A guide to HDFC Co-ops

The PropertyClub Team
Mar 30th 2019
In your New York City real estate search, you’ve probably come across a co-op listing or two that just seemed too good to be true. More likely than not those listings were HDFC (Housing Development Fund Corporation) Apartments.

Overall, HDFC’s buildings were designed to be affordable housing for families. However, qualifying for an HDFC apartment is not easy, and while HDFC apartments offer great value they typically come with resale restrictions, including high flip taxes intended to keep them affordable and limiting potential investment gains. As such, if you are among the select few who qualify for an HDFC unit, you should evaluate whether or not the purchase is worth it.

What is an HDFC building?

HDFC buildings were created in the 70s, and 80s to allow tenants to break free from their “slumlords” to form cooperatives buildings. In general, HDFC apartments are usually much cheaper than regular coop apartments.

Are HDFC apartments the same as Mitchell-Lama apartments?

HDFC apartments are different than Mitchell-Lama apartments. Mitchell-Lama co-ops are formed under Article 2 of the Private Housing Finance Law (“PHFL”). If you own a Mitchell Lama apartment there are rule and regulations which govern the sale and transfer of the apartment should the shareholder vacate or die. 

The provisions for HDFCs can vary depending on the building. Overall, since HDFCs resemble regular co-ops; rules and regulations differ significantly from building to building depending on the bylaws and the board. Overall, the real difference between a regular co-op and an HDFC coop is the financial structure.

What is the financial structure for HDFC buildings?

HDFCs were designed to be affordable housing. As such, HDFC buildings receive tax breaks and subsidies, which keep the operating costs and maintenance charges low.  Buyers in HDFCs must meet strict income limits. The limits are calculated using the area median income (“AMI”) or alternatively, a formula based on the utilities and maintenance fees for the apartment.

How Do I Qualify for an HDFC Unit?

To qualify for an HDFC unit, your income must be low.  More than likely if your family makes over $150,000 annually, you won’t be eligible for an HDFC apartment.

Is the down payment requirement lower in an HDFC co-op?

Surprisingly, HDFC co-ops require at least 20 percent down just like every other co-op in New York City. However, since a lot of HDFC co-ops are struggling financially, they may require down payments higher than 20 percent all the way to cash only deals.  This means that first-time buyer mortgage programs will not work in an HDFC co-op, because these programs typically only require 3 percent to 5 percent down. 

Pros of buying an HDFC apartment

  1. Lower Monthly Cost. Because HDFC apartments are subsidized, the monthly maintenance costs are typically much lower than traditional co-ops.
  2. Great long-term investment. HDFC apartments can be a great long-term investment; that is because it can take decades to realize any capital gains when selling an HDFC coop.  However, if you’re buying an HDFC unit intending to stay for decades, you’re likely making a great decision, that is because you will more than likely purchased the unit at below market value.

Cons of buying an HDFC Apartment

  1. Flip Tax. This is a fee paid at closing to a co-op corporation for selling your co-op apartment. This fee is often used to generate additional income for the building, which is usually needed in HDFC buildings. Typically, the fee is paid by the seller. HDFC co-ops are known to impose high flip taxes on sales. Typically, 30 percent of a seller’s profits will have to be paid to the co-op. And, in some buildings, the flip tax can be as high as 50 percent. Depending on the co-op by-laws, high flip taxes may apply only to sellers who own for a short period of time. (e.g., less than five years).
  2. Maintenance issues.  While some HDFC buildings are well-managed and maintained, a lot of HDFC building have years of bad management and neglected maintenance. In HDFC apartments, it can be challenging to get maintenance fees increased because the majority of the shareholders are on tight budgets. Therefore, before purchasing an HDFC unit, your lawyer will review the board minutes, which will clue the lawyer in on any issue going on in the building, such as a major roof repair that is needed or a recurring bed bug infestation.
  3. Risky if you unexpectedly need to move. Most of the time, when someone purchases an HDFC apartment, said shareholder will have every intention of staying in the unit for a long time. However, young families are especially susceptible to unexpected moves because of career changes or changes in family composition. Since only a small percentage of individuals, qualify for HDFC apartments, these type of units stay on the market for months at a time. And, because you often are not allowed to rent or sublet HDFC apartments, you may be stuck with all the cost and expenses until the apartment is sold.