Nothing is worse than getting slapped at the closing table having to dish out an extra $20,000 in closing costs. Think that can’t happen to you? Think again.
Before listing your coop, you need to anticipate your closing costs, lest your fruitful celebration turns into a barren memorial. A good broker will not let that happen! Well in advance of you selling, she can give you a template for calculating fees and estimating closing costs. An even better broker (ahem) will attach a said document to this article. (see attached)
What’s important for you to understand—and why I’m writing this piece in the first place—is that in assessing those closing costs, you’ll soon find out that there’s a confusing little fee called the “transfer fee.” Indeed, there’s a difference between a transfer tax and a transfer fee. And, just to make it a little more confusing, the transfer fee is sometimes referred to as a flip tax.
Just so We’re on The Same Page:
Flip Tax (not to be confused with a transfer tax which is a city & state tax) is implemented by coop boards and is part of one’s closing costs at the time of sale. It's typically 1-2% of the sale price, though it could also be a flat fee, a percentage of the seller’s profit, or a certain dollar amount per share. (Remember that in a coop, one owns shares in a corporation.)
A flip tax is most commonly put into effect in coops as opposed to condos, and it works to deter people from “flipping” the property. The coop board’s intention is to preserve the integrity of the building—the flip tax squeezes the profit margin, thus making a “flip” cost-prohibitive. There isn’t an actual rule anywhere that states you can’t flip a coop (because you can!), but without some serious appreciation in a short period of time, it’s likely not cost-effective to sell within the first two years of ownership. You’re just going to have to dust off the ol’ calculator to see if it makes sense and cents.
As a Buyer, How Does This Affect Your Life?
In most cases it won’t; the flip tax is generally paid by the seller. But don’t make an ass out of you and me because, in hoity-toity areas such as Sutton Place, Beekman Place, Park Ave and Fifth Ave, the responsibility falls on the buyer to pay the flip tax. Ever notice that Sponsor Units are typically priced lower than the market? This is because the flip is passed onto the buyer! Don’t know what a sponsor unit is? Then you need me even more than I thought. Don’t worry, I’m here for you. I always recommend to my clients that if the flip tax is listed as “buyer pays,” that we try to negotiate splitting the costs. Sometimes when representing a buyer, I've negotiated that the seller pays the flip tax entirely. Here’s why: by lowering the buyers closing costs, they can preserve their liquid funds and in so doing, meet the board’s financial requirements of post-closing liquid assets (see my article on Financially Qualifying Buyers for more information on this). As long as the buyer continues to meet the debt to income ratio requirement of 29% or less, this is an ideal strategy.
Rolling the flip tax into the sale price also softens the blow if you’re the seller. You don’t feel the hit because it's coming out of your profit and the buyer benefits by rolling the payment into their mortgage. For the buyer, there may be no getting around not paying it, but it certainly feels better when it’s spread out over 30 years. (Kinda like when you give in to your kid’s relentless requests for $10 worth of V-bucks to play Fortnite. You don’t even feel it .until several months later, when you realize you’ve spent hundreds of dollars on digital nothings.)
Despite the fact that flip taxes can sneak into and spoil a deal (and by the way, nothing kills a deal quicker than an undisclosed flip tax), I’m actually in favor of them. Why? Because they’re good for NYC real estate and in turn, all of you. See, flip taxes help buildings make money to cover expenses without raising maintenance fees. Manhattan real estate appreciates abundantly (roughly 7% year over year), so the longer you stay in a building, the more you’ll benefit from the low/steady maintenance fees flip taxes enable. The effect? More New Yorkers sticking with their properties longer and building equity.
I’ll close this piece (ABC, Always Be Closing. oh, never mind.) with a tip I suggest to all my clients: indicate in your apartment listing, *Seller is willing to pay the flip tax! This way, you’ll get the highest offer possible since your future buyer will feel like they’re already getting something. Sometimes the perception of a deal is all one needs. I like to use these intangibles to my clients’ advantage in negotiating; it’s a delicate nuance that assures a delightful real estate experience, as opposed to the dreadful ordeal where you end up hating your real estate broker.
Not on my watch. I will make you love me.