Top 5 Contract issues in a NYC new construction sale
The NYC real estate market is
hot right now growing at a clipped pace. People are once again throwing themselves into the eternal fires of bad decision making when they sign a Contract to purchase a new construction condominium in New York. You see one granite countertop and you lose your mind. One small whisper of “We’re getting multiple offers on these” from a real estate broker (a lawyers sworn frenemy) can send a client into panic mode and plunking down money faster than Mel Gibson in Ransom. There are, however, some things that every purchaser should negotiate when purchasing a new construction. Here are the top 5 points you want to speak to a lawyer about when purchasing (and you want to speak a lawyer about this b/c I don’t want to give you the impression that I’m giving you legal advice because I am not and this is my way of writing a disclaimer):
5 Important Contract Clauses in a NYC New Construction Condo
1. Transfer Taxes: This is the kitten caboodle, really. When times were good in the market, the Sponsor of a new construction would mandate that the purchaser paid these. When times were not so good, and the developers were crying and waitressing on the side to make ends meet, they gladly swallowed these fees. Simply put, this could save you tens of thousands of dollars. If you’re on the hook for paying transfer taxes in New York City, you’re shelling out 1.45% of the purchase price (if over 500k), and that doesn’t include the State getting it’s cut as well. At the end of the day, you’re talking about tens of thousands of dollars that you could save by having your attorney negotiate this.
2. Sponsors Fees: When I did my first new construction closing many moons ago (prior to grey hair in my beard) I noticed something crazy-the Sponsor was shoving all kinds of costs onto the Purchaser. Not only was purchaser responsible for the transfer taxes, as mentioned above, but the Purchaser also had to pay for the Sponsor’s attorneys fees (lol, right?) 421-a abatement costs (essentially the money it cost the sponsor to get the building to have a tax abatement-but really, no) minimum of two months working capital, a Move in Fee (beyond me as to why) a fee for delaying the closing, a fee for making their attorney travel anywhere (I cannot look at someone in the eye and attempt to charge this without laughing at how insane it even sounds) as well as a variety of other fees. The good news is you can negotiate these. Again, this could easily save you thousands of dollars.
3. Drop Dead Date: This has nothing to do with your mother in law. Rather, this is a clause that we always place in a Contract of Sale when a new construction condo project has either not closed on any of it’s units or, more likely, doesn’t have a Certificate of Occupancy. In it’s simplest sense, the clause allows you to get out of the deal if the Sponsor can’t sell you this Unit, with a C/O, by a specified date. The rationale behind it is that you don’t want Sponsor holding your 10% deposit until Kingdom Come.
4. Preferred Lender: I genuinely look forward to the day when I never hear the words “preferred lender” again. Essentially, the developer uses a bank to get you a mortgage. The bank claims that because they’re “familiar” with the building, they can easily get your mortgage approved when other banks may not. You are then required to use that bank to apply for a mortgage if you want to buy the Unit. In my experience, this has never, ever, ever worked. More often than not, the lender has the same issues that various other lenders have. Why? Because it’s a building and all banks typically look for the same things. The bigger problem is that the lender has a deal with the Sponsor to finance all 100 units (or 20, or 40, you get the point). If it comes down to a deal that’s favorable to the developer versus you, who do you think that mortgage broker is going to be working for? Who do you think they love? Now, the broker can easily say “it’s beneficial for both sides if I get the deal done.” Absolutely, but in my experience, it’s never really panned out for the borrower. Make sure you have the opportunity to pick the broker you want in the deal.
5. Mortgage Contingency Clause: If you listen to nothing else I’ve written, please listen to this. MAKE SURE you have a mortgage contingency clause in the Contract. This clause allows you to get out of the deal if your bank doesn’t lend you the money for a mortgage. Yes, I know you really love the place and the Sponsor doesn’t want to sell it to you without contingencies. Yes, I know that you have wonderful credit and a wonderful job and you will definitely get a mortgage so who cares and YOLO, right? No. You may be the best driver in the world but you still have car insurance. This is a monstrously important piece of protection in a Contract. It has to be there. No questions asked.