The Hidden Costs of Buying and Selling Property in New York
The buyer's first step in the search of a dream house is to find a competent real estate broker whose commission (usually 5 percent of the purchase price, but it does vary by broker and is fully negotiable) is ultimately paid by the seller. Once the dream house is located, the broker or buyer's attorney will help the buyer obtain an engineer's report of the condition of the house including, electrical, plumbing and structural systems. Home Inspectors must now be licensed. The buyer may also be advised to obtain a termite inspection; a septic tank inspection and an environmental report of the property to determine if there are any violations of environmental law. Should the buyer decided not to purchase, the buyer has lost the cost of these reports. The buyer also may have to obtain a property survey, but not before the contract is signed.
The buyer's attorney will coordinate the results of these studies, review the contract of sale which is usually drafted by the seller's attorney, and incorporate the seller's obligations to correct defects in or on the property. The seller's costs to correct these defects may be adjusted in the final purchase price which is negotiated between the buyer's and seller's attorneys.
If the buyer is buying a co-op, the purchaser must obtain approval from the cooperative board and a mortgage commitment, however, neither will occur prior to the signing of the contract. The co-op board may charge a fee for this service. If the buyer is purchasing a condominium, the buyer will need to obtain a letter from the condominium management corporation regarding the costs of the common monthly charges. A condominium association fee is customarily charged.
When the contract is signed, the buyer is required to pay a deposit which is held in escrow in a special bank account usually by the seller's attorney. The seller pays a tax on the gains, if any.
Once the contract is signed the buyer's attorney orders a property survey or a survey inspection, a title search and title insurance which are paid by the buyer at closing. In the meantime, the buyer is busy obtaining a mortgage from a bank. The bank will charge the buyer hefty fees including a loan application fee, points , a credit report fee, legal fees for drafting a mortgage, mortgage note, and other related documents. The buyer will need to pay for an appraisal of the property for the bank and a homeowner's insurance policy covering the cost of the purchase. The buyer will have to pay mortgage interest at closing.
Both attorneys are in constant contact with the title company in order to clear up title defects, review the deed, prepare affidavits, powers of attorney with affidavits of full force, easement agreements, and other ancillary documents required by the title insurance company in order to close the sale. The buyer's attorney also makes sure the seller is fulfilling his contractual obligations in a timely fashion. For representing the buyer, the attorney will be paid anywhere from $1,500.00 to $5,000.00 depending on the location, reputation and affiliation of the attorney.
BOTH BUYER AND SELLER PAY TAXES, ALL KINDS OF TAXES! For example, the buyer pays real estate property tax, and the total amount of this tax is usually indicated in the title report. The buyer pays to the mortgaging bank part of the real estate property tax at closing. A three-month prepayment of property tax is due on a New York City residence. The buyer must sign the New York State Combined Real Property Transfer Tax Form TP-584, but the buyer does not usually pay a transfer tax unless the buyer purchases property more than a value of $1 million. Such property is taxed at 1 percent of the purchase price ("the mansion tax").
The seller customarily pays transfer tax in New York State on the purchase price, unless the sale is exempt from a transfer tax. Transfer tax rates in New York City vary depending on the value of the property transferred. The seller will also pay a New York Sate Real Estate Gains Tax on the gains, in addition to the Federal Capital Gains Tax. If the seller is not a United States citizen nor has a Green Card, and the sales price is more than the purchase price and improvements of the seller, there is a hefty tax to be paid called the Foreign Investment Real Property Tax Act (FIRPTA).
In summary, for a house in New York the buyer will be expected to pay the following costs at closing: the entire purchase price less 10 percent paid on deposit; legal fees to the buyer's attorney; legal fees to the bank's attorneys; fees to the title company for searches and title insurance and premiums; municipal departmental searches, certificates of occupancy, survey inspection or new survey; deed recordation, mortgage recordation, mortgage recording tax; homeowner's insurance; short-term interest on the mortgage for the remaining of the month of the closing; adjustments for oil and gas payment or payments for property, town and school taxes paid in excess by the seller for the relative quarter; maintenance fees for the first month if the property is a co-op; monthly charges if the property is a condominium; co-op board fees or managing agent's fees for document preparation; move in fee, recognition agreement, and fee for recording security interest; and a condominium association fee.
The seller, who has already made payments for structural repairs, roofing repairs, and septic tank defects must pay his broker the commission they negotiated , the buyer?s and seller?s attorney for legal fees which vary, the title company for documentary stamps for a co-op; the co-op managing agent for transfer and processing fees, move out fees, if these are not absorbed by the buyer, the New York State Tax Commission for transfer fees, the cooperative board for a "flip-tax", which may be imposed on co-op sellers (variable, but usually 2 percent of the purchase price or a per share fee); the New York State transfer tax and the New York City Tax Collector for the transfer tax; seller's bank to pay off his existing mortgage unless the mortgage is being assumed by the buyer. These documents must also be recorded with the County Clerk. (i.e., the Satisfaction of the Mortgage, UCC-3).
If the buyer and seller are unaware of these hidden costs, the dream house can become the house of horror.
Now is the time to buy, but let the buyer beware.