By James McGrath
A lot of people, especially those who live outside New York City, have only a vague notion what a co-op building is. Sure, they know it’s some sort of apartment but the details are often hazy at best. Yoreevo has you covered with everything you need to know before buying a co-op in NYC!
What is a co-op in New York City?
Is it worth buying a co-op in NYC?
What does a co-op’s maintenance fee cover?
What is an assessment?
What is the co-op board approval process?
How do I make an offer on a co-op?
Why are co-op buyers typically rejected?
Should I use a real estate agent to purchase a co-op?
Co-op is short for “cooperative.” When you buy a co-op apartment, you are actually buying shares in a corporation that owns the building. That might sound strange given a co-op listing advertises a specific apartment but technically, the buyer is purchasing shares. Just like you can buy 100 shares of Apple, you can buy 100 shares of 123 Main Street Corporation.
This compares to condos where you’re buying the specific unit or a house where you're obviously buying the entire house. In legal terms, both condos and houses are "real property." Co-ops, on the other hand, are "personal property" because you're buying shares, not real estate.
Don’t worry - if you buy a co-op, your fellow shareholders won’t have a key to your apartment.
Each owner is granted the right to occupy a specific apartment. This is called the “proprietary lease” for that apartment. Think of the proprietary lease and shares as a package deal - you get shares in the overall building plus the right to live in the apartment you "bought."
Unless you're specifically focused on condos, you'll certainly consider co-ops as they are about 75% of NYC apartment buildings.
Most people in NYC are quick to hate on co-ops. Just search for "co-op horror stories" and you'll find plenty of entertaining stories. But it’s important to note that every co-op sets its own rules. There are super laid back co-ops and others that weigh in on everything. So while there are general guidelines, make sure to get specifics for any building you’re considering.
Disadvantages of a buying a co-op
Let’s explore some of the clear and widely known negatives when it comes to co-ops:
Board Approval Process
When you're buying a co-op, prepare for a particularly invasive approval process. The board can ask for pretty much anything and your options are to comply or take your business elsewhere - there is no negotiating. We’ll address some common components of a board application later but for now, suffice it to say, co-op applications are more complex and take longer than a condo application.
Limited Subletting (ability to rent)
Subletting (a co-op’s term for renting) tends to be more restrictive in co-ops as you need to follow the building’s sublet policy and get board approval for each sublet. Sublets can be outright forbidden or have no restrictions whatsoever. Again, it depends on the specific co-op. Usually a co-op will require a shareholder to live in the unit for a period of time and/or restrict how often they can sublet their unit.
A flip tax is a fee paid to the building when you sell. Just like the NYC and NYS transfer taxes, you can't avoid them. While flip taxes are sometimes found in condos, they're significantly more common in co-ops.
A flip tax isn’t even necessarily a bad thing though. If you plan on owning your apartment for a long time, it's a big positive. Every time someone else sells, that flip tax gets deposited into the building's bank account and as a shareholder, you partially own that account. All else equal, a building with a flip tax will have lower maintenance fees.
Yoreevo conducted a sample and found the most common flip tax, by far, was 2% of the sales price and most co-ops do have one.
Smaller Buyer Pool
Between their stringent financial requirements and foreign buyers restrictions, fewer buyers can qualify to purchase a co-op. Fewer buyers means lower prices all else equal. This isn’t really a negative as it’s a positive when you're buying but it's still something to consider.
Advantages of buying a co-op
Co-ops Cost Less
Because of all the reasons above, co-ops cost less than condos. In very broad terms, we would say 20% to 30% less. This is without a doubt the #1 reason buyers end up choosing a co-op over a condo.
Lower Closing Costs
Closing costs are much lower on co-ops because personal property is being exchanged (shares and the proprietary lease) rather than real property. This allows co-op buyers to avoid the mortgage recording tax which only applies to real property. Co-ops also don’t require title insurance as the co-op knows exactly who owns each unit at any given time.
Want to lower closing costs ever further? Get a rebate of up to 2% of the purchase price on any NYC co-op.
Learn more here
After you get into a co-op, the application process works in your favor. As part of their free wheeling allure, most condo applications do not include a background check while co-ops generally do. As a result, you can be pretty sure your co-op neighbors are going to be squeaky clean.
Co-ops often, maybe always, have financial requirements that more strict than the bank. A minimum 20% down payment is required and buyers must have a debt to income ratio of below 30% and often below 25%.
These elevated financial requirements are part of the reason NYC did not see a housing crisis as bad as the rest of the country in 2008. Co-ops basically did not allow banks to make aggressive loans.
This is a significant positive as the last thing you want is a forced seller in your building. When someone needs to sell, especially in a bad market, it will usually be at a low price. A forced sale can reset pricing for the entire building as the transaction will be part of the comps going forward.
A co-op's maintenance fee combines property taxes and common charges into one monthly payment. This is contrary to a condo where you receive a separate bill for each.
It's all one payment because remember you don’t actually own the apartment. You own shares in a building and the entire building receives the property tax bill, not the individual owners.
A maintenance payment is usually about 50% property taxes and 50% common charges. At the end of each year, co-op owners get a form from the management company letting them know how much their share of the property taxes was.
The common charges in maintenance go to everything required to run the building - paying the doormen, cleaning the hallways, taking out the garbage, etc.
Maintenance can also cover planned capital improvements like painting the hallways or a new lobby.
All co-ops have a reserve fund. You can think of this as the building's checking account and it's used to pay day to day expenses. It also has some extra money for unexpected expenses but sometimes there’s not enough.
For example if the roof starts leaking, it would have to be fixed immediately and roofs aren't cheap. If there is not enough money in the reserve fund, most co-ops will implement an "assessment." This is when an additional amount is added to each shareholder's maintenance bill.
An assessment usually has a specific reason - the roof in the example above - and a clear end date. Once the expense is paid for, the assessment ends.
Assessments can also be voluntary. If a building wants to redo the hallways, they can choose to pay for it with an assessment.
Getting approved by the co-op’s board of directors has three components -
Meet the co-op’s financial requirements
Virtually every co-op requires at least a 20% down payment. Some take down payments to the extreme and effectively only allow cash purchases.
But even if you have plenty of cash, you still need an acceptable debt to income ratio (or "DTI"). This is how the board measures your ability to make your monthly payments. They'll add up all your monthly payments and divide that by your monthly income.
Usually the monthly payments will simply your mortgage plus maintenance but if you have student debt, a car lease, etc, all of that will also be included.
Most co-ops want that number below 30% or even 25%. If it's higher, some buildings may still allow you to buy if you put a year or two of maintenance payments in escrow at closing. This is often considered for people that have a lot of assets but little income.
The last metric is “post closing liquidity.” This is simply how many months of payments you'll have in cash, stocks and any other liquid assets after you close. Anything that you shouldn't be selling (like retirement savings) or is hard to sell (like real estate) likely will not be considered. Most buildings want to see 12 or 24 months of post closing liquidity.
Co-ops have these strict financial requirements to avoid a forced sale. If someone stretches to purchase the most expensive apartment they can get and loses their job the day after closing, they're going to have to sell. That's a bad outcome for everyone - the buyer, other shareholders and the board.
Complete the co-op’s purchase application
Most co-op applications require:
After reviewing your application, the board of directors has three options - ask questions, invite you to an interview or reject the application. If your purchase is going to be rejected, it is usually at this stage.
Pass the co-op board interview
Co-op board interviews get a bad rap but aren't so bad. While you should be prepared for a full on, job-like interview, usually the board of directors just wants to welcome you to the building. They may ask you about yourself or your application but if there were any significant issues, they likely would have been addressed before scheduling the interview. Board members don't want to waste their time so getting to the board interview is a very encouraging step.
Since the listing agent needs to have confidence you’ll satisfy the board’s financial requirements, making an offer on a co-op requires more information. On top of the actual offer and mortgage pre-approval, you'll also have to submit a REBNY financial statement. This provides a quick snapshot of your financials.
If the listing agent or seller has questions, you'll have to answer them. They need to be confident any offer they accept will be approved by the board.
We had a client get annoyed when a listing agent asked why they had such a high income but limited assets. We understood where both parties were coming from. The client found the question invasive but the listing agent knew the board was going to ask. Simply put, the co-op application process is not for everyone.
Keep in mind that any information asked at this stage will also be in the board application which the listing agent will review.
When a board rejects an applicant, they don’t have to (and typically don’t) give any reason whatsoever. The seller doesn't even get an explanation. While we don’t have data to back this up, our experience tells us the majority of rejections are for financial reasons.
For example, say a 30% DTI is required but a buyer with a 32% DTI makes a very strong offer. The seller might gamble and hope they get approved. Or maybe the buyer's DTI is below 30% on average but volatile year to year. The board might view that as too risky.
Boards also want to see good reference letters - both personal and professional. If something in a letter rubs the board the wrong way, they might hesitate to accept the application. An agent once told us she had a buyer rejected and the only thing she could point to was a personal reference letter that mentioned the buyer loved cooking a particularly pungent type of cuisine.
Sometimes the board will reject an applicant because they are getting too good of a deal. If the seller doesn’t care about money (and NYC has a few people like that!) and just wants to be done with the process, they might offer the apartment to their buddy or a neighbor for a low price. Since this affects the building's comps, the board will often reject these “below market value” transactions.
Many buyers think they can save a bundle if they forgo the use of a buyer’s real estate broker. It’s a fair assumption but the seller pays the same commission regardless. Most listing agreements are structured with the seller paying the listing broker 5% or 6% and then if the buyer has a broker, the commission will be split 50/50. Listing brokers love unrepresented buyers because they get paid twice as much.
For this reason, you should have a broker when buying. You'll have someone looking out for your best interests and negotiating on your behalf. Even better, you can use a buyer’s broker that provides commission rebates (like Yoreevo!). With a commission rebate, your broker gives part of their commission to you at closing. Yoreevo clients receive a commission rebate for two-thirds of the total commission, most commonly 2% of the purchase price which often covers a co-op's closing costs!