5 Creative Solutions To Reduce Your Brooklyn Closing Costs When Buying A Home
Feb 22, 2023 brooklyn,Brooklyn Buyers,Brooklyn Buyers Agent,brooklyn real estate,Buying in Brooklyn,buying into brooklyn,buying process,Closing Costs
Buying your dream home in the Brooklyn real estate market can be difficult due to increasing interest rates. In addition to that are co-ops, which typically require ample cash reserves on top of the down payment. Depending on the type of property you want to buy, whether apartment or townhome, the closing cost can be between 2% and 4% of the purchase price, even reaching 5% for brand new condos. You can also anticipate closing costs by calculating them with this closing costs calculator from Freddie Mac.
It’s usually recommended for buyers with a budget to limit their search to existing buildings because NYC closing costs are the highest for brand-new developments. But if you fall in love with a place there is a chance your broker and attorney can help by producing opportunities to lower certain fees and taxes.
Read below for ways to reduce closing costs as a Brooklyn home-buyer.
1. Keep an eye on the Mansion Tax
Let’s first answer the question: What is the mansion tax in NY?
The mansion tax is a one-time tax of 1% to 3.9% for all sales of $1 million or more customarily paid by buyers. (hauseit) A simple example would be if you are paying $1 million then you are taxed 1% of the cost. If you pay $2 million the tax goes up to 2% and so on.
A way to avoid or reduce the NYC mansion tax would be by sticking to properties that are below the different thresholds. Another option is to convince the seller to lower the asking price in a soft market. Keep in mind this might not be possible if there are other buyers lined up behind you.
Tip: Don’t expect the seller to pay this tax for you, the math ain’t math-ing on their end.\
2. Be Cautious About Buying From a Developer
Newly built condos come with higher closing costs than the average co-op, along with the higher price tag of the initial asking price.
Why are the closing costs so much higher in a newly developed Brooklyn condo?
There are transfer taxes imposed by the city and state that costs about 1.825 percent of the purchase price, so you can be spending around $18,250 on a $1 million condo. Instead, try aiming to buy an almost-new, pre-owned unit. This way you still get the “brand new” feeling without the “brand new” price.
In a soft market, you could convince some developers to cover costs like free common charges for a year or paying off the transfer taxes. But the market’s behavior would directly affect these types of negotiations, and making sure you work with a buyer’s broker would make it more likely to receive these types of deals.
Tip: Take a deep dive into how the sales are going at the specific residence. For the building’s plan to be declared “effective” by the state Attorney General’s office, the development needs to reach a certain percentage of sales.
3. Mortgage Recording Tax: What is it and how do I get it taken off my closing costs?
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 right?
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+. There is a little bonus when it comes to this tax. Your lender usually chips in 0.25% so your net responsibility is 1.8% or 1.925% and NYC throws in the first $30. May not be a significant amount but hey we take what we can get.
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 in New York City!
This tax might be the most surprising to Brooklyn home buyers because it doesn’t get talked about like other NYC closing costs and only applies to real property. Real property includes condos and houses – property where you get a deed to that specific property.
To reduce the price of this tax check to see if the seller has an outstanding balance in the original mortgage. You can use a tool called a purchase consolidation extension and maneuver agreement or “purchase CEMA”. It involves combining the seller’s mortgage with the buyer’s mortgage and then modifying the terms to current rates.
For example, if the seller has an $800,000 mortgage balance and the buyer is getting a $1,000,000 mortgage, then doing a purchase CEMA can save around $15,400 in mortgage taxes. Bear in mind you may have to deduct $1,000 to $2,000 in extra fees to achieve those savings, but still. (Brick Underground)
4. Closing Credit When You Buy New into a New Development
New developers may be willing to pay BK buyers a closing credit rather than reducing the asking price on units. This way developers can get the sale without bringing the purchase price down, which would negatively impact prices for other units.
Tip: Talk to your agent and attorney to look into this opportunity.
5. Buying in a Building with a Hefty Tax Abatement
Buying new in a building with a heavy tax abatement can significantly lower the cost of your monthlies for years. This assumes the apartment fits within your budget and the savings are not canceled out by covering the developer’s closing cost.
Abatement is the process used to correct property taxes that have been levied erroneously or illegally due to erroneous valuation for assessment, irregularity in levying, clerical error, or overvaluation. While it is a taxpayer’s right to file an abatement, approval is not automatic.
Tip: Make sure you can afford the monthly taxes once that abatement period runs out. If not, you will end up having to sell and start the closing cost cycle all over again.
At the end of the day, this type of finagling is best left to the professionals – your buyer’s agent & attorney. Get in touch today and we can help get you the best deal possible, while also getting you your dream Brooklyn home!
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If you’re interested in learning more about the buying process, download our free Buying Into Brooklyn Ebook. We share a ton of valuable resources to demystify the buying process and help you become a Brooklyn home-owner.