When purchasing an apartment in New York City, you have to decide between buying a condo or a co-op. Co-ops are typically cheaper but also come with additional restrictions that buyers must consider. Here is a helpful guide to buying a co-op in NYC.
What is a Co-Op in New York City?
A housing cooperative, also known as a co-op, is a type of residential housing in which the buyer owns a portion of the entire building instead of a single unit.
When you purchase a co-op, you buy shares in a corporation that owns and controls that building. As a result, you have the right to live in a particular unit based on the number of shares you purchase.
This is different than a condo sale, where you purchase a particular unit and rights to certain common areas but have no ownership stake in the rest of the building. When you buy a condo, you will receive a deed, much like purchasing a single-family home or another residence. When you purchase a co-op, you receive a proprietary lease.
Co-ops feature certain benefits compared to a condo, including a lower price per square foot and more say over what goes on in the building. But they also require a lengthy approval process and higher monthly fees. So, it’s important to know what you’re getting yourself into before making a purchase.
How to Buy a Co-op in NYC Steps
Every home search will be slightly different. But here are the general steps you will likely take to secure a co-op in NYC.
1. Prepare for Your Search
Before you begin searching, it’s important to prepare. Co-Op negotiations and approval are notoriously rigorous. Plus, the real estate market in New York moves so quickly that you may have to make a move immediately once you find the right building. So, it’s vital to have all your ducks in a row before you begin searching.
This means hiring the right professionals to help with your search, including a real estate agent, attorney, mortgage broker, and anyone else who might be able to help in the process.
Before you begin searching, you should also get all your financial documents together and get pre-approved for a mortgage if you’re financing the purchase. That way, you know right away how much you’ll be able to afford, so you don’t waste time looking at homes outside of your price range.
2. Find the Right Building
Once you have all your important information together, it’s time to start apartment shopping. This is where having a good broker will come in handy.
You can always search for yourself and avoid paying a broker fee. But, a broker can save you time and may have access to exclusive listings that you may not get to see on your own. Plus, they will be able to help you with the application and approval process, which can often be complex.
3. Submit an Offer
Once you’ve found a property that meets all your criteria and fits into your price range, it’s time to submit an offer. It’s best not to wait too long because the NYC real estate market moves fast.
So as soon as you find the right home, you should consult with your broker or attorney to draft an offer letter. Even if you need to take some time to negotiate, it’s best to get the conversation started as soon as possible if you’re serious about purchasing the home.
4. Agree on a Price and Sign the Contract
Once you’ve agreed on a price, you’ll be asked to sign a contract affirming your commitment to buying into the co-op. It’s customary for co-op boards to require a 10% deposit when you sign the contract.
This will be put into escrow until the closing and can be refunded if your application is ultimately denied. The full deposit required to close on a co-op in NYC is typically between 20 and 30%. But this initial 10% will go toward that total figure at the closing.
5. Finance Your Coop Purchase
Once your offer is accepted, you’ll have to complete the mortgage process if you plan to finance the purchase. By this point, you should have already gotten pre-approved. But you’ll still have to go through the official underwriting process to ensure that you can afford the purchase.
You should be fine as long as you were truthful during the preapproval stage and didn’t make any sudden career changes or take on additional debt since first contacting the lender. But it’s important to be sure that you work with a lender who has experience funding NYC co-ops because the transactions can often be more complicated than the typical home purchase.
6. Board Approval
Once your mortgage application has been approved, it’s time to seek board approval. This entails compiling what is known as a board package. The exact requirements will vary from building to building, but they will typically ask you about your financial history and personal background.
Some of the questions may seem invasive, but the board will want to know as much as possible to verify that you’ll be a good addition to the building. In addition to submitting an application, you’ll also likely be required to do an interview where they’ll delve even further into your character and lifestyle. So do your best to prepare and try not to take any probing questions too personally.
7. Close on the Property
If you’ve made it through the grueling process of seeking board approval, all you have left to do is sign the contracts and pay the closing costs. You will likely want to do a final walkthrough of the unit you’ll be acquiring right before closing. If everything checks out, all that’s left to do is sign on the dotted line and receive the keys to your new unit.
Pros and Cons of Buying a Co-Op
Many people love co-ops because they often feature a greater sense of community than the typical NYC condominium building. But, they also feature far more restrictions and a difficult approval process that can be grueling for some. Here a some of the major pros and cons.
- Cheaper than Condos: Co-ops are generally 15-20% cheaper than condos of comparable size. Co-ops also don’t require additional closing costs such as title insurance and taxes because you’re not purchasing a physical piece of property. But these expenses may be factored into your monthly maintenance fees.
- Tend to Be Stable Investments: Due to the rigorous approval process owners of a co-op must go through, there is a greater likelihood that all residents are financially stable and able to repay their mortgage and maintenance fees. As a result, co-ops rarely decline in value, even during a market crash or recession.
- Greater Sense of Community: Purchasing a co-op means you’re buying into the culture and activity of an entire building, not just a particular unit. As a result, co-ops tend to foster a closer community than condo buildings because residents have more chances to see each other and interact. Plus, residents have more of a say over what goes on in the building because the board can levy fines against noisy neighbors or other unwanted behavior if shareholders complain.
- Lengthy (and often intrusive) Approval Process: One of the worst things about purchasing a co-op is the approval process. They will want to know everything about you to verify you will be a quality addition to the building.
So, some of their questions may even seem intense and overbearing. They will also want to do their due diligence to ensure you’re financially stable and won’t default on your mortgage or maintenance fees. So, if you’re looking to close as soon as possible, a co-op may not be the way to go.
- Less Control Over Your Own Unit: Because you don’t actually own the unit you’ll be living in, you have less say over the space than in a condo. Things like painting the walls or remodeling the bathroom will have to be approved by the board first. Plus, there are often restrictions on subletting the unit if you wanted to go out of town for a while.
- Higher Maintenance Fees: Even though the cost per square foot is typically lower with a co-op compared to a condo, they also usually carry higher maintenance fees. So, it’s important to do the math to make sure you understand your monthly obligations.
How Long Does It Take to Buy a Co-Op in NYC?
The exact timeline will vary from building to building, but typically, it takes about 2 to 3 months to purchase a co-op. The amount of time it takes to close can be impacted by several factors. For instance, if you’re paying all cash, it will take less time than if you’re financing the purchase.
But typically, the biggest factor impacting the speed of the close is board approval. The board typically only meets once a month. So, depending on when you submit your application, you may be waiting for several weeks just so they can review it.
Plus, if your application is missing information or contains errors, you may be asked to resubmit it, which can cause additional delays. Or, if they have other applications they are reviewing, it may take even longer. Many other factors can also delay the process, so be prepared to wait at least a few months to close the sale.
What Does a Co-Op Maintenance Fee Cover?
Maintenance fees are paid monthly by shareholders in a co-op. These fees will cover the overhead expenses related to operating the building. These include expenses such as property taxes, utilities, maintenance staff, and any cleaning or repairs in common areas or the exterior of the building. The exact expenses will vary depending on the building, but that’s typically what’s included.
Co-op fees are often higher than condo fees because owners of a condominium will typically pay property taxes separately. Co-ops are taxed as one collective lot, and individual shareholders will each pay a portion relative to their ownership stake in the building. So it’s important to calculate this into your monthly budget.
What is the Co-Op Board of Approval Process?
A co-op is technically a corporation that oversees the operation of a building. So just like in the business world, co-ops have a board that has the final say over what goes on in the building. To purchase shares in a co-op, you must be approved by a board by submitting an application and passing an interview.
The board package will typically include financial records and personal reference letters to vouch for your character. Financial statements include pay stubs, bank statements, tax returns, and a letter from your lender. They will likely also ask for a reference letter from friends, family, employers, or a past landlord to vouch for your character.
If all checks out, they will invite you to come in for a final interview. During the interview, they will ask you questions about your employment, financial habits, and anything else they find relevant. This process may be a bit nerve-racking but think about it like a job interview – just answer as truthfully as possible, and if it doesn’t work out, it was probably for the best.
Why are Co-Op Buyers Typically Rejected?
There are several reasons why co-op buyers are typically rejected. Some of the most common reasons potential buyers are rejected include:
- Financial reasons: The buyer has too much debt or not enough income to cover expenses.
- Employment history: Most co-ops want to see candidates have a stable career and don’t hop from job to job every few years.
- Bad Credit: Co-op boards can be very strict, so even with plenty of income and assets, a history of not paying bills on time is enough for the board to reject you.
- Lifestyle Concerns: Certain co-ops will turn down high-profile celebrities because they don’t want the publicity to disturb other residents. Or, if you have a history of throwing extravagant parties, they may also turn you down.
- Errors or Omissions in the Application: Prospective owners who purposely leave things out of the application or make egregious mistakes may be deemed untrustworthy or unreliable and be rejected as a result.
- Pets: Many co-ops have strict rules when it comes to pets. Even if they allow animals, there may be restrictions on the size and amount. Brokers should do their due diligence to ensure that buyers with pets are within the guidelines of the co-op. But sometimes this info slips through the cracks until the application process.
- Bad interviews: Sometimes a buyer might look great on paper but perform poorly in the interview. Typically, a board won’t reject you just for being anxious. But if you are unkept or uncooperative and rude during the interview, this could be cause for rejection despite your financial credentials.
Is Buying a Co-Op in NYC a Good Idea?
Co-ops are a smart investment for some but don’t make sense for everyone. They allow NYC residents to own a home at a lower price than purchasing a condominium. Plus, they can foster a sense of community and residents are more often more invested in the future and culture of the building rather than just their unit.
But they are not a wise investment for everyone. Those who are looking to close quickly should probably not look at co-ops because the board approval process can often be slow. Or anyone who prefers privacy and wants exclusive control over their own unit may become frustrated by all the rules and regulations imposed by the board. So, co-ops are smart for a particular type of buyer but certainly aren’t for everyone.
Should I use a Real Estate Agent to Purchase a Co-Op?
While it’s not a legal requirement, using an experienced broker to purchase a co-op is typically a smart idea, especially if you’ve never done so before. Co-op purchases can be very complex, and without the right guidance, the process can become frustrating and overwhelming.
Plus, a broker can help you fill out the board application and prepare you for the interview so you know what to expect. The board approval process can be tough, and it helps to have an experienced professional to help guide you through it. Otherwise, you may spend several months applying only to be rejected and forced to start from square one.