At some point this summer, the FHA is going to cut maximum “seller concessions” from 6% of the home price to 3%. Such concessions mean that the sellers (generally the sponsors of new developments) pay for costs associated with the sale of an apartment, including loan origination, transfer taxes, or entire closing costs altogether. When this was announced, the FHA noted that 6% maximum (double the 3% Fannie and Freddie limits) “exposes the FHA to excess risk by creating incentives to inflate appraised value.”
Coupled with the 30% concentration maximum per building, those looking to make an FHA purchase should look to get their contracts signed sooner rather than later. As a side note, we’ve heard rumblings that some developers are already planning to take on the burden of paying the ominous transfer taxes as a normal course of business instead of formally passing them on to the buyer only to then pay them anyway in the form of a concession. From Ron Gitter at Coop and Condo:
From the sponsor’s perspective, since the sponsor has just laid out many millions of dollars for construction, once units start getting sold, recouping costs is of major interest. Ordinarily, the seller pays the New York City and New York State transfers taxes in connection with the sale of an apartment. For New York City, this tax amounts to 1 percent of the purchase price for apartments under $500,000 and 1.425% for apartments priced at $500,000 or more. The New York State transfer tax is .004 percent of the purchase price (which equals $4 per $1,000 of purchase price). In sponsor sales, the sponsor attempts to pass those costs along to the purchaser. If you were buying an apartment for $1,000,000, that would add approximately $18,000 onto the purchase price. It’s actually a greater cost, because when you sell your apartment, those transfer taxes won’t be paid by the purchaser. In the old days, the sponsor would not even consider picking up these costs, and the burden of the transfer taxes and sponsor’s attorneys fee were foisted on the buyer. In many cases, these costs are now items for negotiation. With sponsors holding so much inventory, a deal won’t be lost because a buyer does not want to pay the transfer taxes.
Should developers choose en masse to pick up the transfer taxes (which would not be considered a “concession” contractually) this could mitigate half of the downside of this FHA policy adjustment. Stay tuned.
