Buying New Condos: The Hidden Costs
Wouldn’t you like something shiny and new? Well, in South Boston and other neighborhoods, there’s great deal of new condominium construction ongoing. That presents some great opportunities for new buyers – the ability to pick your own paint, floors, details, etc. – as well as warranties that you wouldn’t get outside new construction.
Of course, new projects aren’t perfect. They come with a great deal of unknowns. Making an offer before seeing the final product can be scary, and the property’s lack of history deprives you of some information. That much is obvious, though. Below are some less-obvious considerations when buying a newly constructed condominium.
In a brand new development, you won’t likely qualify for a traditional 30-year fixed mortgage. That's because a new property is full of unknowns (owner occupancy rate, condo fee, comparative values, etc.). Consequently, the new condo unit won’t likely meet the underwriting standards for fixed-rate mortgages.
You’re not without options, however. You may apply for a variable-rate loan and plan to refinance later. In some cases, you may have more lending options if you approach the same bank that’s financing the project.
In the first year of ownership, new condominiums require some extra homework for property taxes. That’s because municipal tax assessors and collectors are slow to update the property’s information.
When you first move in, the condominium building may be listed with the city as a multifamily building, as though one person owned the whole thing. That will require the newly formed condo association to receive the tax bill and manually split it up among the owners by percentage interest. At a new condo’s closing, you will likely be required to sign an agreement to contribute.
More importantly, in cities that have a residential exemption (such as Boston), you will need to apply for it. The application window opens briefly once every year, and you won’t receive any discounts until you’ve successfully applied for it. That means that you’ll inevitably be paying a non-resident tax rate for at least some time. Just don’t miss the city’s application period. It’ll be an expensive oversight.
A new condo building will require a new condo association. That new condo association will require some capital reserve money. To raise the money, most new buyers will be required to make a capital contribution – usually equal to two months’ condo fees – at the closing.
Is that fair? Well, actually, it is. When you buy into an existing condo association, you indirectly buy a share of the existing condo reserve. If you’ve adequately reviewed the condo association in an existing development, then you’ve factored the reserves into your purchase price. In the new development, you’re starting with zero reserves.