A first-time buyer’s guide to tax abatements, transfer taxes, sponsor co-ops, liquid assets, maintenance fees, and more

New Yorkers proudly state that they live in a city that’s like nowhere else in the world. And they’re right. Unfortunately, the same could be said of buying real estate in New York City: It’s different here. And it is a mistake to sign on the dotted line unless you truly understand the particulars of buying here, such as tax abatements, sponsor units, and the big one: The difference between a co-op and a condo.

“There’s a steep learning curve for first-time buyers, which is why it’s important to work with an experienced agent, even if you have previously bought property outside of New York City,” says Lauren Bennett, an agent at Corcoran, one of New York City’s largest real estate brokerages.

Sure, it’s intimidating, but take heart: Literally millions of people have successfully done it. You just need to enlist the right people to help you. 

Bennett is currently working with a buyer who’s moving back to New York City after a period of time in California. 

“She’s looking for a one- or two-bedroom apartment and has been asking lots of questions about the types of units and how the process works so she can make smart financial decisions about the kind of apartment she should buy,” Bennett says.

If you’re in a similar situation, below is some key terminology to familiarize yourself with as you kick off your search.

What is a co-op? 

A co-op is shorthand for a cooperative building or unit. It works like this: Instead of buying a unit, you buy shares in the co-op, which then allow you to occupy a specific apartment. 

“I like to refer to it as abstract versus concrete,” says Bennett. “You are a shareholder in the building rather than having a deed for your unit as you would in a condo.”

Many NYC buildings were converted from rentals to housing cooperatives in the middle of the last century, and co-ops still make up the majority of Manhattan’s housing inventory. 

There’s a larger inventory of co-ops rather than condos in New York City, so for that reason, if you intend to live in the apartment yourself, “you’ll have more to choose from if you buy a co-op. You will also get “more for your money in terms of price per square foot,” says Michael Tannen, an agent in Corcoran’s Park Slope, Brooklyn office, who has helped many first-time buyers navigate the real estate market.

While co-ops typically cost less, they also usually demand more from buyers in terms of down payment and financial qualifications. The approval process also includes an interview by the co-op’s board.

Another important consideration a co-op’s sublet policy.  

“If you want the apartment as an investment, or think you will rent it out further down the road, you should steer away from co-ops because they generally have more restrictions when it comes to subletting,” says Tannen.

What is a condo?

In some aspects, buying a condo is like buying a house: You get a deed that gives you ownership of the apartment’s interior. But it differs from owning a house in several significant ways: Like a co-op, condo owners elect a board the performs many of the same functions, however, condos are known for having more relaxed policies because they are structured differently, legally speaking. 

Another distinction: Condos are usually in newly built or converted buildings, and as a result, have more amenities. (They also are your best chance at getting a tax abatement, more on that in a moment). Co-ops tend to be in older buildings, but that doesn’t always make them less desirable. Interiors in co-ops tend to have more detail and some layouts in older co-op apartments can be more spacious than a brand new condo.

What is a condop?

Generally speaking, brokers describe a condop as a co-op with condo rules—meaning there may not be a board interview, and they may have more relaxed requirements on things like subletting and pied-à-terre purchases. 

More specifically, a true condop is a combination of a co-op apartments with a commercial space on the ground floor—that is the condo component of the building.

These building can be a little more complicated to run in terms of management, so if you are considering buying here, you should make sure there is no ongoing litigation.

What is a sponsor? 

A sponsor is the developer or owner of the building, whether it’s a co-op or condo.

A “sponsor co-op” refers to a co-op apartment that still belongs to the owner of the building’s unsold shares (typically, the building’s owner at the time that the rental building was converted into a co-op). 

“There are benefits to buying a sponsor unit in a co-op because there is less oversight in terms of the approval process,” says Tannen. 

Typically, you will not have to go through the board approval process, and some rules that apply to buyers of resale apartments will not apply to you. For example, you might find that you only need a 10 percent down payment instead of 25 percent and that you will not need to meet liquid asset requirements typically required by the board.

What is a contingency? 

A contingency refers to a risk that a buyer or seller takes on during the purchase process.

For example, a mortgage contingency offers an escape hatch if you can’t get a mortgage—meaning you can walk away from the deal and get your deposit back. 

In a competitive market, sellers typically require buyers to waive all contingencies.

Additionally, says Tannen, “there are other types of contingencies you may want to waive to make your offer more attractive. You can waive your inspection contingency on a new development if the building is well established.”  

You can have a contingency on almost anything, says Bennett. “I’m doing a deal right now and the seller needs to close because he’s doing a 1031 exchange, so he’s choosing to move his gains into another type of property and that is a contingency for the acceptance of the offer.”

Your broker and attorney can guide you to structure the contingencies so they serve and protect your needs. 

What is a tax abatement?

These are tax breaks or concessions on a building or unit's property taxes. One of the most common is 421-a, given to new condominium developments in exchange for providing a certain amount of affordable housing units. The reductions in your tax commitment are limited to a specified number of years (anywhere from 7 to 25), and they phase out over time. When they end, you have to pay the full amount. 

“If you can get a property with a tax abatement, that’s great,” says Tannen, who is currently representing the sale of a condo where taxes are $11 a month for the next 10 years. “Lower monthly carrying costs, even if they’re temporary, can make a big difference in overall affordability, particularly for first-time buyers,” he says.

What are liquid asset requirements?

Very often, co-op boards want to see that you will have at least two years worth of monthly costs in cash, bonds and/or stocks—your liquid assets—after buying an apartment. This is called post-closing liquidity. This gives the building some security that you will be able to cover your monthly payments.

What are maintenance fees and common charges?

Whether you buy a condo or a co-op, you will be required to pay a monthly fee in addition to your mortgage (if you have one). These monthly carrying costs have different names depending on the type of apartment you buy. 

You pay common charges in a condo, which amount to your share of all the costs to run the building, such as doorman, swimming pool, and repairs. You’ll pay property tax separately.  

In a co-op, you’ll pay a monthly maintenance fee, which includes the costs to run the building as well as your share of property taxes.  

Transfer taxes

The transfer tax is a sum paid on the sale of a property that’s made up of a state tax and local city tax. As of July 1st, New York State’s transfer tax is 0.4 percent on apartments up to $3 million and 0.65 percent on properties above that price. The city's transfer tax is 1 percent for properties that sell for less than $500,000 and 1.425 percent for more expensive properties.  

“State and city transfer taxes are usually shouldered by the seller, except if you’re buying in a new development,” says Robert Doernberg, senior managing director in Corcoran’s East Side office.“That said, some developers may cover them. That’s one of the advantages of having an experienced agent representing you and negotiating the best possible deal.”

Closing costs

As with any complicated financial transaction, there are taxes and fees that go hand in hand with an apartment purchase. For buyers, closing costs generally amount to 2 to 4 percent of the purchase price, with condos closing costs on the higher end of that range.

Transfer taxes and attorneys’ fees will be part of the closing costs. If you’re buying something for $1 million or more, you’ll also owe a so-called mansion tax of at least 1 percent of the purchase price. Starting on July 1st, that tax will be applied incrementally, all the way up to 3.9 percent on homes that sell for $25 million or more. 

Having a skilled agent represent you as a buyer can mitigate your closing cost burden.

“When you put in your offer, we usually negotiate a little bit depending on how hot the building is,” says Bennett. “Some buyers may be able to negotiate a cost of the attorney fees or a free storage unit,” she says. 

Visit corcoran.com today to find the right agent to help you buy the perfect New York City home.