Is it worthwhile to buy a co-op in New York City?

The majority of New Yorkers despise co-ops. Simply searching for "co-op horror stories" will yield a plethora of entertaining stories. However, it is important to note that each co-op has its own set of rules. There are co-ops that are extremely relaxed and others that weigh in on everything. While there are general guidelines, make sure to get specifics for any building you're thinking about buying.

 

The disadvantages of purchasing a co-op

 

Let's look at some of the obvious and well-known disadvantages of co-ops:

 

Process of Board Approval

 

When purchasing a co-op, be prepared for a lengthy approval process. The board can request almost anything, and your only options are to comply or take your business elsewhere - there is no room for negotiation. We'll go over some common board application components later, but for now, suffice it to say that co-op applications are more complex and take longer than condo applications.

 

Subletting is restricted (ability to rent)

 

Subletting (the co-op term for renting) is more restricted in co-ops because you must follow the building's sublet policy and obtain board approval for each sublet. Sublets can be strictly prohibited or have no restrictions at all. Again, it is dependent on the particular co-op. A co-op will usually require a shareholder to live in the unit for a set period of time and/or limit how frequently they can sublet their unit.

 

The Flip Tax

 

When you sell your home, you must pay a flip tax to the building. They, like the NYC and NYS transfer taxes, cannot be avoided. While flip taxes are occasionally found in condos, they are far more common in co-ops. However, a flip tax isn't always a bad thing. It's a big plus if you intend to live in your apartment for a long time. When someone else sells, the flip tax is deposited into the building's bank account, which you own a portion of as a shareholder. A building with a flip tax will have lower maintenancefees, all else being equal.

 

The buyer Pool Is Smaller

 

Fewer buyers can qualify for a co-op due to their stringent financial requirements and foreign buyer restrictions. All else being equal, fewer buyers equal lower prices. This isn't really a negative because it's a benefit when purchasing, but it's something to think about.

 

The Benefits of Purchasing a Co-op

 

Co-ops are less expensive

 

Co-ops are less expensive than condos for the reasons stated above. In broad terms, we would estimate a reduction of 20% to 30%. This is without a doubt the most important reason buyers choose a co-op over a condo.

 

Reduced Closing Costs

 

Co-ops have much lower closing costs because personal property (shares and the proprietary lease) is exchanged rather than real property. This allows co-op buyers to avoid the mortgage recording tax, which is only applicable to real estate. Co-ops do not need title insurance because the co-op knows who owns each unit at any given time.

 

Security

 

The application process works in your favor once you've been accepted into a co-op. As part of their allure, most condo applications do not include a background check, whereas co-ops do. As a result, you can be confident that your co-op neighbors will be spotless.

 

Stability

 

Co-ops frequently, if not always, have more stringent financial requirements than banks. A minimum 20% down payment is required, and buyers must have a debt-to-income ratio of less than 30%, preferably less than 25%. Because of these increased financial requirements, New York City did not experience a housing crisis as severe as the rest of the country in 2008. Co-ops effectively prohibited banks from making aggressive loans. This is a huge plus because the last thing you want is a forced seller in your building. When someone needs to sell, especially in a bad market, the price is usually low. A forced sale can reset pricing for the entire building because the transaction will be included in future comps.

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