if in a co-op) or common charges (if in a condo) will go towards things like inevitable repairs/improvements (new roof, fixing the outside of the building, replacing the boiler). This should also cover things like your apartment’s windows or plumbing issues, as those are also related to the building rather than just your apartment. Between these monthly deposits and insurance you should be covered for everything but improvements you want to make. Congratulations! You’re a homeowner being forced to save money by the building, so you won’t get screwed when the roof falls in and you forgot to save! This is also why it’s VERY important to do your due diligence before buying and make sure the building’s financials are sound (but more on that later).
If you are renting out your apartment (an investment property), you will need to have more cash on hand to pay broker fees (because we are moving towards a world where landlords pay), turn over the apartment, deal with months of vacancy, etc. So in those cases you will need to have an additional account on top of the maintenance/common charges you are paying each month.
And if you’re buying a standalone building, you need to have your own fund (basically put away your own “common charges” every month) for all the building-wide expenses.
What does any of this mean in actual terms? There are co-ops available for $300k, so you can buy an apartment with roughly $70k in the bank. If your parents are in a position to lend you money, you can have even less saved. And you generally want your expenses to be 25% or less of your monthly income, so a higher paying job will obviously get you a more expensive apartment. But if your credit score rocks and you get a lower interest rate on your loan, this can offset a lower salary. Putting more money down will do the same. But I’ll get into ALL this as the month goes on.
For now, START SAVING and I’ll see you later.