In New York City real estate, just when you think you’ve reached your limit, there’s always more. Enter: the infamous closing costs. These fees are substantial and in addition to the purchase price. Many buyers find them shocking and disheartening at the closing table.
The term “closing costs” can encompass the friction costs associated with the resale of condos and co-ops, as well as new construction. Each one has a nuanced cost specific to that type of ownership, such as attorney, brokers and bank fees, capital contributions, the mortgage filing recording tax, transfer taxes, title insurance (condos and townhomes), the flip tax (for co-ops), the mansion tax (if the purchase is over $1 million), and a portion of the Resident Manager’s Unit [RMU] (if in new construction).
When buying or selling a property, the total sum of closing costs can be hefty, sometimes as high as 10 percent over the purchase price. A buyer will typically pay between 2 percent to as much as 6 percent on a resale, depending on whether it is a condo, townhouse or co-op; that amount can be substantially higher for new development purchases. Conversely, a seller who originally bought into new construction and had to pay transfer taxes with that purchase now has to pay them again when selling.
Those purchasing in a new development should be aware that additional breadth of friction costs will be incurred, as the building has not yet been occupied. Those fees include contributing one to two months of common charges to the building’s reserve fund to comply with Fannie Mae and Freddie Mac loan requirements, as well as purchasing a portion of the Resident Manager’s Unit [RMU] if the building has a resident manager or superintendent.
All properties listed for over $1 million are subject to adjusted mansion taxes, which are based on a sliding scale determined by the sales price, in addition to transfer taxes typically paid by the sponsor (i.e., the developer).
According to StreetEasy, a third-party listing site for New York City, “A good rule of thumb for buyers is to be prepared to spend 2-5% of the purchase price in closing costs, and expect the percentage to be on the higher end for condos, townhouses, homes over $1 million, and new developments.”
*Table provided by StreetEasy – Exact mansion tax rates are as follows:
|
Mansion Tax Rate |
Purchase Price |
|
1.0% |
$1,000,000 – $1,999,999 |
|
1.25% |
$2,000,000 – $2,999,999 |
|
1.50% |
$3,000,000 – $4,999,999 |
|
2.25% |
$5,000,000 – $9,999,999 |
|
3.25% |
$10,000,000 – $14,999,999 |
|
3.50% |
$15,000,000 – $19,999,999 |
|
3.75% |
$20,000,000 – $24,999,999 |
|
3.90% |
$25,000,000 or greater |
For example, the mansion tax is 1.25% for properties listed between $2 million and $2.99 million, 1.50% for homes between $3 million and $4.99 million, and as much as 3.90% for a property with a sales price of $25 million.
This amount is compounded by the combined city and state transfer tax, which has also increased substantially, going from a flat rate of 1.825% (regardless of the sales price) to a sliding scale model, as outlined below:
- 1.4% for sales below $500,000
- 1.825% for sales between $500,000 and $3 million
- 2.075% for sales of $3 million or more
Therefore, a buyer purchasing a property for over $3 million could end up paying nearly 7% of the price just for the mansion tax and transfer tax.
Consider this only-in-NYC scenario: In 2019, billionaire Kenneth C. Griffen bought a penthouse at 220 Central Park South for a record-breaking $238 million, making it the most expensive residential sale in U.S. history at the time. Although the exact closing costs are not publicly available, estimates indicate the mansion tax alone would have been around $9.282 million! He would have also had to pay the transfer tax at the 2.075% rate, equaling over $4 million!
The only upside to some closing costs is that they offer the ability to negotiate, depending on the market conditions. When buying in a new construction, for example, the sponsor typically expects the buyer to absorb these costs. However, in a down market, the buyer can potentially pass the mansion and transfer tax costs back to the sponsor, who may be willing to absorb the fees as a concession, thereby adding to the net savings for the buyer.
In some cases, a buyer could even try to incorporate closing costs into the mortgage. Whether or not this happens, ultimately depends on how creative your mortgage broker is in structuring the loan. Certain banks are also able to make exceptions versus maintaining ‘vanilla’ loans that offer no flexibility.
According to an article by Evelyn Battaglia in BrickUnderground, “The responsibility for some of these taxes is not set in stone. When the market is slow, inventory is high, or an apartment is difficult to sell, a seller or developer may be willing to cover some costs to seal a deal.”
Assembling a team of well-versed and experienced professionals can make a substantial difference in the amount you have to spend. The key is identifying what to ask for and when, which can save you as much as 5% to 10% over the negotiation of the sales price, creating a quite compelling deal.
It’s essential to work with people who know how to effectively close these kinds of deals. You should also price shop, comparing quotes from all the professionals you work with, notably real estate attorneys and mortgage brokers (or lenders), to understand the specific costs associated with each transaction and explore strategies for reducing them, as all those friction costs certainly add up.
The person who understands the structure in critical detail and knows how to negotiate it ultimately yields the most success. It is an art form to know how to structure deals effortlessly and garner the most profound value in real-time for their clients.
By exploring strategies for reducing all these costs—and most importantly, examining the total value proposition—you can have a stress-free closing, knowing that you were ultimately able to lock in savings before you even move in!
