What is a Condo? Everything You Need to Know

When you purchase a condo, you are purchasing real property as opposed to a co-op where you purchase shares in a corporation.? When you own a condo, you own the actual physical space the apartment occupies and it has its own tax lot. You will also own a percentage of the common interest, which includes areas such as hallways, the lobby, and any common outdoor space.

The percentage of the common space owned by each apartment is allocated when the condo is formed and that percentage never changes unless someone combines two apartments.?

Common Charges??

The common charges, better known as HOAs in the rest of the country, will be reported separately from the real estate taxes when you are looking at listings online. As an owner, the common charges represent your portion of the bill for keeping the building running.

The formula for ascertaining common charges for each owner is simply the annual cost of running the building divided by the percentage of common interest owned by each apartment. Every owner pays one twelfth of their annual cost on a monthly basis. Separately you pay your own real estate tax bill to the NYC Finance Department. If you have a mortgage the bank will hold your real estate taxes in escrow and pay them on your behalf.

For most buildings the greatest annual costs are labor and insurance. Other costs include water, cooking gas and garbage removal along with many other ancillary items necessary to keep a building running.?

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Benefits to owning a condo vs coop?

There are fewer hurdles to purchasing a condominium than a co-op. Unlike a co-op, your purchase application is not being scrutinized for approval of your finances to determine if you are a worthy co-investor. While condominiums offer much more flexibility than a co-op, you are still purchasing into a vertical living situation which requires rules.

It is not uncommon for buyers to assume they do not have to fill out the dreaded board package when purchasing a condominium but that is not true.?

While you are required to submit a purchase application for a resale condominium it is largely to collect documents needed by the managing agent in accordance with their fiduciary duties to the building.

Some of the documents that require your signature are likely to include signing off on the building’s fire code and the building rules. For example, House Rules will outline the pet policy or make it clear that simply owning a part of the hallway does not entitle you to use it as a storage area due to fire code.?

The purchase process also differs. Condominiums cannot refuse your purchase based on your finances, they only have the Right of First Refusal. This means that if they want to reject your purchase, the building is obligated to purchase the home from the owner for the same price you are offering to pay. This rarely happens as most buildings do not have enough cash on hand to cover the purchase nor do they want to own and manage an apartment. Being on the Board of Directors is a volunteer position, after all.?

Closing costs?

Closing costs are higher for a condominium than a co-op because one is real property and the other is simply shares in a corporation.

Of all the costs associated with purchasing a condominium, the highest ones are the mansion tax and the mortgage recording tax. The mansion tax starts at 1% of the purchase price for properties priced at $1 million and increases with eight hurdles with the top tax rate at 3.9% for properties priced over $25 million.

The other is the mortgage recording tax, which is 1.925% of your mortgage — if you are taking a mortgage greater than $500K while those below the $500K mark are charged 1.8%. Both of these taxes explain why many properties are priced at $999K and many buyers pay all cash.?

Can you Airbnb a Manhattan condo?

Many homeowners around the country enjoy the benefit of short-term rentals, but in New York City the majority of buildings require you to rent for a minimum of 12 months. You might find a building with a six month rental term minimum, but they are rare.

Even if you find a condo without restrictions on the time you can rent, it is illegal in NYC to rent an apartment on Airbnb for less than 30 days. Any Airbnb rental less than 30 days requires the owner to register with the city and be present for the term of the rental. This has proven to be unpopular with owners and renters alike.

Good news?

The good news about buying a Manhattan condominium is that it is easy to rent out. Unlike a co-op you do not have to live there for a set period of time before you rent it out. You can rent your condo the very day you close and own it for an unlimited period of time. Many owners, especially first-time buyers, find great comfort in this flexibility.

The tenants still have to submit an application for the same reason owners must, complying with firecode, insurance regulations and other disclosures required by law. In addition, there will be a number of fees associated with the rental application along with building move-in fees a prospective tenant will bear. Most renters will ask for a two year minimum lease to offset the cost of these one time fees.?

The downside to purchasing with an easy rental policy is that if you are getting a mortgage and you’re buying into a building with more than 50% of the apartments rented out, it could be more challenging to get a mortgage. These buildings are deemed non-warrantable. Many traditional banks will not finance a condo unless it is warrantable. You can still get a mortgage but going through a portfolio lender may require a higher down payment and increase your borrowing costs.

Other factors which can impact if a condominium is warrantable or non-warrantable includes: one entity owning more than 10% of the building, pending litigation, unstable finances or more than 35% of the condo complex being dedicated to commercial space.?

Can you renovate a NYC condo??

You can renovate a condo but this does require approval. Buildings want to be certain your plans do not negatively impact the structural integrity of the building. For example, if you are planning on installing a washer and dryer into an apartment where the building’s plumbing is not sufficient for the strain, you could end up causing leaks.

Plumbing, electricity and moving walls are the big three items which need approval. Simply painting or replacing bathroom fixtures or appliances does not require approval. However, your service providers will be required to provide evidence of sufficient insurance before they enter the building.

Renovating an apartment ultimately increases the value of that home and that is in the overall best interest of everyone who owns an apartment in the building. None of the rules are meant to be punitive or pass judgment on your design choices, they are simply watching out for the best interest of all.??

Homeowner Responsibilities

When you purchase a condominium, you’re purchasing real property which comes with real responsibility. This can be challenging when a long-term renter decides to purchase. They are accustomed to reaching out to the landlord to facilitate repairs. Homeowners are responsible for maintaining everything inside the apartment? including appliances, floors, walls and even the heating and cooling system.

Typically, the windows are considered a building responsibility but there is one Upper West side condominium which requires owners to bear the cost of replacing the windows when they renovate. This beautiful landmarked condominium on Central Park West has many casement style windows which can cost up to fifty thousand dollars for just one apartment.

When you purchase a condominium anywhere in the city, the owner is required to have all of the appliances working. You will test each of them just before you close on the apartment. While they must be in working order, if they are old you will have to replace them sooner rather than later. As for heating and cooling, many buildings have PTAC units or heat pumps.

In either case, if these units — which pull in the hot or cold air into your apartment — break down, you will have to pay to have them fixed.? All but the smallest and self-managed condominiums have a superintendent who maintains the building’s mechanical systems and common elements.?

You may be concerned about who will take care of repairs if you live out of town and rent out your Manhattan condo. If you purchase in a building with a managing agent and a dedicated superintendent, most of your concerns will be taken care of in your absence. The managing agent and the Board of Directors oversee the running of the building while the superintendent will handle the emergencies.

Typically, the building staff can also be relied upon to provide recommendations for vendors from painters to electricians to someone to repair appliances. In most cases you will not need to hire an outside managing agent, just remember to give a holiday tip each year to the building staff.

Buying from a Sponsor?

When buying directly from a Sponsor as a first offering you are bypassing the need to submit a purchase application and there is no board to exercise a right of first refusal. However, the procedure to purchase is slightly different than in a resale.?

The attorney general views the purchase of a new development as an initial offering — like an Initial Public Offering for a stock. Therefore the developer must file an offering plan and have it approved before they can publicly announce any apartments for sale. The plan will outline every detail of the development.

What is promised in the offering plan is what you should expect to receive with some minor variations. For example, if the exact appliances named in the offering plan are not available, then the sponsor must have appliances of the same quality or better.

The Offering Plan is where you will find the Schedule A indicating the initial sale price for every apartment, the square footage, the projected common charges and real estate taxes along with their percentage of common elements each apartment owns.?

Before you sign your contract and hand over your deposit, your real estate attorney will read through the entire plan and advise you of any risks before you sign your contract and hand over your deposit. Should you wish to read it yourself, be aware that these plans can be up to 500 pages long!

Transfer Tax

There are additional closing costs in new developments. The biggest additional cost is the transfer tax. All new developments require the buyer to pay the city and state transfer taxes, which is a tax assigned to the seller in the resale market.

There are city and state transfer taxes on every sale and the total is calculated on the price of the apartment. The New York City transfer tax is 1% for properties purchased below $500K and 1.425% for properties purchased above $500K.

The state transfer tax starts at 0.4% for properties purchased below $3 million and is 0.65% for properties purchased over $3 million.

That total amount of the transfer taxes you will owe is then added to the cost of the apartment and the taxes are recalculated on that amount and that is the tax you will pay.

The wait to close

The wait to close is frequently longer than the developer anticipates unless the building already has its Temporary Certificate of Occupancy and the tax lots have been issued by the city. The projected closing date is typically based on the construction schedule assuming everything goes according to plan. Yet there can be unanticipated delays from materials taking longer to arrive to uncooperative weather making construction conditions difficult.

Additionally, there is city paperwork to complete including inspections which lead to the Temporary Certificate of Occupancy and the tax lots, which are required for closings. Coordinating with all of these third parties can lead to delays the developer cannot control.

The walk through and the punch list

One of the great benefits to purchasing a new development is having a perfect new home that no one has ever occupied. During your first walk through, the apartment may have flaws. Unlike a resale, where you purchase “as is”, in a new development sale you are entitled to go through the entire apartment, point out all the flaws and make sure it is perfect.

There is no need to be dismayed if a bathroom cabinet is missing or a tile was cracked during construction. The developer has a crew of specialists ready to sweep through and bring each apartment up to standard.

Capital improvement requirements

If you own a condo, you will be paying a monthly common charge and taxes. However, if the building doesn’t have sufficient funds and a major capital improvement project is required, you could wind up with an assessment on top of your usual monthly payment.

Examples of capital improvement projects include:

local law 11, replacing a boiler or a roof. If you are an investor these added monthly costs will impact how profitable your investment is in the long term. While you cannot predict the future you should not expect your common charges to remain constant. They will go up over time because of inflation and they almost never go down.

If you are buying a primary home and you want to keep your monthly costs down, look for a building with lower monthly costs which also offers a full suite of amenities. This way you will not also be paying for a gym outside of your building.

For example, there are a few larger condominiums in Murray Hill that boast swimming pools, full gyms, roof decks and even an outdoor running track. Yoga studios and libraries for quiet study areas outside of the home can now be found in many newer condominiums especially on the Upper West Side.

Have any questions? Fell free to reach out to me — that’s why I’m here.

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