If you’re considering purchasing an apartment in New York City, the majority of your options are likely to be co-ops. This property type is prevalent in New York City, but many people who consider purchasing one have little or no idea what a co-op is. What’s more, they have a limited understanding of how owning a co-op differs from owning a home or a condo.
What is a Co-op?
Co-op is short for Housing Cooperative, which refers to a property with multiple units and owners. However, instead of owning their apartment, all residents split ownership of the entire complex, owning shares in the cooperative. Basically, the whole building is owned and controlled jointly by all residents, with each of them having shares and occupancy rights. But it should be noted that, unlike when buying a condo, co-ops are not considered real property. What you are buying is shares in a corporation that subsequently entitles you to a proprietary lease.
There are three co-op structures that you may come across:
- Limited Equity – This was put in place as a means of keeping co-ops as affordable as possible. This structure puts a cap on how much equity owners can earn, preventing them from selling their co-op shares for a huge profit.
- Zero equity or group equity – These co-op owners accrue no financial equity in their homes but pay rental rates that are much lower than market value.
- Market Rate – This structure is the opposite of limited equity and works much more like a standard residential situation. Owners can sell their share for as much as they want.
Co-op Downpayments and Closing Costs in New York City
Co-op down payments tend to be higher than down payments made on real property. In NYC, a 20% or 25% downpayment isn’t uncommon, but many co-ops will require a 30% down payment. More exclusive co-ops can sometimes require a down payment of as much as 40%, limiting the people who can afford to live there. And the most exclusive co-ops might not even allow financing at all. We’re talking about co-ops on, for example, Park Avenue or other areas of the Upper East Side. Because of high down payment requirements in NYC co-ops, it’s important you discuss with a realtor the co-op buildings that are within your budget before you start searching.
While down payments may be relatively higher for a co-op, closing costs tend to be lower. This is because there isn’t any need to pay for title insurance or mortgage recording tax. This means the closing costs will likely be about 1% to 2% of the co-op’s cost. If the co-op is pricey, usually more than $1,000,000, you may expect to pay 2% to 3%.
If you intend to make your co-op purchase with the help of a financial gift from a friend or family member, you should check the regulations for any co-ops before you start the application process. Some co-ops may not allow gifting at all, while most others will require a letter or documentation if you intend to make your purchase with the help of a gift.
Financial Reserve Requirements
Financial reserves are sometimes referred to as post-close liquidity and are a requirement for some of the most exclusive NYC co-ops. It’s generally a good idea to have financial reserves equal to approximately two years worth of mortgage payments. Financial reserves can include any type of liquid assets that can easily be converted into cash, such as stocks and bonds. As mentioned before, some very exclusive NYC co-ops require purchasers to have financial reserves equal to the co-op’s sale price.
What to Know About Co-op Boards
Unlike when purchasing real property, purchasing a co-op requires the buyer to apply to the co-op board. The co-op board is just a group of residents who are in charge of overseeing the running of the building, somewhat like an HOA. Some co-op boards can be somewhat invasive and may require a myriad of personal information from you to accept your application. Also, be prepared to have to go through the co-op board interview. When submitting your co-op board application, expect to have to hand over the following:
- Two years of income tax returns and W2s
- Personal and professional reference letters
- Pay stubs and a letter of employment confirmation
- Statements for both asset and liability accounts
- Financing Information for your loan, if applicable
If your application is accepted, it’s time to move on to the co-op board interview. Depending on the co-op you apply to, the interview process may be very informal or quite grueling and invasive. Be prepared for questions about almost anything, from your financials to potential renovations. If you have a real estate agent, they can prepare you for the interview and give you the low-down on what exactly to expect. All in all, it isn’t supposed to be a scary process. Remember, the co-op board members are just looking to make sure you will be a reliable and fitting addition to your joined home.
If you get through your interview, you should find out whether or not the co-op board has approved you within a week or two.
What’s Included in Monthly Maintenance Payments?
When you buy a co-op, you aren’t just responsible for your own unit’s maintenance fees and bills. You also have to pay your share of the costs for common maintenance charges and property taxes. Remember, the co-op pays the property taxes to the city, and you pay the co-op for your share of the property taxes. Of course, the actual cost of the bills and fees you end up paying will depend entirely on what co-op you purchase and what amenities they offer.
Limitations To Be Prepared For
Because you don’t own any real property with a co-op, and you’re purchasing a share of a housing unit with multiple other owners, there are some limitations. For example, not all co-ops allow pets, so if you have a furry friend you can’t live without making sure any co-ops you consider are pet friendly. Additionally, many place restrictions on the size, breed, and number of pets you can have. There are even co-ops that require pet interviews!
You should also be prepared to have any renovation plans approved by the co-op board. If you think you’ll want to make renovations or alterations to a co-op, it’s a good idea to have a real estate agent or an attorney review the co-ops alteration policy if they have one.
Buying a co-op can be a great purchasing decision, and there’s a reason why they’re so popular in cities like New York. They’re typically cheaper than a condo, offering better square footage for your money and more financial stability. That being said, you will need to get your ducks in a row before you make a co-op purchase. It’s always a good idea to seek out a knowledgeable real estate agent to help you if you are interested in buying a co-op.