By James McGrath
Just when you thought buying an apartment in NYC couldn’t get any more complicated or costly, you start to think about closing costs. The sheer number and size of a buyer’s closing costs can at best be overwhelming and at worst a deal breaker so it’s important to have a rough sense of how much closing costs are in NYC before you start looking at apartments.
Buyer closing costs are everything that gets tacked on after you agree on a price with the seller. It includes taxes, fees and services charged by the government, bank, management company, insurers and your attorney - everybody gets a piece!
Different fees apply to different types of transactions and they can be significant. On the low end - say an all-cash co-op under $1,000,000 - fees could be as low as a few thousand dollars. Meanwhile if you’re financing new construction, buyer closing costs are easily 5% of the purchase price and can even get over 6%. As if new construction wasn’t expensive enough!
It’s also important to realize that most buyer closing costs are cash costs. In other words, you won’t be able to roll them into the mortgage. This can significantly increase the amount of cash you need to bring to the table. Buyer closing costs of “just” 2% of the purchase price would still require a typical buyer with financing to bring 10% more cash to the closing table.
While we recommend all buyers read this post first, you can jump straight to estimating your closing costs using Yoreevo’s closing cost calculator.
The mansion tax is probably the best known buyer closing cost in NYC. Up until 2019, the mansion tax was a simple 1% of the purchase price for any real estate transaction of at least $1,000,000. In March 2019, the rates were increased for transactions $2,000,000 and up. You can find the detailed table in our dedicated mansion tax post.
It’s important to note the mansion tax is binary - it’s $0 if you buy an apartment for $999,999 and $10,000 if you buy one for $1,000,000. This is why it’s extremely rare to see an apartment close right at $1,000,000.
There’s not much room to avoid the mansion tax as it applies to all types of real estate - co-ops, condos and houses. However, if you’re looking at an apartment just over the $1,000,000 threshold, you might be able to get back under it with a commission rebate as it’s treated as a reduction to the purchase price. Other than that small price band, it’s pretty clear cut - you have to pay.
We would consider the mortgage recording tax the most surprising of NYC buyer closing costs because it’s a little complicated and a significant amount of money.
What is it exactly? According to New York State, it is “a tax on the privilege of recording a mortgage on real property located within the state” - what a privilege!
In New York City, the mortgage recording tax is 2.05% of the mortgage amount if it’s less than $500,000 and 2.175% if it’s $500,000+. The small bit of good news is your lender usually chips in 0.25% so your net responsibility is 1.8% or 1.925%, respectively. An even smaller bit of good news is NYC throws in the first $30! We're not sure if that's supposed to be a joke but money's money!
If you’re financing 80% of your purchase, the mortgage recording tax will be about 1.5% of the purchase price so it's significantly larger than the mansion tax!
So why is this one of the more surprising buyer closing costs? Because it doesn’t get a lot of press and only applies to real property. As a reminder, real property includes condos and houses - property where you get a deed to that specific property.
Conversely, the mortgage recording tax does not apply to personal property which means it’s a big fat $0 on co-ops. When you buy a co-op, you’re actually buying personal property - shares in the building and the proprietary lease to live in a specific unit. No deed, no real property, no mortgage recording tax.
Even if you’re looking at a condo, you can potentially avoid some of the mortgage recording tax with a CEMA. A CEMA is when you take over the seller’s existing mortgage. That requires negotiation and a good amount of paperwork so make sure to explore that possibility early in the transaction.
We have a dedicated mortgage recording tax post which goes into more detail about this buyer closing cost.
While not as significant as the mortgage recording tax, title insurance is another buyer closing cost that sneaks up on buyers because it’s not well known.
Title insurance protects the buyer (and their lender) from claims on the property. What could that mean?
Say the seller renovated their kitchen but never paid the contractor. The contractor might file a construction lien on the property with New York State. The contractor now has a claim on the property. Theoretically, this would be discovered during due diligence but things happen - it wasn’t initially filed properly, the state lost it, your attorney missed it, etc.
With a title insurance policy, buyers are protected from this type of claim after closing. Remember, in the example above, the lien was on the property - not with the seller - so the lien would be your problem once you close.
A simple way of summarizing title insurance is it ensures you’re buying the apartment and only the apartment. If there are any unwelcome surprises down the road, you’re covered. A title insurance policy lasts as long as you own the property and costs about 0.4% of the purchase price.
When buying a condo, you will virtually always be required to purchase title insurance for a variety of reasons. On co-ops however, it's rare to purchase title insurance as you are not buying real property.
Given the magnitude of the items above, buyers will be happy to know their attorney will be one of the smaller buyer closing costs.
Unlike most other types of attorneys, real estate attorneys typically charge on a per transaction basis, not hourly. Whether your purchase is a breeze or contract negotiation gets complicated and drags out for weeks, the price is fixed.
Ballpark real estate attorney rates are $1,500 to $3,000 per transaction. That being said, some will charge a few hundred bucks and others get over $5,000.
When you’re choosing an attorney, it’s very important that regardless of price, they conduct thorough due diligence and look out for your best interests. Technically, every attorney should but Yoreevo has been involved in transactions where attorneys cut corners.
Once, after an attorney represented the building “seemed” to be in good financial shape, we discovered about 20% of the building’s owners were behind on their common charges. Big problem? Not necessarily but certainly something that should have been mentioned.
To avoid situations like that, it’s best to ask a friend or your real estate broker if they can recommend someone they have worked with before.
While not material, purchase application fees are one of the more obnoxious buyer closing costs. When your condo or co-op application is submitted, there will be fees associated with processing it.
Most applications will require a processing fee, credit check fee, financing fee and our favorite, a move-in fee. In one of Yoreevo’s transactions, there was even a substantial messenger fee even though we dropped off the application!
Before you make an offer on a property, you can request a copy of the purchase application so you know what you’re looking at but all in, expect to pay $2,000 - $3,000 for these odds and ends.
We’ll also throw financing fees in this section as they are similar to application fees. Financing fees are charged by your bank to execute your mortgage. They include application fees, appraisal fees and the bank’s attorney. All in, plan on around $2,000 for financing fees.
Sometimes sellers will try to pass their closing costs on to you.
The only time this should not be a surprise is with new development where sellers expect you to pay the transfer taxes and other costs. At 1.825% of the purchase price, transfer taxes are significant and with other items, new development closing costs can easily be 2% more than a resale.
If a seller is asking you to pay something else like a flip tax, that's something that should have been disclosed from the start. Unscrupulous sellers and agents sometimes slip these into the deal sheet after an offer has been accepted. This is the equivalent to raising the price and should not be tolerated.
If you find yourself in such a situation, talk to your broker and attorney. They’ll be able to tell you if the seller is trying to pull a fast one.
The short answer is no - most buyer closing costs are not tax deductible. Taxes such as the mansion tax and mortgage recording tax may be added to your cost basis and thus shield capital gains when you sell. Talk with your accountant to dig into specific closing costs and see how they apply to your situation.
Most buyers will find real estate’s main impact on their tax return will be mortgage interest and, less so after tax reform in 2017, property taxes.
It’s pretty much impossible to avoid most closing costs but there are steps you can take to minimize them.
The easiest way to save on closing costs is to focus on co-ops. With a co-op, you’ll avoid the mortgage recording tax and title insurance. Right there, you’ve saved about 2% of the purchase price.
And while the government is not going to negotiate, everyone else might. Will your bank waive that application fee? Could your attorney take $250 off their fee? You won’t find out unless you ask. These improvements won’t move the needle but they’re small victories!
The most effective way to reduce your closing costs is to ask your real estate broker for a commission rebate. Most buyers are unaware this is even an option so even if you don’t work with Yoreevo (although we hope you do!), make sure to ask for a rebate. Buyer broker commissions are almost always 2.5% or 3% of the purchase price so even if you only get a small portion of that, it can offset a large chunk of your closing costs!