How To Buy an Apartment in New York City and Not Get Screwed
I recently purchased my first New York City apartment. There were some serious lessons learned along the way. So my hope with this article is to provide some instructive advice on not only how to buy an apartment in New York City, but how not to get screwed in the process.
There are some sharks in the New York City real estate waters. From brokers to lawyers and banks, you’ll need to navigate them and try to avoid getting bit. Because if you’ve ever sat at a closing table for any piece of real estate, you know that all parties try to suck as much money out of you as possible.
Everyone is trying to get paid. And for those in the industry, it’s a volume business. Keep that in mind when a broker is trying to rush you through a deal, or when your attorney wants you to immediately settle on a negotiation point. They want you to reach the finish line as quickly as possible. They won’t get paid in full until you do.
By way of background, I am not a real estate broker. Just your average buyer who purchased a studio apartment (condo, not co-op) in Midtown Manhattan with his wife. I am a lawyer, but not a real estate lawyer.
Although I do have almost a decade of experience working on Wall Street trading floors. Needless to say, I’ve had my share of run-ins with some of the world’s suavest and skeeziest characters. But to be fair, most are trying to do the right thing.
The real estate industry by contrast, particularly in New York, is like the Wild West. It’s effectively unregulated. If someone at a bank wants to market or negotiate a swap, for example, they generally have to do so on a recorded line (among many other requirements).
Brokers can do and say almost anything with little accountability or oversight. Unless it’s in writing, if there’s a dispute, it’s usually a game of “he said, she said.” More on how to hold brokers accountable later.
Find a good New York City real estate broker
Note that I wrote “New York City.” The first piece of advice here is to find someone who knows the market well. Your friend who has a New York real estate license, but works primarily upstate is not who you want representing your interests in the city. Neither is someone who may have helped you purchase a house on Long Island, for example.
You need your own New York City shark who will give you key insights into different neighborhoods and comparable properties.
So if you’re looking in Manhattan, find someone who not only knows Manhattan, but is well-versed in the specific neighborhoods you’re interested in. One broker we encountered proudly stated he never went above 14th Street. Another broker we spoke to rarely went downtown (below 14th Street). Some specialize in certain Brooklyn or Queens neighborhoods.
FInd a broker that specializes in the neighborhoods you want. Otherwise, you’ll be playing battleship in the dark, and they’ll serve more as a glorified admin than as your broker.
But how do you find a good broker?
That’s tough. It’s not like Ryan Serhant is available to everyone.
My wife and I found ours by going to open houses. Scouring listings on websites like StreetEasy and reaching out to listing agents. We met a few and found one we liked. And you don’t need to use them for the listing you found them on. If you’re interested in a different property, you can ask them to represent you on it.
The broker who represented us, however, was also representing the seller. So he was operating in a dual agent capacity, which is not completely unique to New York, but it’s illegal in some jurisdictions. For good reasons.
The pros and cons of dual agency
Coming from the legal industry, it’s anathema to me that I could represent both sides of a deal. Fairly. The conflicts are too great.
Somehow the New York real estate industry was able to make it legal. Although the New York Department of State does warn against it.
I guess it’s suckers like me who keep it alive by agreeing to dual agency.
That leads to our first pro: convenience. You found a listing agent on a property you’re interested in, but don’t have a broker. You could go find a different (random) broker or work directly with the listing agent to buy the property. If you’re willing to take the risks (which we’ll get to) of dual agency representation, this could significantly streamline the buying process.
It could also give you greater bargaining power. For example, if the seller is not willing to come down on price, but you’re close, the broker (who is getting double commissions if the deal closes) may be more willing to forgo a percentage point or two on his/her commission to reach a deal. Brokers typically take 3% for representing one side, but they can make 6% if they operate as dual agent. Many are happy to take 5% in exchange for taking a few thousand off the purchase price.
All of this comes at a cost to you, unfortunately. The very nature of dual agency representation is tricky and arguably inherently unethical. This is somewhat mitigated by the requirement to get written informed consent from all parties, but the fact remains that a dual agent cannot provide the full range of fiduciary obligations to either side.
Basically what that means is that your broker may advance interests potentially adverse to you if they help the other side. They still have to protect your confidentiality, but you don’t have their undivided loyalty.
So be careful what you say to your broker if you agree to go the dual agent route. What you say could be used against you.
Scrutinize every broker representation
Regardless of dual agency, make sure to scrutinize everything a broker tells you. That doesn’t mean asking for documented proof of everything they represent, but it does mean asking good questions.
For example, if they tell you the apartment has been gut renovated, ask what they mean by that. We had a broker who represented this initially. A few questions later it became clear that his definition of “gut renovation” really meant cosmetic changes to the bathroom and kitchen.
Try to get any of these more material or important representations in writing. Email is sufficient. If there are problems down the road, it will be easier to reference.
Keep in mind though that the New York City market can move fast. If you ask too much all at once, prompting long back-and-forths, you may be beat out by another offer. You may also encounter a seller’s broker who doesn’t want to deal with you.
But these questions are important because once you own it, there’s little recourse for problems you discover.
Strongly consider an inspection
For some reason, inspections are not too common in New York City real estate. When we purchased a house outside of New York, there was no way we were forgoing an inspection. But in the city, the thinking goes that the condo homeowners association is responsible for major building repairs and therefore, anything specific to a unit is likely minimal at worst.
At a minimum, make sure to check that all appliances work, faucets are operational, and there aren’t any obvious issues. If you are not in a bidding war or concerned about losing out to a buyer who will forgo inspection, get an inspection. They are only a few hundred dollars, all of which go a long way towards giving you peace of mind.
Had we not rushed into purchasing our apartment, I would have opted for an inspection. They may have discovered that we had a faulty shower diverter, which we experienced during about our fourth shower in our new apartment. So much for gut renovation! Luckily in a New York City apartment, you should have a superintendent or handyman who can help.
Understand the building’s costs and finances
So much of your monthly costs when owning a New York City apartment are tied up in common charges, property taxes, and any current or planned assessments specific to the building. Understand all of those costs before making an offer. You should also understand how much it will cost per month for homeowners insurance. Shop around.
One often overlooked area is understanding the building’s finances. You may like an apartment and its location, but if the building has almost no cash reserves, it could suddenly be very expensive to live there if the building is hit with an assessment. God forbid the elevator breaks!
Make sure any building you make an offer on has at least some reserves for that rainy day.
Also keep in mind that some neighborhoods in New York City have notoriously higher common charges than others. Battery Park City, for example, may appear affordable on the listing prices, until you look under the hood and discover insane common charges (which ultimately affect the appreciation of those properties).
Not all of the Battery Park City buildings warrant those fees. It’s due to the fact that all of the buildings pay rent to the Battery Park City Authority. They don’t even own the land underneath them.
Make sure you understand if any neighborhood arrangements could affect your common charges or property taxes, either now or in the near future.
Where to obtain financing
Most buildings will not accept financing from just anywhere. They usually want to work with a bank with a New York City branch. They want a bank that knows the building, saving them time and effort when having to fill out questionnaires for underwriting. They also want a bank that knows the city generally.
If you try to go the ex-New York City bank route, as we did initially, you could run into warrantability issues. For example, if a single owner, such as the sponsor, owns over 20% of the units in the condo association, some banks outside New York City may not be willing to give you a mortgage. There are a number of other reasons why a condo may not be warrantable. So if you do want to get financing for a New York City apartment from a bank outside the city, make sure everyone is clear on warrantability from the beginning.
It’s otherwise an easy way to kill a deal. Or you may find yourself scrambling for new financing at the 11th hour.
Also keep in mind that most seller’s brokers or listing agents will not take you seriously if you are trying to finance more than 80% of the purchase. So if you plan to put down less than 20%, reconsider whether you’re in the position to buy. Not only will you struggle in terms of credibility, but you may also have trouble getting that type of financing from a New York City bank.
So if you want to save yourself time and hassle, plan to put down at least 20% (more if you can!) and go to any number of banks with a presence in New York City. You could go to big banks like Chase or Citi, but in my experience they offer some of the worst rates. I’ve found local New York City banks like First Republic or more mid-tier banks like U.S. Bank are the most competitive.
Avoid non-bank lenders like RocketMortgage unless every party is aware and agrees upfront. It may sound silly, but just as many buildings in New York City are particular about what banks they are willing to work with, non-bank and ex-NYC lenders are particular about things like warrantability. Don’t kill your deal over financing.
Negotiate fees
There are numerous fees when buying a condo in New York City. From recording the mortgage (if you get financing) to transfer taxes, fees are usually divided between the seller and buyer. There’s even a mansion tax for any apartment that costs over $1 million (1% of the price!).
It’s industry standard for the seller to pay some of these fees, but everything is negotiable.
For example, usually the seller pays transfer taxes. But if the unit is part of a new development or if it’s still owned by the sponsor of a development, it’s standard for the buyer to pay transfer taxes.
The apartment we purchased was from the sponsor, so we were expecting to pay these taxes, which amounted to almost $20,000. Not an insignificant sum in the least.
As part of the negotiations, we sent back edits to the purchase agreement that put the onus of paying transfer taxes on the seller. They never rejected the edits. I’m not sure if they missed them or if they were simply in agreement, but by the time we closed, the seller paid ~$20,000 more in fees as a result of a few redline changes.
It doesn’t cost anything to ask or propose edits.
The same is true for the team you will assemble. From the bank (if getting financing), to your lawyer (standard in New York City) and insurance company, you should try to negotiate all of their rates. Shop around so you understand the market and try to get at least three quotes. Otherwise it’s hard to know if you’re getting a good deal.
Talk with the doormen or other building staff
How do you know if you’re moving into a good building? Feel out the doormen and some of the other building staff. Make conversation with them.
How long have they been there? What part of the day do they work? What’s their favorite part about working in the building?
In my old job I always found secretaries and administrative assistants to be some of the best sources of information. They saw everything. If you could break the ice and build relationships with them, you could access a treasure trove of information.
Doormen see it all. From contractors who come in and out of the building, to all of the residents who live their daily lives. They can tell you about any scaffolding outside, any odd features specific to the building, or whether future work is planned (beware of future, unannounced assessments!).
Talk to the doormen. And if you’re really interested in the building, try to talk to the super (superintendent) to understand more about the state of the common spaces. They may be somewhat guarded, but they also want to be good ambassadors of the building and are usually willing to talk.
See a lot of New York City apartments
In closing, my best advice is to see as much as possible. Even apartments in neighborhoods outside your top preferences. You never know what you might like, and while it’s your broker’s job to know the market, you can never know enough yourself.
Especially if you do go the dual agency route. You will need to know what similarly situated apartments are going for in order to conclude whether you’re getting a good deal.
So see everything, ask tons of questions, and be strategic in your negotiations. Everything is negotiable.
And when issues arise (they inevitably will), fight for yourself. Nobody else will – not even your broker – as effectively as you. It’s the surest way to prevent yourself from getting screwed.
The New York City market can be rough, the buying process can be long and painful, but hopefully by employing some of this advice you will be able to spot some of the common pitfalls before they occur.
Good luck.
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