Pros and Cons of New Development

New development is a category all its own in NYC real estate and includes both ground-up new construction and pre-war conversions (essentially new construction inside of a pre-war building shell). Everyone knows there is a cachet (and price premium) to buying brand new. What are the pros and cons of buying in a new development?

Pros of New Development

1. Floor Plans Designed for Modern Living: Naturally, new developments are designed with today’s buyer in mind: en suite master bathrooms, double vanities, walk-in closets, large open plan kitchens with high-end appliances and vented hoods. New developments tend to maximize their usable square footage by eschewing layout elements often found in their pre-war counterparts, such as long hallways, closed kitchens, and over-sized foyers.

2. Quality of Finishes: To get top-dollar, developers know they have to invest in high quality, eye catching finishes. At a certain price point, that means things like solid slab marble counters, rainfall showers, high-end appliances, solid white oak flooring, and custom cabinets and tiles.

3. Amenities: Standard amenities in new developments include central heat and air, in-unit vented washer/dryers, heated floors, “smart home” features, and premium materials and appliance suites. A larger development might also have a full-scale fitness center (perhaps with a pool), a roof-deck or other shared outdoor space, doormen and concierges, cold storage for grocery deliveries, bike and private storage, resident lounges, business centers, parking, and a host of other amenities for children and pets.

4. No Unknown Renovation Costs or Headaches: Renovating is neither cheap nor easy, and a new development represents the ultimate in a move-in ready product with the home delivered pristine condition all the way down to scuffs on the walls and dings on the floor. A buyer in a new development is paying for finishes so exploring the different options in different projects is a major part of the process, unlike in resale where many buyers focus more on the potential of the space with some updating in mind.

5. That Feeling of Being the First. Most of my clients who have bought in a new development say that the main draw for them was being the first to live in their home. Many new development buyers are repeat offenders who will trade in their home for a brand new model when it’s time to move.

Cons of New Development

1. Higher Closing Costs: Developers almost always seek to shift to the buyer certain closing costs that would ordinarily be paid by the seller in a resale. These “asks” usually include state and local transfer taxes, which come out to 1.825% of the total purchase price for over $500,000, the sponsor’s attorney fees for closing, reimbursement fees, document preparation fees, etc. Even if the buyer does a good job of negotiating who pays closing costs, the buyer will almost certainly have to contribute a couple months of common charges to build up the building’s reserves at the onset -- and possibly even a substantial fee toward a superintendent’s apartment.

2. Higher Monthly Carrying Charges: New development condos, especially in new construction, tend to have substantially higher monthly costs -- both common charges and taxes -- than their resale counterparts. The higher common charges can be attributed to the cost of maintaining amenities, but the taxes are also higher because they are assessed anew, unlike in resale or conversion projects. The taxes can also be unpredictable for those who commit to purchasing in the early stages, when the taxes are mere projections in the offering plan and have not yet been assessed.

3. Unpredictable Timeline: There is always some uncertainty about when a buyer in a new development can finally close on an apartment. And even after closing, there may be further uncertainty about when the amenities and common spaces will be completed and operational. An experienced developer may be able to minimize delays, but much is outside of their control. For example, closings might not begin until a certain number of units have entered contract and the city has completed its many rounds of inspections.

4. New Construction Concerns: While most new development sales come with a guarantee of quality for major systems and the soundness of construction for a certain period of time after completion, it is almost inevitable that there will be some minor issues in the first few years. The building will “settle” (which means, at the very least, cracks in the paint) and there will almost certainly be a leak somewhere. Of course, there are horror stories about major issues -- like pervasive water infiltration -- but these are very rare, especially at certain price points. If possible (i.e. if the building is already built and the unit is ready), we always recommend having an experienced inspector thoroughly go over the property prior to signing the contract.

5. Price: Finally, the most obvious con of buying in a new development is the price premium. Prices for new development tend to run at least 15% higher than older resale inventory, and can be much, much more -- for example, in the last quarter, new development two-bedroom condos in Manhattan traded on average about 43% higher than resale ($2.65M vs. $1.85M). While some of the astronomical price tags have been negotiated (and many quite significantly) down during the slowdown, many new development units (about a quarter) have simply sat unsold as developers have not had to rush to lure buyers in the same way individual sellers have had to do. Developers are in the business of building to make a profit, and also have additional obligations to investors and lenders that limit how negotiable they can be on prices. Ultimately, it is a personal decision whether having a shiny new place is worth the price premium, especially as today’s new construction is tomorrow’s resale.

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Why work with an agent?

Today there is a wealth of real estate information online and many intelligent and capable New Yorkers have begun to wonder why working with an agent is still beneficial. Given that real estate agents still thrive, there's got to be some reason they are useful to prospective buyers, right? An agent...

1) Saves you time. (And true as ever, time is money)

2) Makes you a more informed buyer which makes you competitive in a constantly changing market.

3) Helps you navigate through the complicated process of acquiring a home in New York.

4) Finds the right mortgage agent to arrange the necessary financing.

5) Puts together a strong offer package to be competitive in the market.

6) Negotiates the price and terms of the sale more effectively via collegiality shared among agents.

7) Finds the right attorney to represent you.

8) Assembles the best possible board package to qualify you for acceptance, and takes the load off of the process.

9) Coaches you for the Board interview.

10) Prepares you for your closing.

More Common Questions About Agent Representation:

Should you have one agent from each real state company to have access to all properties? What about broker exclusives? An exclusive listing means that the seller of the property is represented exclusively by a selling agent, not that buyers represented by other brokers cannot view or purchase it. Exclusive listings are co-broked, you will not be missing out on any other agent’s exclusives by working with a Compass agent.

What about Sunday Open Houses? A great way to see many properties in one day is by going to Sunday open houses. If your agent is unable to go with you, ask him or her to register you for the open houses you wish to attend. When you sign in at each place, be sure to put down your name, your agent’s name and your agent’s phone number. This way you will be represented if you want to make an offer on any of the properties you have seen.

Do I have to pay an agent fee? No. Sales commissions are paid by the seller; not the buyer. When a property is co-broked, the commission is shared between the seller and buyer’s brokers. The seller pays the same commission whether there are one or two agents involved, so there’s no out-of-pocket expense or advantage to being unrepresented as a buyer.

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Condo or Coop?

While coop apartments are not entirely unique to NYC, there is no other place where they make up a majority of the housing stock as they do here. The crux of the distinction is that a coop apartment itself is actually not real estate, rather the apartment's owner is a shareholder in the corporation which owns the building and has a lease to reside in the specific apartment.

So what does this mean? It means you still "own" an apartment, but there are some strings attached. Since a potential buyer of a coop apartment is seeking membership in a private corporation rather than purchasing real property, the corporation can pick and choose to whom to extend membership. Thus the dreaded coop board packages and even more dreaded coop interviews. While the corporation can't base its decision to reject a potential shareholder based on membership in a protected class, boards do not articulate the underlying reasons for a rejection which has in the past resulted in the exclusion of minorities. Now it means that a coop board can require disclosure of all financial details and any personal information that will aid in their decision whether to approve a potential buyer. There are some scary boards out there, but most just want to make sure that the purchase is financially stable and will not default on their obligations. Your real estate agent can advise you as specific requirements and will help you prepare a board package.

In addition to the power to approve or reject potential new shareholders, the board can set rules curtailing certain ownership rights. For example, many coop boards restrict the right of an owner to rent out (technically, sublease) their apartments. Others may require that the apartment is used as a primary residence and not as a pied-a-terre.

Other differences exist, but are less significant. For example, individual owners of a coop apartment are not subject to property tax -- again since they don't own any actual real estate. Instead, the whole corporation incurs real estate taxes for the building, and each unit holder pays their share as part of the monthly maintenance charges. Thus there is a single "maintenance" for coop apartments (on listings the "% tax deductible" figure represents what portion goes to taxes), whereas condo or other real estate owners get separate bills for common charges and real estate taxes. In either case, the real estate taxes are tax deductible for individual unit holders and the total monthly charges are roughly equal all other things being the same.

Another example, a "mortgage" on a coop apartment is not actually a mortgage -- the collateral is not the apartment as it would be in a coop or other real property, but rather a lien on the shares in the corporation. For most intents and purposes, the loan is treated the same as a traditional mortgage, at least when dealing with lenders familiar with the NYC market (out-of-area lenders may be unfamiliar with NYC coops and not able to complete the transaction). Beware, however, that a mortgage recording tax of 1.8% (or 1.925% for loans over $500,000) will apply to loans on condos but not coops.

Some distinctions that work in favor of coop ownership? If the buyer is planning to finance part of the purchase price, coops have much lower closing costs as they are not subject to the mortgage recording tax (since it's not really a mortgage...).

Now that we've covered the difference between Coops and Condos, time for the practical part: What does this distinction mean in terms of inventory and pricing in NYC, and why should a buyer choose one over the other?

First some numbers: There are about 175,000 owner-occupied housing units in Manhattan in TOTAL! Manhattan is a very small island and mostly rentals—625,000. Of the 175,000 total owner-occupied units, 155,000 are coops and condos, and 70-75% of those are coops. Not only are condos fewer in number, they are generally about 30% more expensive on average than a comparable coop. Brooklyn is a bit less lopsided: though the resale market is still dominated by coops, the price difference is less pronounced, with coops about 10% less expensive than comparable resale condos.

In terms of available inventory, the number of new listings for condos has been growing while the coop market has been shrinking. The uptick in the condo supply is due mostly to the proliferation of high-end luxury development, which is pushing the relative prices even further apart with condos now about 44% more expensive on average than coops.

With coops generally more abundant and so much cheaper, why pay more for a comparable condo?

First, some purchasers simply may not qualify for or afford a coop. While they are more expensive, condos often require a lower minimum down payment amount so a liquidity-challenged purchaser may not be able to cough up the 20%+ down payment required by most coops. Even if a purchaser can afford the down payment, they may not qualify to purchase under a coop board's financial requirements. Coop boards may set rules on minimum financial requirements or may more informally deny applicants who they do not view as financially viable. The two biggest financial considerations for the coop board are debt-to-income ratio (usually 25%) and post-closing reserves (usually at least a year's worth of mortgage and maintenance payments after closing costs). This means that if a purchaser has limited savings or a relatively low salary, they might not qualify for a coop, or their budget for a coop might be much be much smaller than their budget for a condo, which has no such financial requirements.

Second, a purchaser might want to pay extra for certain freedoms. Like the freedom of not disclosing detailed financial and personal information to the coop board as part of the application process. Or the freedom to sell their apartment to whomever they choose rather than choosing a most qualified applicant and wondering if the board will approve or reject the purchase.

Beyond curtailing certain freedoms during the purchase/sale process, the coop board can also set rules regarding the use of the apartment. Most coops limit owner's ability to rent out their apartments (for example, may rent 2 out of 5 years, may rent for one year with the possibility of extension, may never rent...) whereas condos have no such controls. Some coops may require that the apartment be used as a primary residence and not a pied-a-terre.

There are many other factors that go into the determination of what sort of ownership is right for a particular purchaser, and many purchasers may fall into a gray area: Some coops might work while others won't, and comparable condos might be out of reach financially, so the trick is finding the right apartment based on individual circumstances and goals. Never fear, real estate agents are there to help sort through these considerations and find you the right home or investment property.

For any questions regarding the NYC home-buying process or residential real estate market, please reach out.

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