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It takes about 30 minutes perusing real estate listings online to realize that in most cases, co-ops are more affordable than condos. Which naturally leads to the question, "So how much money do I need to buy a co-op in New York City?"
As with most things in the city, the more, the better.
"The important thing to understand when our agents help clients evaluate their financial situation in preparation of a co-op search is not just how much money they need to put down and close on a co-op, but how much they will need in reserves after they close to satisfy board reserve requirements," says Thomas Kutzman, co-founder of Prevu, a modern NYC brokerage that rebates two-thirds of its commission to buyers.
Down payment, plus reserves
While the actual figure you'll need obviously depends on the cost of the apartment you're buying, the percentage of the purchase price needed for a down payment is more consistent.
"Each building is different, but as a general rule you'll need to put down at least 20 percent," says Blair Sheehan, a licensed real estate salesperson with Prevu.
You'll be evaluated on more than just the amount of cash you have. Your debt-to-income ratio—all your monthly debt payments divided by your gross monthly income (in more basic terms, the amount of money going out vs going in every month)—must also measure up. Because every co-op makes its own rules, this number will vary from building to building, but Sheehan says 25 percent is fairly standard. For example, if your income is $6,000 a month and your monthly bills—everything from mortgage to insurance to student debt total $2,200, your debt-to-income ratio is 36 percent, because $2,200 is 36 percent of $6,000. A healthy ratio is one way co-op members ensure would-be buyers aren't stretching themselves too thin—a situation which would potentially put the co-op at risk.
Co-ops will also require that you have some financial reserves post-closing (i.e., spending your every last dime on the down payment is not only frowned upon, it's essentially a non-starter). Sheehan says that generally, New York co-op boards like to see a backup fund equal to two years of maintenance and mortgage payments. These funds can include liquid assets such as cash, mutual funds, or other investments that can be immediately converted to cash. Real estate, insurance policies (with no cash value), and retirement funds are typically excluded. Occasionally, co-ops make exceptions if a candidate has limited assets but a high salary, or a low salary but significant assets.
A little help from friends and loved ones
You don't need to be unemployed or strapped for cash to possibly need some financial assistance buying a co-op. As is the case with other co-op policies (pet-friendly, subletting or pieds-à-terre allowed), whether a co-op allows various forms of assisted buying such as purchasing outright, co-purchasing or gifting, are typically included in a listing description or can be determined by your real estate agent. But, as with most aspects of the co-op buying process, it's complicated and not necessarily pain-free.
Sheehan says that most buildings frown upon parents buying apartments for undergraduates or children under 18.
"For co-purchasing," she explains, "most buildings require the child to have a job that enables them to pay the mortgage and maintenance on their own, and that no more than 25 percent of their monthly salary will go towards that."
Sheehan also notes that the co-purchasing parents will need to serve as a guarantor on the application, and therefore will be required to submit tax returns and letters of recommendations.
"They're essentially on the co-op application as a co-applicant. So they need to be aware of, and comfortable with that," she says.
Finally, if a gift (i.e. a lump sum of money you've received) is helping to put you over the top, you'll need a gift affidavit, which is a notarized letter stating the details of the gift. It is important to note that not every co-op allows for gifting.
Sheehan advises, "If you will be receiving a gift to help in your purchase, it is best to bring this to the attention of your real estate agent and attorney as soon as possible to ensure you appropriately document the gift and understand the eligibility.”
When it comes to your financial solvency, no one's going to take your word for it. Applicants have to state their financial assets in a financials form, and then provide backup documents to verify those numbers. Co-ops usually ask for "cash in banks," meaning checking and savings accounts, as well as investments, retirement funds and other assets, such as real estate, art collections, cars, etc. The result is an overview of an applicant's liquid and non-liquid assets.
Expect to provide statements for all of your accounts for the last two or three months. Some boards ask for pay stubs, some don’t, but all boards ask for tax returns, and it is best to always have these signed by you or your accountant.
"The attention to detail with a co-op application needs to be precise and perfect," says Sheehan, who acknowledges that some inexperienced co-op buyers find the process a bit invasive. "You want everything to be clear and detailed so the board understands just what type of applicant you are in terms of your eligibility both financially and personally.”
The good news for co-op buyers is that closing costs are typically less than those associated with the purchase of condos—primarily due to the absence of a mortgage recording tax and title insurance for co-ops. Overall, expect to pay about one to two percent of the purchase price, or two to three if the apartment costs more than $1 million. Attorney fees will run you between $2,000 and $5,000, and slightly more if the sale is complex. The purchase of any property over $1 million is subject to a mansion tax (regardless of the actual square footage) of one percent.
Prevu provides all the expert advice of a traditional real estate brokerage without the high fees. Click here to learn more about the Smart Buyer Rebate, and here to learn about Prevu's Smart Seller program.