BY:Daniel M. Wasser
New York City residential real estate is among the most expensive in the world, with selling prices of over $1,000,000 now commonplace. However, the selling price does not fully reflect the true economic cost to the purchaser or the benefit to the seller. In addition to the broker’s commission, there are various transfer taxes, mortgage recording taxes, title insurance costs and other transaction-related expenses that can add significantly to the purchaser’s cost and can significantly reduce the seller’s net proceeds.
The amount of transaction-related expenses will vary based not only on the price of the property, but also on the form of ownership. Condominiums and townhouses are classified as “real property,” and when a purchase is financed, the lender will hold a mortgage as security for repayment of the loan. On the other hand, the co-op shares and proprietary lease which are the indicia of co-op ownership are classified as “personal property,” and co-op financing is not considered a mortgage transaction. In addition, the co-op owner is subject to the terms of the corporation’s certificate of incorporation, bylaws and proprietary lease. Along with provisions relating to the general operation of the co-op corporation, these documents impose conditions on transfers of coop shares, often including imposition of a fee – commonly know as a “flip tax” – on such transfers.
To illustrate the impact of these expenses, we offer the following quiz.
What is the difference in price between a $999,999 condominium and a $1,000,000 condominium?
If you said $1, you are off by $9,999. That is because of the mansion tax – a 1% tax on the purchaser price imposed by New York State on purchasers of residential real estate costing $1,000,000 or more. (If you are in the market for a home, do not count on your broker to remind you of this tax.) The mansion tax applies equally to co-ops and condominiums.
If you are purchasing a new home and the price is close to $1,000,000, try to avoid the mansion tax by keeping the price under $1,000,000.
If you buy a condominium for $1,000,000 and finance $700,000, how much more will you pay than if you buy a co-op for $1,000,000 and finance $700,000?
$18,440. Because co-op ownership is considered personal property, not real property, a co-op loan is not treated as a mortgage and, consequently, the New York State mortgage recording tax does not apply. The condominium purchaser, however, will pay a mortgage recording tax on a $700,000 loan of $13,100 (i.e., 1.875% of the loan amount [1.75% if the loan is under $500,000], less $25). In addition, because the condominium is considered real property, the purchaser of a condominium customarily will purchase title insurance, while the purchaser of an individual co-op unit will not purchase title insurance since the co-op corporation will hold title insurance on the building as a whole. On a $1,000,000 condominium, the premium on an owner’s title insurance policy will be $4,508. Moreover, because of the mortgage loan, the lender will require mortgage title insurance which, in the case of a $700,000 loan, will add $832 in title insurance premiums, assuming the mortgage title insurance is ordered at the same time as the owner’s title insurance. If not ordered at the same time – e.g., if the purchaser were to take out a mortgage months after closing on the purchase – the cost for the mortgage insurance premium would rise to $2,772.
Normally the purchaser of a condominium or townhouse pays a mortgage recording tax based on the amount of the purchaser’s new financing. However, if the seller has mortgaged the property, the amount of the mortgage on which the purchaser must pay the mortgage recording tax can be reduced by the outstanding principal balance of the seller’s mortgage, assuming the seller’s hank can he convinced to enter into a Consolidation, Extension and Modification Agreement (hereafter, a “CEM Agreement”). A CEM Agreement has the practical effect of preserving the seller’s mortgage solely for purposes of reducing the mortgage recording tax. It is not the equivalent of an assignment of the seller’s mortgage, and at the closing the seller’s mortgage will be paid off and the purchaser’s mortgage will become effective. Although seller’s bank will pass through its legal fees (up to approximately $1,000) for the preparation of a CEM Agreement, the savings for the purchaser can he considerable. Unfortunately, the seller’s bank cannot he compelled to enter into a CEM Agreement. We find it useful to add a provision to the Contract of Sale for the seller to cooperate with the purchaser in the effort to cause seller’s bank to he accommodating, and we endeavor to commence discussions with seller’s bank well before the closing.
A client purchases a co-op for $1,000,000, without any financing. One month later, the client is transferred to England and needs to sell the co-op. Fortunately, the market has not changed, and with the help of a broker, the apartment quickly is resold for $1,000,000. What are the net proceeds from the sale?
At best $921,750, and at worst, considerably less. In addition to a 6% broker’s commission, the seller is responsible for the New York City transfer tax in the amount of $14,250 (,i.e., 1.425% of the purchase price [although only 1% on transactions of less than $500,000]) and the New York State transfer tax of $4,000 (i.e., .4% of the purchase price). The transfer taxes and broker’s commission apply regardless whether the transaction involves a condominium or a coop. However, if the transaction involves a co-op, depending on the policy in effect in the co-op, the client could owe the co-operative corporation as much as tens of thousands of dollars for the flip tax.
Enjoy life in New York City, and hope you did not buy at the top of the market.