Learning how to buy a co-op apartment in NYC is not rocket science. While buying a co-op is a bit trickier than buying a condo due to the co-op board approval process, it’s a rather straightforward and rewarding process as long as you do your homework.
Buying a co-op in NYC takes approximately three months from the time you’re in contract. Most co-ops will require a minimum of 20% down. A typical co-op will also require that no more than 25% to 30% of your monthly income goes towards your mortgage, co-op maintenance, and other debt payments.
The strict buyer financial requirements and the board approval process itself are two main reasons why a co-op is more difficult to buy than a condo. Other downsides of co-ops include subletting rules and generally more strict house rules than what you’d find with a condo.
The main benefit of buying a co-op is that you get more for your money compared to a condo. Co-ops in NYC can be anywhere from 10% to 40% cheaper than a condo of comparable size, location, layout, etc.
Whether buying a co-op is a good investment in NYC depends on the economics of the particular unit you’re considering as well as your lifestyle.
Here are some examples of when buying a co-op is a bad investment in NYC:
You buy a co-op with a strict sublet policy even though you’re aware that your job may transfer you to another city at any time. Low and behold, you transfer out of NYC and are forced to sublet your co-op. Once you use up your subletting allowance of two years, you’re forced to sell your apartment.
Since you only owned the unit for a few years, prices have barely appreciated. Furthermore, all of your gains on the sale price are wiped out by seller closing costs: broker commissions, NYC & NYS transfer taxes, attorney fees, etc.
You fall in love with a co-op and find yourself in a frenzied bidding war. While other segments of the market are flat or falling, your search is focused on the hottest neighborhood in NYC. Because of the hysteria surrounding the listing, you submit a very high best and final offer for the unit and end up overpaying for the apartment.
While you probably still won’t lose any money if your hold period is 5 to 10 years or more, overpaying puts you in a tough position in the event you need to unexpectedly sell in the short term.
You buy a one-bedroom co-op knowing that you will likely have a child this year. Low and behold, you end up having to sell your co-op and buy a larger apartment only a few years after making the initial purchase. It would have been a better investment to rent until you could have afforded a 2br co-op from the start. Buying and selling frequently in NYC is a bad idea because of how high buyer and seller closing costs are in the city.
Here are some examples of when buying a co-op is a good investment in NYC:
You find a great apartment which was originally overpriced. Because the unit spent so much time on the market with an unrealistic price, you are able to catch a vulnerable seller and negotiate an incredible sale price. Better yet, the maintenance on the co-op is incredibly low for an apartment of its size.
You have no plans to leave NYC in the next 5 to 10 years, and you realize that it doesn’t make sense to continue paying rent without building any equity. Therefore, you decide to buy a co-op apartment.
Many buyers in NYC begin their search by doing research on condos vs. co-ops. Before going into the weeds, there are two facts you should know from the get-go: 1) condos are more desirable because you can sublet them, but 2) co-ops are the best option for long-term New Yorkers because they’re much more affordable.
With that said, the co-op vs. condo debate is not an exact science. This is because each individual co-op or condo building has its own policies on subletting, seller flip taxes, etc. In other words, some co-ops can be more like condos while some condos may operate as if they’re co-ops!
The key differences between coops and condos in NYC come down to the following factors:
Purchase Price – a co-op is typically 10% to 40% cheaper than a comparable condo. The lower purchase price of a co-op can be the difference between buying a 2br vs. a 1br or having an extra bathroom compared to what you’d get with a condo.
Board Approval – both condos and co-ops typically have a purchase application which buyers must complete. The difference is that a co-op can reject a buyer for any or no reason. A condo can only reject a buyer if it agrees to buy the unit at the same price negotiated between the buyer and seller. Since most condo associations don’t have this amount of money lying around, the ‘right of first refusal’ is almost never exercised.
Sublet Policy – most co-ops in NYC will prohibit subletting during the first few years of ownership. Thereafter, you can only sublet for 1 to 2 years every 5 years. The only restriction you’d find with a condo in NYC is a minimum1 year lease term on sublets, and many condos don’t even have this restriction.
Buyer Closing Costs – buyer closing costs are significantly higher for condos compared to co-ops. For a buyer financing a $1m apartment purchase, condo closing costs will be closer to ~4% compared to just 1% to 2% for a co-op.
Seller Closing Costs – seller closing costs may be higher for a co-op if the building has a ‘flip tax.’ The flip tax is an additional transfer tax imposed by a co-op which sellers must pay in addition to the other standard closing costs. It’s extremely rare for a condo to have a flip tax in NYC.
Most co-ops in NYC require a minimum 20% down and have a debt-to-income ratio target for buyers between 25% and 30%. On average, the financial requirements imposed by co-ops are much stricter than how a mortgage lender typically underwrites a borrower’s application.
Although co-ops are less expensive, some of this benefit is eroded by the fact that you simply need to have more cash and higher income to buy a co-op compared to a comparable condo.
Co-op buyer closing costs in NYC are 1% to 2% of the purchase price compared to ~4% for condos. They’re much lower for co-ops compared to condos primarily because the Mortgage Recording Tax does not apply to co-op (coop) apartments.
The fact that co-ops are not considered ‘real property’ also means that there is no need to purchase title insurance. The combination of avoiding the Mortgage Recording Tax and title insurance accounts for the bulk of the difference in buyer closing costs between condos and co-ops.
It takes approximately 12 weeks to close on a co-op apartment from the time you’re in contract. Prior to this point, it typically takes 1 to 2 weeks to negotiate and 2 weeks to complete buyer due diligence and sign a purchase contract. Therefore, it takes approximately ~4 months to close on a coop purchase in NYC from the time you submit an initial offer.
There are three stages to buying a co-op once you’re in contract:
Stage 1: Preparing the Purchase Application (4 Weeks) – it takes approximately four weeks to prepare and submit a co-op purchase application. The bulk of this time is waiting for your lender to issue the mortgage commitment letter. If you’re buying all cash, you can submit the board application much quicker since there is no need to wait for the mortgage underwriting process.
Stage 2: Board Review (4 to 6 Weeks) – it typically takes four to six weeks to hear back from the co-op board once you’ve submitted your application. If you are conditionally approved, the board will invite you for an interview.
Stage 3: Closing Proceedings (2 Weeks) – if you’re approved, it typically takes a few weeks for the closing to be scheduled.