Friday, March 29, 2013

Here’s what’s different about buying an apartment in a new development. (It's not just the fresh paint.)

Buying an apartment in a a brand new and possibly unfinished building can be a bit like buying a suit or a dress online.

You don't get to try the clothes on.  And you may not get to walk around in the apartment.  But that's only part of it.

While you will have the advantage of living in an absolutely brand new, sparkling clean, freshly painted space with appliances that all still have their leaflets inside, there are some things you need to be aware of.

Here’s a link to an article that will give you some important information about financing. Mortgage 101: 6 Tips to Remember When Buying in a New Development

One extremely important point the article makes is that you should research the developer.

I say you should also research the contractor, the architect, and anybody else involved with the project. What other projects have they done? Were they successful? Did resale values hold up in those projects? Is anyone suing them? Google is your best friend.

Note in particular what the article says about closing costs, which are significantly higher in a new development. Developers, unlike most sellers, expect you to pay the New York state and city transfer taxes, which will come to about 2% of the purchase price.

You may be expected to pay the developer’s legal fees. In a buyer’s market, a developer may be willing to negotiate costs, but right now we’re in a seller’s market, and sellers get to call the shots. Closing costs for a condo in a new development could be as high as 4% or even 8% of the price of the apartment.

All of this should be explained in detail in the offering plan, which is a volume usually the thickness of, say, the Philadelphia telephone book.

By all means look through it yourself, especially the parts about costs, but it’s even more important to have your real estate lawyer look at it. (It should go without saying that your lawyer should specialize in Manhattan real estate and have represented many buyers of properties in new developments.)

The number of contracts already signed has an important effect on your ability to get financing, which the article discusses. But the number of contracts signed also affects the price you’ll pay for the apartment. There’s a trade-off.

The more units that are under contract in the building, the clearer it is that the project is successful and will be completed, the developer is not going to go broke, and the risk to you is small.

But you pay for this protection in the form of a higher price for the unit you buy.

When a new development comes on the market, the prices are as low as they will ever be. The developer wants to get as many contracts as possible signed as quickly as possible.

The condo plan cannot be declared effective until at least 15% of the units are in contract with bona fide buyers. So the units are priced attractively.

If you sign a contract at this early stage, you will get a lower price than if you wait. But there are risks involved. Besides the difficulties you may face in getting financing, it’s also not clear yet that the development will be a success. Once that’s clear, the prices go up.

It seems counter-intuitive that developers raise prices on unsold units, but once they’ve got 15% of the units or more under contract, prices climb, usually more than once.

It’s now clear that the project is reasonably successful, and the developer knows he doesn’t have to price so compellingly. You have more protection at this point, and you pay for it.

The longer you wait, the more units are sold, the lower the risk, the higher the price. Some developers will take as many as four or five price hikes before a building is sold out. It’s not difficult for them.

All they have to do is file an amendment with the Attorney General’s office—this involves filling out a form—and as soon as the amendment lands on the AG’s doorstep, it’s approved.

Another interesting aspect to marketing a development isinventory control. Developers don’t put every apartment in the building on the market at the same time.

They don’t want buyers to be confused by being offered too many properties. So if somebody else beats you to the one you want, ask the broker if any others like it will be coming on the market.

If the one you didn’t get is the last one like it, and you want it enough to try to outbid the buyer who got it which results in a bidding war, the developer will file an amendment raising the price on that unit to a higher level than what he actually expects to get.

The developer may not even tell you what the new price is. Normally, he will ask you and your rival buyer for your best offers, and he will decide between them.

Do not expect to negotiate the price on an apartment in a new development. You can always try, and any offer has to be presented, but typically the prices are set in stone.

Of course, when you buy after seeing only a floor plan rather than the actual space, there are many more questions you need to ask. Do the marketers have pictures of what the view will be like on the floor you’re interested in? How high will the ceilings be? Where will the air conditioning equipment be?

It’s not a bad idea to ask an engineer what other questions you should be asking. And from an esthetic standpoint, make sure you see samples of the flooring, the tile in the kitchen and bathrooms, and any other samples they have. Ask to see an artist’s rendering of the lobby.

This is not meant to scare you away from new developments. My late husband and I bought an apartment in one more than 26 years ago, before there was glass in the windows or wood on the floors. I have always been, and continue to be, very happy there.

Just make sure you do your homework.


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