So, you are considering the purchase of an apartment in one of the new buildings that will soon be gracing our skyline.
Here’s what’s in store:
First you will visit a swanky sales office to view a dollhouse sized replica of the building and computerized renderings of the finished apartments. You will then walk through a model apartment with sparkly virtual views projected in the faux windows and exquisite staging by a famous interior designer, and leave completely convinced...
If it sounds crazy buying an apartment before it is even built, it just might be even more dodgy than you think. There are more risks than most buyers are aware of, and no one really talks about them. So here’s what you need to know.
1. The developer is allowed to deviate up to 5% from the square footage promised before the buyer has the right to walk away from a contract, regardless of how or why the square footage was reduced.
(In a 1,500 square foot apartment, that’s a 9x8 home office space…gone.)
2. There is NO set threshold for cubic square footage deviation. Meaning there is nothing obligating the developer to deliver the ceiling heights promised, or preventing them from installing ductwork or soffits that reduce the usable space in the home. Even if you were to sign a contract that promised 11’ ceilings but you receive 8’ ceilings instead, this is not necessarily an "out" from the contract. You would have to prove in court that the reduction materially reduces the value of the unit.
(A well known real estate attorney I often work with recently represented a buyer who was delivered an apartment with ceilings UNDER 8 feet! Fortunately, the developer was an honest and reasonable person, and when he visited the apartment himself, he agreed completely that it was unlivable and let the buyer out of the contract.)
3. The property taxes listed on the offering plan are only required to be accurate for the building’s first year of operation. If the building is not fully functional on the day it is assessed for these purposes, the taxes will be abnormally low and could even double or triple by the time the building is complete. There are usually clauses buried deep in the offering plan that state that the figures provided are only for the first year, and they typically do not provide estimates for what the taxes will realistically become.
4. Amenities promised (bowling alley, hammam, doggy wash) might not be delivered, even if they are listed in the offering plan. If you purchase your apartment prior to the offering plan being declared effective, as is often the case, the developer has the right to make alterations as they see fit.
5. Remember those sample bathroom walls clad with glittering bookmatched marble from a fairytale village in Sardinia? And the exotic floors of honey-hued tigerwood reclaimed from a monastery in the Amazon? All those beautiful finishes you saw in the model unit are only what they intend to use. But should that dream quarry run out of the product during the course of construction, the developer can make substitutions as necessary.
Remember This When Negotiating
When purchasing an existing apartment, it is the responsibility of the seller to pay the city and state transfer taxes which are a significant 1.825% of the purchase price. However in a new development, it is the buyer's responsibility - tacking an extra $55,000 on a $3 million dollar purchase for instance.
Transfer taxes can be negotiated in making an offer on a new development, especially in today’s slower market. Covering the transfer taxes allows the developer to negotiate and reduce the buyer's out of pocket costs without showing a lower sales price in public record.
The Silver Lining
Now that you know what to watch out for, there are some killer deals out there for the well-informed buyer. There is an abundance of new development inventory, and the subsequent competition has developers offering discounts and concessions, which make for some extremely attractive deals (I can tell you specifically where).
So have your eyes wide open and an experienced broker (moi) and a knowledgeable Manhattan-based real estate attorney on your team, and you too can own your own slice of the next neighborhood Taj Mahal. Forewarned is forearmed as they say.