One of the most surprising aspects of buying or selling a New York City apartment—and thus, one of the more stressful—is the amount you'll spend on closing costs, potentially tens of thousands of dollars that get tacked onto the purchase or sale of a home.
For sellers, closing costs take a bite out of the proceeds from the deal, possibly affecting your future plans. For buyers, closing costs can have a real impact on budget, in some cases persuading you to buy one apartment over the other. “When you’re considering that co-op that you like versus that condo that you like, it’s not just the purchase price, it’s the closing costs as well,” says Doug Perlson, founder of brokerage RealDirect. “When the typical buyer or seller is thinking about what their closing costs are going to be,” he adds, “they inevitably underestimate because they don’t take into account a lof the smaller items.”
[This story originally ran in March, 2015 and has since been updated with new information.]
If you’re jumping into the market, do it with eyes wide open. Read on for an overview of how to estimate your closing costs, as well as a few ways to save:
What are closing costs?
Along with a laundry list of administrative charges—a $100 UCC-3 filing fee here, a $250 lien search charge there—the big ticket items are the broker’s commission, taxes, mortgage expenses, attorneys’ fees and building fees. Some, like move-in and move-out fees, are the same across the board, while others depend on the sale price, as well as what kind of apartment you’re dealing with (condos have higher costs for buyers) and whether you’re getting a mortgage or not.
How much should I budget?
Below is a general guide, though, of course, the actual sum will vary widely. To estimate your costs, you can use a calculator like this one from RealDirect.
Buyers: 2 to 4 percent of the cost of the apartment
A good rule of thumb is to set aside roughly 2 to 3 percent of the purchase price or 3 to 4 percent if the apartment is over $1 million (more on this later).
Closing costs will be higher if you’re buying a condo. First off, you’ll have to cover title insurance. The state determines rates for the insurance itself, and there are also various administrative charges, so expect to spend about $3,000 to $4,000. Co-ops don’t require title insurance, since technically there’s no transfer of title for real property, since you’re buying shares in a corporation.
Secondly, if you need a mortgage to buy a condo , expect to pay $2,000 to $3,000 for bank fees, including your bank attorney’s fees and an appraisal, which may start at $500 and climb quite a bit higher, depending on the purchase price. You’ll also have to cover a mortgage tax of 1.925 percent for loans over $500,000 or 1.8 percent for loans under $500,000. Again, this only applies to condos.
The last big charge is for attorney’s fees, which vary quite a bit, but tend to range from $2,000 to $5,000 for lawyers who specialize in real estate deals. The cost will go up if the deal is more complex—say, if you’re buying two apartments that you plan to combine, or you're setting up an LLC to buy a condo—regardless of whether you’re buying a condo or co-op, says Steven Hafif, a real estate partner at law firm Abrams Garfinkel Margolis Bergson LLP.
Sellers: 8 to 10 percent
Sellers can expect to pay a lot more than buyers, largely because they have to cover the brokers’ commission, which is traditionally 6 percent (split equally between the listing and buyer’s brokers). (Though when the market is in a cycle that favors sellers, it's more possible to negotiate this down to around 5%.) The other big charge is a transfer tax of 1.825 percent if the sale price is over $500,000 or 1.4 percent for deals under $500,000. Both these items apply equally to condos and co-ops, as do attorneys’ fees of $2,000 to $2,500, depending on the complexity of the transaction.
Also, note that some co-ops have flip taxes of 2 percent or thereabouts, and sellers are usually the ones who cover this cost, Hafif says. That said, this is one area that could be open to negotiation. "The buildlings will say who they consider the flip tax to be payable buy—in better buildings it tends to be the purchasers, and in other buildings, it's the seller," says real estate attorney Bruce Cohen. "However, that can also be negotiaable. And the building doesn't really care where it comes from, as long as it gets paid."
The sponsor’s closing costs
One of the most shocking budget items for buyers of new construction is that they’re on the hook for the developer’s closing costs, including transfer taxes and attorneys’ fees, as well as their unit’s share of the super’s apartment, if applicable. This also applies to sponsor units in co-ops. Altogether, that can add up to hundreds of thousands of dollars, depending on the purchase price, says Tyler Whitman, head of sales at the brokerage TripleMint.
Less surprising than just badly named, this extra 1 percent tax—paid for by the buyer, not the seller—applies to any purchase over $1 million, even if said purchase is a 600-square-foot apartment. For this reason, it's not uncommon in negotiations for the apartment's price to get knocked just under the $1 million mark to avoid this extra expense.
Most condo and co-op buildings charge move-in and move-out fees, which can range from a few hundred to a couple of thousand dollars each, and board application fees of $500 to $700, our sources estimate. Some newer, fancier buildings will charge more to protect their hallways and lobbies, whereas some older buildings set their fees long ago and haven’t increased them, contributing to quite a bit of variation in the cost, Perlson says.
"When you apply, the board should send the prospective purchaser or the broker a list of what is needed, as well as fees," says Robbie Gendels of mortgage lender National Cooperative Bank (FYI, a Brick sponsor). "On our end with mortgage fees, it's pretty straightforward. But each building is different, so I tell prospective borrowers that they need to makes ure they're getting the whole picture."
You’ll pay the same amount whether you’re buying a studio co-op or the penthouse at a glitzy condo tower, but in many cases, the fees are deposits, so you can expect to get the money back if you don’t damage anything. Also, you might pay these fees at the closing or earlier during the process, when you’re submitting the board application.
Where can I cut costs?
1. Save on the broker's fee
Sellers: At 5-6% of the sale price, a broker’s commission is by far the biggest closing cost associated with selling an apartment. Aside from trying to negotiating the fee down, consider working with a brokerage that rebates part of its commission to you.
For example, right now, sellers who list their abode with Prevu (a Brick Underground partner based in NYC) pay zero commission to Prevu, a savings equal to 2.5 to 3 percent of the sales price. Participants in the brokerage’s “Smart Seller” program agree to show their apartment themselves to potential buyers, while a Prevu agent handles the more challenging aspects of selling in NYC—such as distributing the listing across all relevant public and broker-only websites, negotiating with buyers, preparing a co-op or condo board package if the buyer doesn’t have a broker, and more. Sellers choose whether to offer a commission to buyers’ brokers to entice them to bring buyers to the apartment (a 2.5% commission is highly advisable; if a buyer comes without a broker, sellers pay no commission at all). TripleMint (another Brick Underground partner) rebates sellers up to 1% of the commission. RealDirect offers marketing plans that fall somewhere between “for sale by owner” and brokered transactions for a 1 or 2 percent commission (plus the buyer’s broker's commission).
Buyers: To partially or totally offset your closing costs, work with a brokerage that offers a buyer’s rebate on its commission. For example, if you do some legwork yourself by viewing properties without an agent, an agent at Prevu (a Brick Underground partner) will handle pretty much everything else, including advising you on the right price to offer, preparing your offer, negotiating with the seller, and assembling the board package you’ll need to prove your worth to a co-op or condo board. As a participant in Prevu’s “Smart Buyer” program, you’ll pocket a rebate of two-thirds of the commission paid to the buyer’s broker at closing. On a $1 million condo with a 6% commission (split 50-50 between the seller’s broker and buyer’s broker—so in this example, 3% each), the rebate equals 2% of the purchase price…a cool $20,000.
2. Arrange the deal to your advantage
If you’re buying a $2 million condo, there’s not much you can do about paying the mansion tax. But if your purchase is close to the $1 million mark, there may be a way to structure the deal to avoid the extra assessment. For example, you could work out an agreement with the seller to buy some of their furniture or rent the place for a few months, and keep the purchase itself under $1 million, Perlson suggests. (Of course, consult a legal and/or tax expert on this to avoid running afoul of the law.)
3. Buy new—in a building with a hefty tax abatement
Assuming the apartment fits within your set budget range—and the savings aren't canceled out by the expense of covering the developer's closing costs, as discussed above—buying into a building with a heavy tax abatement can significantly lower the cost of your monthlies for years to come (more on that here).
4. Buy almost new
A newly built condo is already going to be pricier than your average co-op; factor in the expense of paying the developer’s closing costs, and it can be quite a bit more than a similar apartment that’s only slightly used. “A lot of people come in wanting new construction, but if they can wait for the first resale in new construction, that’s a great way to save,” Whitman says.
5. Shop around for a mortgage banker
Some loan officers will compete to get your business by offering to cover various expenses, like the credit check or UCC filing fee, which can save $50 or $100 here and there, Whitman says. (Of course, it’s still probably the smartest move to choose a mortgage based on the best interest rate.)
6. “Splitter” the difference
If you’re getting a mortgage and your seller is still paying off their own home loan, you should ask your attorney if a "purchase CEMA" could work for you, Hafif says. This little-known mortgage maneuver involves the buyer taking over the seller’s mortgage, and can save both parties thousands of dollars in transaction taxes. (Read more here.)
Where should I pay full price?
While cut-rate legal services are available, this is one area where it pays to go with someone who’s responsive and knowledgeable about New York City apartment sales, even if they charge $1,000 more. You don’t want an attorney who slows down a deal because they don’t answer their phone, or one who overlooks a key clause in the contract that leaves you unprotected.
“You can totally find an attorney who will do it for $1,500, but I’ve worked with probably 150 attorneys on various transactions that I’ve done in the city,” Whitman says, “and it is the one area that I can guarantee you, you get what you pay for.”
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