What does it mean when a condo building is 'declared effective'?
Being "declared effective" is an important milestone for a new condo building that means closings can begin.
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When you are looking to buy a brand new condo in New York City you have to learn some new terminology. You probably know what the offering plan is—it's the paperwork that tells you all the important information about the building including pricing, buying procedures, floor plans, and building bylaws. Within that document will be details about how the building can be "declared effective."
This term is shorthand for the official sign-off for the building by the New York State Attorney General’s office. Without this, closings cannot begin, so it's a crucial step towards the building's financial future.
Mike Fabbri, an agent at NestSeekers, compares buying a condo in a new development to investing in a new publicly traded company's stock.
"Being declared effective is like the IPO milestone," he says. It's a sign the developer of a building has got 15 percent of a building's apartments into contract and closings can legally begin. If you have your eye on a particular development, Fabbri says "effectiveness" is a specific moment in time when the building goes from concept to actual condo building.
Most lenders will not consider financing a sale in a building where less than 15 percent of the apartments are under contract. Many banks have an even higher threshold of 50 percent.
Developers work around this by partnering with lenders early on. The earlier purchasers sometimes close all cash, however, Andrew Gerringer, managing director of The Marketing Directors, says a sponsor will often have a preferred lender who lines up mortgages until the building meets Fannie Mae specifications.
"Buyers should be aware that they may pay a little more for the interest rate on these types of loans and they want to make sure that they are in a building that will be able to sell at least 50 percent of their units so that more traditional financing becomes available," Gerringer says.
A sponsor might also offer incentives for early buyers.
"Savvy buyers who are willing to buy into a vision without a tangible product to show for it are incentivized to sign a contract early—typically via discounted pricing or other concessions," Fabbri says.
Once 15 percent of the building's units are in contract, the building can be declared effective and closings can begin, which generally means pricing will increase.
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