About Coops and Condos
In New York City, the typical homestead is a co-op or condo apartment. The co-op, or cooperative apartment complex, is by far the more common in New York. Co-ops became popular in the postwar period as a way for apartment dwellers to acquire home equity and have some input into the way their apartment building were being managed. Many former rent-controlled and rent-stabilized buildings were converted to co-op in the 1970s and 1980s and they are a popular and affordable way for New York City residents to have the benefits of home ownership.
How is a co-op different from a condo?
- Legal Distinction
- When you buy a condominium, you are purchasing real property. When you buy a co-op you are not actually purchasing the physical apartment; you're buying shares in the cooperative corporation that owns the building. Once the deal is closed, you will own the number of shares allocated for that apartment based on its size and location. Instead of the deed you receive when you buy a house or a condo, with a co-op you get a stock certificate and a proprietary lease, or occupancy agreement, on a specific apartment. As a shareholder, you become part owner of the building. In addition to the monthly loan payments on your individual unit, if any, you are responsible for monthly building maintenance and real estate tax payments to the co-op and you have a share of the assets and liabilities of the building.
- Tax Implications :
- When you own a condominium, you are a property owner, and you pay real estate taxes directly to the city. In a co-op, your building is assessed as a whole and the building pays the real estate taxes. You, as a shareholder, are charged a percentage of these taxes, which are typically included in your monthly maintenance bill. Therefore, in looking at average monthly carrying costs for a condo versus a co-op, you must determine the annual real estate tax estimate on the condo, divide it by twelve, and add it to the monthly maintenance charges.
- Whether you are a co-op or a condo owner, real estate taxes and mortgage interest on primary residences are usually deductible on your Federal income tax return. As a co-op owner, the interest on the underlying mortgage allocated to your shares may also be deductible. The co-op annually notifies shareholders of the dollar amounts of these allocations. The value of the deduction is dependent on, among other things, your income-tax bracket and whether you itemize deductions.
- Maintenance Costs and Common Charges:
- Common charges are the costs associated with the upkeep of the building,
which are in addition to the costs of your apartment. The common charges
may include payments on water and sewer fees, fuel costs, utilities for
the common areas, salaries for building employees, insurance, and any
other expense related to the operation of the building. These costs are
apportioned to each co-op shareholder or condo unit owner as maintenance
fees, usually payable via the corporation or condo association on a monthly
basis. In the case of a co-op, the monthly maintenance payments usually
cover local real estate taxes on the building and may also include payments
on the building's underlying mortgage.
- Mortgages and Co-op Loans:
- When you get a mortgage to buy a condominium, the property is collateral for the mortgage. Since you're not buying real property when you buy a co-op, you are not getting a mortgage in the traditional sense of the term. In effect, you are getting a loan to buy the shares and a proprietary lease to live in the designated co-op unit. Your shares in the co-op serve as your collateral. Shares are not as valuable to the bank, because they can't be sold as easily as the real property of a condo. The co-op's board of directors may put conditions on the sale of its shares. It may also be difficult to sell the shares if the building is in poor financial or physical condition. Because of this, the loan rate may be higher than a condo mortgage.
- What are the corporation bylaws and what is the role of the board?
- The bylaws are the rules and guidelines under which the board of directors is elected and runs the corporation.
- In a true co-op, where the sponsor is no longer the majority shareholder, the board of directors is made up of your neighbors--shareholders who function on a volunteer basis and usually have no training in building management or real estate financing. In most co-ops the board has broad authority to approve stock sales, authorize expenditures, hire staff, and adjust maintenance charges. The board can also change policy, rules, and regulations as long as they don't conflict with the bylaws or proprietary leases. They can determine such important issues to shareholders as prohibitions on the ownership of pets and the right of a proprietary lessee to sublet an apartment.
- How do I decide between a co-op and a condo?:
- Your long-term goals will help determine whether a co-op or a condo is appropriate for you. It's important to understand that the basic purpose of a co-op is to be owner-occupied, with the assumption that owners have a direct stake in the quality of their surroundings and create more stability of residency. Therefore, many co-ops have restrictions on renting. The co-op's board of directors must approve whoever rents your apartment as well as whoever ultimately buys it. Aside from aiming for a compatible community of residents, the co-op has a stake in the financial reliability of each unit holder, since unpaid taxes and carrying charges ultimately fall upon the remaining shareholders if any unit holder defaults.
- If you plan to live in the apartment for five years or more, a co-op is a good choice, since the purchase prices tend to be 20 to 40 percent lower than comparable condominium units.
- There are some co-ops that still have a high percentage of sponsor-held units, or unsold shares. These co-ops tend to have fewer restrictions on subletting, although many banks will require a higher down payment on such a unit, and many will not offer loans on a building less than 60 percent owner-occupied. Also, if the sponsor pledged the unsold shares as collateral for the underlying mortgage and then runs into financial difficulties, the shares become the property of the lender and not the remaining shareholders. Majority ownership by the sponsor does not produce a true cooperative and may not be in the best interest of a purchaser.
- If your plans are relatively short-term or if you do not plan to live
in the unit full-time, you may choose the freedom and flexibility of
a condominium, where there are typically no restrictions on renting or
on selling to whomever you choose. However, bear in mind that the initial
purchase price of a condominium can be substantially higher.
- Evaluating Co-op Financials:
- There are five important factors in evaluating the financial condition
of a co-op:
- The Underlying Building Mortgage This reflects the indebtedness
of the building, which is applied on a per-share basis to each individual
unit. For example, if there is a $100,000 mortgage on a 10-unit building
and all the apartments hold an equal number of shares, then the debt
per each apartment is $10,000. The size of the mortgage is what matters;
the smaller the mortgage, the better the building is for the shareholders.
Another factor to consider is when the building mortgage is scheduled for refinancing. Before buying you should ask for the terms of the underlying mortgage. What is the amount of the mortgage? What is the term? Is it a balloon mortgage with the entire principal coming due at one time? What is that date?
If the terms of the mortgage call for full payment in four or five years, the co-op's board of directors will have to secure new financing without assurance that they can get favorable rates. If the building's payments are fixed for an extended period, there is greater certainty that your maintenance payments will not increase and therefore you will probably be able to make your agreed cooperative loan payments. - The Reserve Fund A co-op's annual operating budget should include
adequate provision for ongoing maintenance. However, major capital
improvements, unexpected repairs, or replacement of building systems
may need to be funded from the building's reserve fund. If the fund
is large enough there may be no need for increased maintenance fees,
assessments, or new loans. If there is a shortfall, shareholders
might have to absorb maintenance increases to cover the cost of the
installation or to pay the interest and principal on a loan. Some
co-op boards pass on the expense to shareholders through assessments
rather than maintenance fee increases. This can take the form of
a one-time set amount or can be an addition to the monthly maintenance
fee for a period of time or in any manner decided by the board.
In general, the lender looks for a reserve fund that is adequate to cover any major capital improvements. Typically a lender would like to see a reserve fund of at least $1,000 per unit with a minimum of $25,000 per building.
- Building Repairs Check the physical condition of the building. Are there any major repairs that need to be done to the building? This could easily cause the maintenance for the apartments to go up.
- Real Estate Taxes Does the building have any tax abatements that
are keeping the real estate taxes artificially low? If so, when does
the abatement expire? Has the building been careful about the assessed
valuation?
- Monthly Maintenance fees In a co-op, monthly fees cover building
services, property maintenance, and real estate taxes. In general,
they should fall within the following ranges:
Studios: $400 to $600
1 Bedrooms: $500 to $750
2 Bedrooms: $850 to $1200
3 Bedrooms: $900 to $1500
Lower maintenance fees are more desirable, but higher fees should not automatically rule out an apartment. Maintenance fees are simply one factor in the value of the apartment.
- The Underlying Building Mortgage This reflects the indebtedness
of the building, which is applied on a per-share basis to each individual
unit. For example, if there is a $100,000 mortgage on a 10-unit building
and all the apartments hold an equal number of shares, then the debt
per each apartment is $10,000. The size of the mortgage is what matters;
the smaller the mortgage, the better the building is for the shareholders.
| Typical Closing Costs for Manhattan Co-op Apartments | |
|---|---|
| A. FOR SELLER | |
| Broker | Broker 6% |
| Own attorney | $1,250 and up |
| Co-op attorney or managing agent | $550 |
| *Flip tax* | 1% to 3% of purchase price |
| *Stock transfer tax* | $.05 per share |
| Move-out deposit | $500 |
| New York City transfer tax | 1% of price up to $500,000 1.425% of price over $500,000 |
| New York State transfer tax | $2 per $500 of purchase price |
| Payoff bank attorney | $350 |
| UCC-3 filing fee*** | $20 |
| B. For Purchaser | |
| Own attorney | $1,250 and up |
| *Bank fees | |
| points | 0 to 2.5% |
| application, credit, and appraisal - | $400 |
| bank attorney - | $350 |
| UCC-I filing fee*** | $20 |
| Short term interest * | One month |
| Move-in deposit | $500 |
| C. Managing agent or co-op attorney | |
| Recognition Agreement Fee - | $250 |
| Lien search | $300 |
| Maintenance adjustment | One month |
| *Mansion tax | 1% of price exceeding $1,000,000.00 |
- Application Process:
- For your mortgage and Board applications, you will need to gather financial documentation such as the last two months of your bank and brokerage statements and other proof of assets. In addition to current income verification, Boards and banks require a minimum of two years of federal income tax returns. If you are self-employed, you will need to provide a minimum of three years of federal tax returns and a letter from your accountant verifying your current income.
- When do I need to move:
- What is the target date for your move? If you
plan to seek mortgage financing, you should know that it takes an
average of three months for a purchase contract to close. Therefore,
you should begin your search four to six months before you wish to
move. - Where do I want to live:
- Manhattan is a city of diverse neighborhoods, all with their own unique appeal. Before you begin your search, decide what is important to you: do you want to be close to work or is proximity to public transportation sufficient? Do you prefer a residential neighborhood or a bustling hub of activity and nightlife? It is good to be open to alternative areas. Neighborhoods other than your "first choice" might be more affordable and offer many of the same features. (For more detailed information on specific neighborhoods, see our Neighborhood Profiles.) Your Manhattan Apartments agent will provide you with a number of neighborhoods that meet your needs and can recommend other areas that you may not yet be aware of.
- What's my budget:
- If you are considering buying an apartment, the first step is determining what you can afford to buy. The following are the two basic rules:
- You can generally borrow twice your annual gross income.
- You need to have cash for a down payment. Many co-ops require at least
25% down, sometimes more.
You may have heard about FHA and VA mortgages where financing is available up to 97% of the purchase price. This generally does not apply in Manhattan; most purchase deals involve conventional financing. You may be able to obtain maximum financing for a condominium, but most co-op boards do not allow more than 75%. Some buildings in Manhattan do not allow any financing at all.
Based on average prices in today's market, you can expect to pay the following;
| Studios | $170,000 to 250,000 + |
| 1 BR's | $250,000 to 400,000 + |
| 2 BR's | $595,000 to 1,000,000 + |
| 3 BR's | $625,000 to $1,000,000 + |
| The above price estimates are for co-ops & condos average 25-40% higher than for a comparable apartment. | |
|---|---|
- Sleep Loft:
- This
is an add-on structure usually found in apartments with high ceilings
(10 to 14 feet or more). Typically it's like the upper of a bunk bed,
with a ladder leading up to it. It usually accommodates at least a double-size
mattress, although some are larger. The space below is often used as
a closet or desk space, and the higher the ceiling, the more comfortable
a sleep loft will be to sleep in.
- Furnished Apartments (for rentals):
- Can include light furnishings (basic furniture) or "soup to nuts" (dishes, utensils, small appliances, etc.)
- Balcony or Terrace:
- Often used interchangeably to indicate an outdoor railed platform extending from the apartment. It can be small enough to accommodate one or two persons standing or large enough for a picnic table, lounge chairs, and plants. It usually has a roof provided from the balcony/terrace of the apartment above.
- Roof Terrace or Roof Deck:
- This implies a larger terrace or patio provided by the roof of the extended floor below. It usually has brick wall barriers around the perimeter, is open to the sun, and some wrap around the corners of the building.
- Garden or Backyard:
- Many ground floor apartments offer private access to the backyard.
It can be tiny or large, and in larger buildings with multiple rear exits,
it may be semiprivate or shared.