Approximately 75% of apartments available for sale in New York City are in cooperative buildings. So what exactly is a co-op, and how is it different from a condo? And what do you need to know before buying a co-op in NYC? Read on to find out.
Co-ops are different from condominiums (“Condos”) and single-family homes. When you buy a co-op apartment, you are not buying real property. Instead, you are buying shares of the corporation, and upon purchasing them, you become a shareholder. In return, the corporation gives you what is called a proprietary lease, and you essentially become a tenant in the co-op building. The bigger the apartment, the more shares you will own in the cooperative.
As a general rule, buying a co-op is cheaper than buying a condo. In particular, HDFC coop apartments are some of the cheapest in the city. This affordability is the primary perk of purchasing a NYC co-op. You’ll also enjoy lower closing costs if you buy a co-op, as you won’t have to worry about title insurance or the mortgage recording tax.
- Gather Your Team of Professionals
- Obtain a Pre-Approval
- Go Apartment Shopping
- Confirm That You Qualify
- Submit Your Offer
- Sign the Contract
- Begin the Mortgage Application Process
- Prepare and Submit Your Board Package & Wait for the Board Interview
- Conduct a Final Walk-Through of the Apartment
- Close on Your NYC Co-op
1. Gather Your Team of Professionals
The first step in the co-op buying process is building your team of experts. You should already have a real estate broker, lawyer, and mortgage broker or banker that you intend to work with to purchase your co-op. The New York City real estate market moves fast, so when you find a suitable apartment, you need to be able to move quickly.
2. Obtain a Pre-Approval
A pre-approval letter is a document that details how much financing you have been approved for; that is assuming you are not purchasing the co-op with all cash. The letter typically includes the loan program, the loan amount, the purchase price, and the interest rate that you qualify for. This powerful piece of paper is significant because it shows Brokers and Sellers alike, that you are serious about purchasing a property. Realistically, you will not be taken seriously without a pre-approval letter.
3. Go Apartment Shopping
You can either start by searching for NYC co-ops for sale or finding an experienced broker who is familiar with the NYC co-op market. A good broker can save you a lot of time by showing you properties that meet your criteria.
4. Confirm That You Qualify
Co-op down payment requirements can range from 10% to all cash. However, the typical co-op down payment in NYC is usually somewhere between 20-30%. Co-op boards also want to see that you have some cash in reserve (e.g., a year of maintenance payments in the bank). Co-op boards also require an interview (sometimes multiple interviews) to meet you and ask any questions regarding the application, your life, and/or your financial history. Because a co-op is technically a corporation, it can approve or deny any applicant for any reason as it chooses, pursuant to the Business Judgement Rule, as long as the co-op board is acting in good faith.
5. Submit Your Offer
Submit your offer ASAP! If your offer is accepted, you should start preparing the financial documents and referral letters that will be needed for your board package. Your broker and/or lawyer should be able to streamline this process.
6. Sign the Contract
Along with signing the contract, buyers typically submit a 10% earnest money deposit to the seller’s attorney to put into escrow until closing. Typically, co-op contracts contain contingency clauses regarding board approval; in the event that the Board rejects your application, you will get your deposit back.
7. Begin the Mortgage Application Process
This is the point where the mortgage company will decide if they will fund your loan. You will have to provide tons of financial information to your chosen lender (i.e., pay stubs, tax returns, bank statements, etc.). The bottom line is that the lender wants to ensure that you have the ability to repay your loan. A word of caution, make sure that you are dealing with a mortgage broker or lender that is familiar with New York City co-ops.
8. Prepare and Submit Your Board Package & Wait for the Board Interview
This is the point where you’re trying to convince the managing shareholders in the building that they should allow you to live in their community. You will need financial documents similar to the documents that you provided to your mortgage lender, as well as personal letters of recommendation. Essentially, you need to ensure that your board package is “airtight” to avoid rejection. At the interview, be honest, be yourself, but also conduct yourself as if you’re on a job interview.
9. Conduct a Final Walk-Through of the Apartment
This final walkthrough confirms the condition of the apartment. And, if your contract required certain repairs, this is the time to ensure that the conditions of the apartment are satisfactory according to the contract terms.
10. Close on Your NYC Co-op
A “Closing” is a transaction where the title of a property is transferred from a seller to a buyer. To complete the deal you or your attorney will be cutting checks or wiring money at closing. This transaction typically takes about three hours to complete. The seller, buyer, attorneys for all the parties, the managing agent for the coop, the mortgage lender, and the real estate agents are all typically present at the closing.
One of the primary perks of purchasing a co-op will be the pricing. In NYC, co-ops are cheaper than condos. But this comes at the cost of convenience. The process of buying a co-op in NYC can be a headache.
Pros of Buying a Co-op
1. Co-ops Are Usually Cheaper Than Condos
One of the biggest reasons to buy a co-op is that they typically sell for less than similar condos. You can often find co-op apartments in NYC for sale for 10-20% less than comparable condos. You'll also save on closing costs if you buy a co-op as you won't have to pay the mortgage recording tax or title insurance.
2. You'll Likely Have Stable, Long-term Neighbors
If you're looking for a sense of community, you're more likely to find that in a co-op building than a condo. Because the co-op buying process is complicated, with stricter screening and financial requirements, buyers are financially stable and tend to be long-term owners. This can be great if you want to build lasting relationships with your neighbors. Co-op owners are often more invested in their communities and the affairs of the building.
Cons of Buying a Co-op
1. The Process For Buying a Co-op in NYC Can Be Grueling
Buying a NYC co-op can be a bit of a headache due to the challenges and strict financial requirements involved. Co-op buildings and their boards have a significantly more intensive approval process compared to condo buildings. You’ll need to submit a lot more paperwork than if you were buying a condo, with a longer board package as well as forms like the REBNY Financial Statement and an Aztech Recognition Agreement.
Many co-ops also limit the amount of financing a purchaser can receive, so you should be prepared to make a down payment of 20-25% of the purchase price. If you’re lucky, that may be lower, or you may be able to buy a sponsor unit. Buying a sponsor unit also comes with the added benefit that you can skip the dreaded board approval process. Depending on the individual sponsor, the financial requirements are usually very lenient compared with that of a non-sponsor apartment.
2. Co-op Maintenance Fees Can Be High
One of the drawbacks of owning a co-op is the monthly maintenance fees, which shareholders pay monthly. The maintenance fee paid to the cooperative covers building expenses such as the heat, hot water, building insurance, salaries, real estate taxes, and the mortgage for the building. Pursuant to the building’s bylaws, special assessments (‘temporary fees”) can also be implemented and incurred for each shareholder, which covers the cost of building repairs and renovations. Typically, special assessment fees range from $50 to as high as $800 per month, depending on the size of the building and the cost of the repairs/renovations that are needed. One of the best ways to mitigate the fees is to try and qualify for the co-op tax abatement offered by the city.
3. Co-op Buildings Can Have Strict Rules
Buying and living in a co-op also means abiding by the building rules. You should familiarize yourself with the rules in the building. Many co-op boards prohibit subletting, and/or parents buying a coop for their children. Each co-op board sets its own, subjective standards in terms of how the building is managed.
It varies depending on the building and location, but it generally takes around two to three months to buy a NYC co-op apartment. Co-ops in Manhattan are usually stricter when it comes to their requirements while buying a co-op in another borough will likely mean a shorter time frame.
It really depends on your goals, but if you’re looking for a home that you plan on living in for the long term, you should definitely consider a co-op.
We spoke with Sydney Blumstein, a top broker at Corcoran with over $200 million in sales, about her thoughts on buying a NYC co-op. “Co-ops are designed for a specific type of buyer. They are owner-occupied, participatory properties, so they’re best for buyers who are interested in planting roots. Renovations are usually for improvements for the homeowner rather than designed to accommodate fix and flip. In NYC co-ops, a flip tax is often imposed to ensure that owners hold these homes for longer. They are less expensive to get into than condominiums, particularly on closing costs.” explains Blumstein. Buying in a co-op building can also be a tricky proposition as the financial requirements are stricter, and more financial disclosure is required. “You need to be financially sound with a debt to income ratio below 28% and able to carry the home for two years (mortgage and maintenance payments) without earning another dollar from the day you purchase. Co-ops are protective, and they want to ensure you can afford to buy and carry what you are purchasing,” continues Blumstein. Her biggest tip to prospective co-op buyers is, “Don’t expect to be able to purchase and close quickly. Cooperatives are a practice in patience. And remember, without a carefully prepared board package fully explaining your financial picture, the board can turn you down without any justification. As a former co-op owner, though, for a special property, it’s usually worth the wait.”