I can’t believe how long it’s been since I wrote something on here. I’ve sent out a newsletter (which had nothing to do with real estate) and I’ve been active on Instagram. But, unsurprisingly, being in the epicenter of a global pandemic led to anxiety, depression, and writers’ block. When nothing is certain it’s hard to write, and I’ve basically just been absorbing.
Now that NYC has passed its shocking peak and we are able to see a way forward, I’m feeling more comfortable writing again. At the same time I just started sobbing during Cuomo’s daily briefing after he read a letter from a farmer in Kansas, then laughed and started clapping (I’ve clearly lost it) at his call out of McConnell. So it’s still touch and go.
But enough about me and global pandemic: we’re here to talk about townhouses.
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Over the last year I’ve been fortunate to work with multiple townhouse buyers. Nothing has closed yet, but from the beginning of the process I realized how different it was than the co-op and condo purchases that make up the majority of NYC transactions. I didn’t realize until recently how few agents have actually done a townhouse transaction, nor how little information many of them have about them. If agents don’t know, then why would the consumer have any idea at all?
So, after a Zoom continuing education class, I’ve combined my notes with some of the key things I learned
Financing/Buying Process
In one way, townhouse purchases are easier than most condos or co-ops: there is no board process. Sponsor units within buildings also have no board package or interview, but you end up paying the sponsor’s closing costs, so this costs you. When you’re buying a townhouse, you get the best of both worlds! The seller still pays transfer taxes and other fees, while you don’t have to go through the nightmare of a board package.
Banks have been tightening their lending standards and last I heard are insisting on 20% or more down on all transactions. But pre-COVID, you also didn’t need the 20% down or post-closing requirement (both requirements to buy a co-op) to purchase a townhouse. Even more so than with condos, in a townhouse deal the limits on financing are tied to the bank rather than the building. This is a rarity in NYC, where a bank will generally give you a loan with less money down than a building requires.
But just because the process is easier from this point of view doesn’t mean it’s easy in general. For all the paperwork you don’t need to do for a board package, there’s something you need to make sure you look out for before officially closing. Unlike in a shared building, you are responsible for ALL upkeep, permits, etc. And the first big item is really the inspection.
Inspection
My team does inspections on everything our buyers purchase, and it recently came very much in handy when a client had to close virtually during COVID quarantine. Because the buyer already knew the status on the apartment, she felt comfortable closing with a Facetime walkthrough (combined with funds in escrow), and I didn’t feel like we were taking as much of a risk. Always. Be. Inspecting.
While I highly recommend inspections on any piece of property, you need to go next-level with a townhouse. But to buyers who think they can do this without an agent, beware: you are going to end up with a massive report that includes every loose floorboard, roof leak, and potential future issue. At least you will if you get the right inspector, also a challenge if you aren’t in real estate and don’t do this regularly. Unlike in a condo or co-op where neighbors can pick up the slack with any building-wide repairs, the townhouse falls entirely on you. And, so that it doesn’t LITERALLY fall on you, you need to pay a couple thousand dollars to have an accurate accounting of potential problems.
Certificate of Occupancy
If you are living in a home, it needs to have a certificate of occupancy (C of O). This also tells you what the legal use is for the building. If you live in a building with multiple units and some form of management, this is a building-wide issue and you rarely need to look into it (new developments trying to get their C of O are an example when this does affect buyers within buildings). You generally check that your building has a current, valid C of O by going to the Department of Buildings’ website, but many townhouses do not have C of O’s listed online.
Only 80% of records are actually online, and the ones missing tend to be older. Since about 90% of townhouses were built prior to 1920, many original townhouse C of O’s are not digitized. If the property doesn’t have one online at all (for example, on a property where the current owners have lived for generations and never bothered to deal with it), or you think the current one is somehow faulty, you need to do some digging. In order to verify the use of a property, if it isn’t on the Department of Buildings’ website, you’ll need to go in person to find the card originally filed. I have yet to do this but I’ve been told it will look like a lot of the old stuff we find in my house in Virginia: a yellowed paper with beautiful handwriting describing the legal use of an OG townhouse. So much cooler than an online listed use.
You can’t skip this step and just look at what the Department of Finance lists as the legal use, because the Department of Buildings and the Dept of Finance do not communicate with each other. Is that silly? Maybe. But hey, who doesn’t want an excuse to go read an old, hand-written certificate? OK, maybe a lot of people, but I love that stuff. Maybe this is why I like my job so much…
Taxes
Woooo! Taxes!!!! If you’ve ever looked at property in NYC, you’ve likely been stunned by some of the monthly taxes on resale properties around the city (many new developments have tax abatements, which is where you see condos with monthly taxes as low as $0). Yes, you can easily pay tens of thousands a year in real estate taxes. Which is why my hope is that we get a repeal of the SALT tax deduction cap out of this crisis. New York, New Jersey, and Connecticut were all specifically targeted by this part of the GOP’s 2017 tax law. Super cool how the liberal cities that generate over a 5th of the country’s GDP keep getting singled out so some chump in Kentucky can look even smugger than usual. Go back into the pond with the other snapping turtles, Mitch. Leave governing to people with souls.
ANYWAY, real estate taxes in NYC are high. On a million dollar property you can very easily pay upward of a thousand dollars a month in taxes. Let’s just use that as our benchmark, because it varies so, so wildly. In contrast, you can easily buy a townhouse for $3.5m that only has monthly taxes of $400 per month. Yes, you read that correctly. Next time you’re scoping properties online take a look at different townhouses at the same price point and you’ll see an insanely broad spectrum of tax bills.
The reasons behind this are complicated and make very little sense. It’s also illegal for me to advise you on taxes in any way, shape, or form. So all I’m going to say is that you should be aware of the taxes on a piece of property before you purchase it, even though they apply to the seller and are not necessarily exactly what you will pay. If you aren’t doing work to the outside of a structure, changing its use, it is unlikely that without major legislative changes your tax burden will suddenly change in a major way. But again, that’s a few caveats and you should always speak to your CPA about what real estate taxes will mean for you and your specific situation.
And one interesting townhouse tax fact, that leads us into our next section: if the property was a nonprofit in the past and you want to convert it to residential, there is no tax records, as nonprofits don’t pay taxes by design. While you could hire a tax attorney to do an assessment of your potential tax burden, the juice probably isn’t worth the squeeze. Your best bet is a comparative analysis of similar properties on the same block. But you won’t know for certain until you have moved in, converted, and the city sends your tax bill.
SRO, Converting Use, FAR, Etc
Say SRO to someone who does real estate and they’ll probably run in the opposite direction. SRO, or single room occupancy, is a designation that came about during “the olden times” (I forgot to write down a date) when uptown had space aplenty and midtown needed low-cost labor. These SRO’s provided cheap lodging with little oversight and a lot of transience. Tenants would stay for a few weeks or months and then head out, potentially not even alerting anyone they were leaving. Leases were informal and not filed with city government. A lot of these buildings are now completely vacant, but their zoning as an SRO remains valid.
The reason that people generally run screaming from an SRO purchase is the element of risk inherent in any SRO purchase. Like I said, tenants would come through and there would be very little in the form of official documentation. However, just because it’s informal doesn’t mean it’s invalid. It’s entirely possible that a tenant is out there, somewhere, with a legitimate claim to a room in the building. And that claim can interfere with an owner’s ability to rezone the home. So even if a place is vacant and has all the required documentation, there will always be a risk that someone comes out of the woodwork and throws a wrench into things before you’re able to finish the use conversion.
In order to change a property from an SRO to something like a single family home, you first need a Certificate of Non-Harassment to prove you aren’t violating the law by kicking out tenants. Much like when you form an LLC and take out an ad in a paper, the first step should be to take out an ad stating you are filing for the Certificate. Second, you should post notices throughout the building stating the same thing, giving anyone who may still have keys an opportunity to reach out. Third, look in the records and see if you can contact any of the prior tenants. Fourth, go back as far as you can in the utility records to look for proof that it has been vacant for a long time. If the electricity bill has been $80/month for five years, that points to the property being vacant that entire time. You’re building a case to take to the city. Finally, go apply for the certificate.
If a home isn’t an SRO but you want to convert it from commercial to residential use, or from a single family to a three family (or vise versa), you still have to do some legwork (including getting a Certificate of Non Harassment) and wait patiently for the city to approve you, but it is significantly less risky. Since rent stabilized or rent controlled tenants have leases that must be filed with the city, there tends to be more of a record. And free-market tenants who have already left the premises can’t claim they need their leases reinstated.
Another thing to look out for is FAR, or Floor Area Ratio. This gets complicated but it shows you the potential additional square footage you can add to a property. You need to be very careful that you can actually build the addition you want (restrictions are even stricter if it’s in a landmarked district, as many townhomes are) but it is a cool potential upside. Just remember: any time you are changing the outside of a property, you may drastically change your tax burden.
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Wow, this is so much longer than I expected it to be, and there is much more to say about townhouse deals. Maybe I’ll do a part two. For now I’ll go back to eating cheese and trying to decide if I’m happy or sad or somewhere in between. Keep on keepin on, guys. Being a human is so hard and we are all just doing what we can.
xo
Anna