Is buying real estate in NYC a good idea? What are the steps from A to Z for buying a home in New York City? We’ll go over everything you need to know about buying property in the world’s greatest city in the following article.
Table of Contents:
NYC frequently ranks just behind Hong Kong for the world’s most expensive cities to rent an apartment. At $4,000 or more per month for the average 1 bedroom apartment as of this writing, you could often rent 10 apartments for the same price in many other major cities around the world!
Buying real estate in NYC instead of throwing your money away on rent can be a great idea, especially if the monthly all in costs of buying vs renting makes sense.
Carefully compare the all in monthly expenses of home ownership which include condo common charges or co-op maintenance fees, property taxes, property insurance premiums as well as mortgage interest and principal.
If the sum of all of the above housing expenses is less than what you’re currently paying in gross rent, then the decision to buy is a no brainer.
That’s because you’re building home equity and wealth every time you make a mortgage payment and pay down some principal. You can view these mandatory principal and interest mortgage payments as a sort of forced savings scheme.
Every time you make that mortgage payment, you’re paying down some mortgage debt and essentially putting away some money for yourself.
If the all in cost of your housing expenses less the payment on your mortgage principal is equivalent to your gross rent, then the cost of buying vs renting is roughly equal.
However, keep in mind that you’ll have to pay upfront closing costs if you decide to purchase an apartment in NYC.
You should carefully consider the potential returns on your down payment if you invest it in stocks, bonds or other alternative investments vs the real estate market. Sure, you can make money on your new apartment if it appreciates in value, but that down payment can make you money if invested elsewhere too.
You should also remember that it’s difficult to find debt that’s as favorably structured as mortgage debt. Where else can you get a non-recourse, non mark to market, super long term loan besides the residential mortgage market?
The first step to buying real estate in NYC involves figuring out how much home can I afford. First, add up your gross income as well as your total credit payments. The latter entails anything that might show up on your credit report, such as car loan payments, student loan payments and credit card payments.
The net of the two will give you an idea of what you have left for housing related payments and discretionary spending. Keep in mind that banks and co-op boards are quite conservative and won’t allow you to use up all of your remaining income for housing payments.
In fact, banks will typically only allow a maximum of 43% for your debt-to-income ratio (DTI ratio). This means that the sum of all of your mandatory housing expenses plus other credit payments cannot exceed 43% of your total gross income.
Co-ops can be even stricter, and many co-op buildings have their own set of co-op financial requirements with DTI ratio maximums of often only 25% or 30%. Play around with our handy Home Affordability Calculator to see how DTI ratio requirements can affect your maximum purchase and loan size.
You’ll need a few key players on your team when buying a house in NYC. The first player who can introduce you to all other players is your real estate agent.
Often called a buyer’s agent, this individual will shepherd you through the complex home buying process in NYC and refer you to every other member of your team.
Ask your buyer’s agent for introductions to experienced real estate attorneys they’ve worked with before.
It’s important to work with someone who specializes in NYC real estate transactions and doesn’t just dabble in a variety of fields.
It can be especially dangerous to work with a family friend or distant relative that your parents pushed on you, especially if this person doesn’t work in the city and is unfamiliar with the way real estate transactions are done in NYC.
Check out our article on real estate lawyer fees and read our questions to ask your real estate attorney before you call anyone. Your attorney will play a critical role in your purchase process as they will be responsible for reviewing and negotiating the purchase contract on your behalf.
After you have an accepted offer, your buyer’s agent can introduce you to a home inspector if you wish to get a home inspection. Note that home inspections are typically not done for most condo and co-op transactions, though home inspections are definitely recommended when buying a house in NYC.
Your buyer’s agent can also introduce you to general contractors and interior designers should you wish to renovate and design your apartment after closing. It’s important to get several quotes from different contractors before choosing one.
Cost and schedule overruns are quite common in NYC, and there’s a saying that renovations always cost twice as much and take twice as long as originally proposed.
Buying real estate in NYC involves seeing a lot of properties, especially if you’re new to the city or a particular neighborhood. The only way to know if you’ve found the perfect home or investment property is to check out as many open houses and do as many private showings as possible.
Only after doing so will you have an idea of what you must have and what you really don’t like in a home. Furthermore, you’ll have a better idea of relative value and what comparable properties are trading for. Lastly, you’ll also have a better idea on how big apartments are and you’ll be able to measure square footage better for co-op apartments without listed square footages.
Ask your trusty buyer’s agent to set you up with search alerts that will automatically send you new listings that come onto the market that meet your criteria. Better yet, have your buyer’s agent keep an eye out for you and only send you listings that exactly match what you’re looking for.
If you have time or are a bit of a control freak, you can set up your own search alerts and do all of your own searching online. If you’re open to doing a little bit of work, you may want to consider signing up for a buyer closing credit to earn some of the buyer agent’s commission at closing.
It’s completely legal in New York to receive a buyer agent closing incentive, and the incentive isn’t viewed as taxable income by the IRS, but rather as a concession on price.
The offer negotiation process in NYC is a bit of a Wild West. There are no hard and fast rules on how to counter offer real estate deals in NYC, and it’s common knowledge that real estate offers are not binding in NYC.
Your buyer’s agent will submit an offer on your behalf by email to the listing agent. The offer email will typically contain the following:
After an offer has been submitted, there may be a period of back and forth negotiation until an offer is accepted. We recommend placing offers on multiple properties and not getting emotionally invested in any single property.
Remember that offers are not binding until contracts are signed, which means an accepted offer is rather meaningless when buying real estate in NYC until the seller has counter-signed a contract.
As a result, a seller can walk away from a deal at any point before they have counter-signed a contract. This means that just because you have signed a contract and turned over a contract deposit does not mean the seller is bound to the deal.
You can counter the seller’s advantage of being the last to act in the contract signing process by submitting multiple offers and even getting multiple offers accepted by different sellers.
You can then negotiate multiple contracts to your satisfaction, and then choose one to sign.
Because you have other contracts that are ready to be signed, you can presumably then even give the seller a firm deadline to counter-sign the contract, or else it will automatically be cancelled. This is a much stronger position to be in then negotiating only one contract and then being completely on the hook as you wait for the seller to counter-sign.
The latter situation is extremely emotionally taxing as you can be bound at any time if the seller counter signs, yet you don’t have a deadline for the seller to fully execute the contract. Meanwhile, the seller could be shopping your binding contract to other potential buyers!
Your real estate attorney will play a critical role after an offer has been negotiated and accepted. As soon as that happens, a transaction summary called a deal sheet will be circulated to brokers and lawyers representing both parties.
Once the lawyers are in touch, the seller’s attorney will circulate a draft purchase contract and a contract rider to the buyer’s attorney. The seller’s attorney or the listing agent will also pass along key due diligence information such as the building’s annual financial statements, original offering plan, any amendments to the offering plan as well as the purchase application, if any.
The buyer’s attorney will review and negotiate the contract on behalf of the buyer, and the buyer’s attorney will also review all of the above mentioned due diligence materials. The buyer’s attorney will also review the condo or co-op building’s board meeting minutes in person at the managing agent’s office. The buyer’s attorney will also order a title search and review the title report on the buyer’s behalf.
Once everything has been reviewed and negotiated to satisfaction, the buyer will sign the contract and hand over a good faith deposit, otherwise known as the contract deposit. The amount of the contract deposit is negotiable but is typically 10% of the contract price in NYC. The buyer’s attorney will messenger the signed contract and the contract deposit to the seller’s attorney.
The seller’s attorney will typically get the seller to counter-sign and fully execute the contract within one or two business days. Anything longer would be unprofessional as the buyer is on the hook the entire time the partially signed contract is outstanding.
Once the contract has been counter-signed, the seller’s attorney will messenger the fully executed contract back to the buyer’s attorney and deposit the contract deposit into the seller attorney’s escrow account. At this point, the deal is considered to be in contract!
Getting pre-approved for a mortgage is an important step to take before you start making offers. In fact, it’s important to get a mortgage pre-approval letter before your buyer’s agent starts scheduling private showings for you.
That’s because a mortgage pre-approval letter is a sign that a serious financial institutional has partially underwritten you and shows that you’re serious about buying and capable of doing so.
Once you have a signed contract and a relatively secured deal, it’s a good idea to allow the bank to order the appraisal on your behalf.
That’s because you’ll be paying the non-refundable appraisal fee even though the appraisal is primarily for the bank’s benefit.
You can also choose to rate lock your mortgage at this point, depending on how you want to time the rate market and what your mortgage broker or bank advises. Mortgage interest rates largely follow the direction of the US 10 Year Treasury Note, so pay attention to how that market is doing when deciding when to lock your rate!
Keep in mind that rate locks only last for a specific period of time, and once it expires you may have to pay a fee to keep the original interest rate.
After you have a fully executed contract, work with your mortgage banker to get a mortgage commitment letter. This letter is the closest thing you’ll get to a promise by the bank that they will actually show up at closing to fund the balance of your purchase. Watch out for the many outs and contingencies in the commitment letter that enable the bank to back out.
Closing costs are unique for each transaction, and as a result your lawyer will provide you with a closing statement with your exact closing costs shortly before the big day.
However, you can estimate your closing costs much earlier in the process with our handy NYC Buyer Closing Costs Calculator.
Some of the biggest closing costs you’ll encounter are the Mansion Tax, the Mortgage Recording Tax and title insurance premiums. You won’t have to worry about broker commissions, those are always paid by the seller.
On closing day, you can expect to see a number of familiar names at the table. Typical attendees include the buyer, the seller, the buyer’s attorney, the seller’s attorney, the bank’s attorney, the title company representative and possible the seller’s broker and the buyer’s broker.
Brokers are typically not present at closing because they don’t have a role to play, and there often aren’t enough seats around the table to accommodate them! As a result, brokers only show up to collect their commission checks, either towards the end of the closing meeting or sometime after. If a broker does show up, it’ll purely be for moral support!
Disclosure: Hauseit® and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided. Hauseit LLC is a Licensed Real Estate Broker, licensed to do business in New York under license number 10991232340. Principal Office: 148 Lafayette Street, New York, NY 10013.