Construction cranes are everywhere in this city, and new development business is booming.  According to The Real Deal, by the end of 2005, more than 9,000 new condominium units will have come on the market this year.  To put that number into perspective, only 1,300 new condo apartments were offered in 2000; 2,200 units were added in 2001; 2,900 in 2002; 3,000 in 2003; and 4,800 last year.  With the high number of new projects complete with amenities packages not found in older products, buying opportunities and choices abound.  However, caveat emptor—buyer beware—was never more important than when buying new construction.        

 

While some condos sell from lavish showrooms with elaborate multimedia presentations and virtual miniature replicas, others attract initial interest from street buzz—like 15 Central Park West at the former Mayflower Hotel site.  As of this writing, we’re told that there are letters of intent for nearly 40% of the available 202 units at this exclusive 2-tower condo slated for mid 2007 occupancy.  With no real spaces to inspect, and at best only model kitchens and baths to visit, the phenomenon of selling from plans before construction is completed is much like buying a promise.

 

Repeatedly, recent history has demonstrated that a newly constructed condo has more value than the same size condo or co-op resale.  A celebrity architect increases worth.  However because of higher closing costs and the inherent risks and delays in purchasing new construction, buyers must do their homework to prepare and protect themselves.  They are cautioned to be smart consumers:  enlist the aid of an experienced broker, consult with an attorney, and speak to others who have been through the process.  While buyers need worry less about recognized developers such as The Related and Zeckendorf, they should check a developer’s past projects and reputation.  Dealing with novice builders can be uncertain since there’s no past performance to predict quality execution. 

 

New construction closing costs are higher than resale transactions.  In addition to customary fees, new condo buyers must also pay the closing expenses usually paid by sellers—specifically the New York City Real Property Transfer Tax and the New York State Real Estate Transfer Tax—and buyers must pay these taxes again when they sell.  The developer’s legal fees, title and recording charges are also passed along to the buyer.  Additionally, purchasers must put into escrow six month’s worth of estimated taxes to be paid by the sponsor when due, and they must also contribute one to two months of additional common charges to build a reserve fund.  In addition, buyers must pay mortgage recording taxes (if they are financing), a 1% mansion tax for properties over $1 million, any closing adjustments, plus bank and legal fees. 

 

Upon contract signing, 10% of the purchase price is due usually, and much of the balance must be paid before closing at specified intervals to cover construction costs.  Payment schedules, structured differently at each project, usually coincide with specific performance.  A handful of lenders are offering products that lock in a competitive rate for 12-18 months, charging one point for the privilege, a portion of which is credited at closing. 

 

Buyers of new construction should take nothing for granted.  Since typical contracts are “pursuant to the Offering Plan,” both buyer and attorney must read the book-length document that is filed with the New York State Department of Law which spells out the property’s characteristics and features.  A “Special Risks” section enumerates several boilerplate disclaimers.  For example, the sponsor reserves the right to rent rather than sell units, to change unit purchase prices, to adjourn the closing “from time to time,” and to change specified fixtures and materials with “similar substitutes.”  Since square footage is measured from exterior walls, usable floor surfaces may be less than the total listed in the plan.

 

In addition, the Offering Plan catalogues finishes, fixtures, landscaping, security and services.  All appliance manufacturers and model numbers are specified.  If medicine cabinets or towel bars are not itemized, you probably have to buy your own.  Warranties for materials are extended to the first purchaser only.  However, since appliances may have been bought far in advance of actual closing, these guaranties can be tricky.

 

Since the condo’s operating budget will determine common charges, it’s important to review the first year’s projected income and expenses.  Is the sponsor being realistic with estimates?  When does the budget actually begin?  If the condo is delayed by six months or more, the sponsor must amend the plan to include a revised budget; if the new budget exceeds the original by 25% or more, the buyer can rescind the contract and reclaim all down payments. 

 

Since delays are to be expected, flexible timing is a prerequisite for new condo buyers.  A promised August closing can become December or even later.  Since move-ins occur before the building is completely operational, with hallways unfinished and services lacking, adjourning is recommended until staff is on hand and kinks have been ironed out.

 

Walk throughs are critical, so take your broker with you.  Most reputable developers will follow through on your punch list.  However, the offering plan may say that the sponsor is not responsible for normal settling of new construction, in which case, how will sticking doors, warpage, nail pops and scratches be handled?  What about unforeseen problems like ceiling imperfections and noise from air conditioners? 

 

How does a buyer secure the promise of new construction?  With common sense, good legal advice and expert broker guidance.