New York City has one of the most complex and expensive real estate markets in the world. Co-op housing or cooperative housing is the most common alternative in NYC (over 75% of apartment buildings). If you are looking to invest in your first co-op apartment successfully, there are certain things you need to understand before taking this giant step. Below is s a short guide on everything you need to know about buying a co-op in NYC.
What Is A Co-Op vs Condo?
A co-op is a form of residential housing whereby buyers do not own a housing unit in the building but rather buy shares in a corporation that owns the building. Unlike a condo, you do not get a property deed after purchase. What you get is a propriety lease which gives you access to a specific apartment.
This form of investment is considered a personal investment rather than a real estate investment as you are buying shares in a company and not real estate property.
Are you wondering if this form of investment is worth it? Worry not! We will outline both the advantages and disadvantages of Co-ps in the paragraphs below.
Advantages of Buying a Co-Op
- Low Cost: Compared to condo units and houses, co-ops are 20 -30% cheaper. That is what makes them such a go-to option for those looking to settle or invest in NYC real estate.
- Security: Co-ops are run by boards that carry out thorough background checks on individuals before agreeing to sell. Once in, you have an assurance that your co-op neighbors are safe.
- Low Closing Cost: As mentioned above, co-ops are considered a personal investment. Therefore, you will incur lesser fees if you decide to sell. Selling your property involves a transfer of shares; therefore, it will not be subject to any mortgage recording tax, and you won’t need an insurance title.
- Price Stability: Co-ops have strict requirements that contribute to the stability of the real estate market in NYC. Usually, not less than a 20% down payment (each co-op sets its range) is requested. Potential buyers equally need to have a debt-to-income ratio higher or equal to 25%, nothing less (a few go up to 30%).
- This system prevents banks from making aggressive loans. It preserves the value of a co-op building from reducing in case one owner has to sell.
- Combined Property and Maintenance Costs:
With co-ops, both your shares of maintenance charges and property taxes are billed together and paid to the corporation. It is then in charge of settling the building’s property tax with the state.
On the other sides of things, here are a few considerations to have before making your purchase:
Disadvantages of Buying A Co-Op
- Limiting Subletting Rules: While they cost less to acquire, co-ops have strict renting rules. Most prefer owners to occupy their premises over renters who could cause damages. The board may equally restrict the number of years you are allowed to sublet your property.
- High Flip Tax: If you decide to sell your coop shares, you will be subject to a flip tax. This is a fee you pay to the co-op. They average 2% of the total sales price. This fee is less costly with condos.
- Board Application Approval: Unlike houses and condos, buyers are screened and approved by the co-op board. This limits room for negotiations and the procedure can be invasive. Some boards may reject co-applications or gifted contributions to the down payment.
- Post-Closing Liquidity Requirement: In addition to your down payment, the board equally requires you to disclose how many months of payments you can afford to have in cash, stocks, and any other liquid assets after you close. This excludes retirement savings and property investments. Most buildings demand 12 or 24 months of post-closing liquidity.
After looking at the advantages and disadvantages of this housing option you are willing to invest in, your next step will be to place an offer. For this, it is advisable to find a real estate broker to help review your application to be sure you meet all the criteria. Once your offer is accepted, all you need to do is wait for the board’s approval to close and move in.