Buying a Co-op in NYC: The Complete Guide

Before you can start looking at buying a co-op, there are a few things you need to sort out. The first thing is your savings and finances. Unless you’ve substantial savings, you’ll need a mortgage loan to buy your first co-op in NYC. Down payments on co-ops can be as high as 50%. You should also know your credit score. Your credit score will determine whether banks will lend to you or not. 

It would be best if you also researched everything about buying an apartment in NYC. This means completing a REBNY financial statement to understand your financial picture clearly. You’ll also need to look at your debt-to-income ratio and how many liquid assets you’ll need to cover the down payment and closing costs and satisfy the co-op’s post-closing liquidity requirements.

Below is a comprehensive guide on everything you need to know about buying a co-op and its considerations.

What Makes Buying a Co-op Attractive?

As mentioned, New York’s housing market comprises condos and co-ops. Your choice depends entirely on your personal and financial circumstances, lifestyle preferences, and experience. For many buyers, the price difference of a more affordable co-op draws them in. Co-op apartments typically sell 20-30% less than condos of similar size and quality. Part of this is that co-op buildings tend to be older, with fewer bells and whistles seen in the thousands of condos going up in the past decade. 

Many new condos also tend to have far higher closing costs if financed. Another reason co-ops are less expensive is that buyers need to be approved by the board. Along with the hassle and chance of rejection, you’ll also be disclosing your financials in whole to other shareholders you’ll be sharing the elevator with for years to come.

Another significant difference between co-ops to be aware of is the strict house rules and regulations. The co-ops shareholders elect a volunteer co-op board that oversees the care and maintenance of the building. Because of this, prices are often lower to entice buyers.

Key Considerations When Buying a Co-op

Here are some things to keep in mind when buying a co-op. Co-ops differ from condos in that instead of owning the deed to your individual property, you own shares in a corporate entity, which in turn owns the property. With a lease, co-op owners gain the right to occupy their units. However, they do not enjoy some privileges of freehold ownership that other types of property afford, such as a condo.

One major drawback is that co-op owners cannot turn around and sell their units to whomever they please at whatever price they can get. There are also restrictions on subletting or altering the co-op apartment. For instance, there are such minute things as the percentage of carpeting required in the co-op.

Regarding New York City co-ops, the board of directors controls how and to whom its share is sold. The board of directors has full authority to accept or reject anyone who wants to buy into a co-op in the building. Other than sex, religious, or racial discrimination, it can turn you down. Further, co-op boards are not required to give you an answer as to why they turned you down. It makes rejection all the more baffling if you do receive one. The co-op board also has broad powers as far as running the building. As long as they are found to be operating in the building’s best interest, their decisions are impossible to overturn, even in court.

Understanding the costs associated

You’ll also need a good understanding of the NYC real estate taxes you’ll face when buying, owning, and selling an apartment in NYC. Lastly, it would help to research the most common co-op buyer mistakes in New York City. Learning from the experience of others will make you far savvier when the actual search begins.

Financial Requirements

Searching for an apartment in NYC doesn’t take long to realize how affordable co-ops are to condos. There are good reasons, such as a higher inventory and the troublesome board approval process. So the next question is – what are the general financial requirements for buying a co-op in NYC? We cover just that. 

Down payment

Each co-op has its rules and regulations, but you can expect the required down payment to be 20%. However, you can also find co-ops that require 25%, 35%, or even 50% to guarantee the purchase.

Liquid assets and other reserves

Just because you have enough money for the down payment and closing costs does not mean you’re in the game yet. Another crucial aspect is the amount of post-closing liquid assets to your name after closing. Once again, every co-op has requirements, but the average post-closing liquidity demand is 1-2 years. Preferred are liquid assets, but other reserves can also be used, such as stocks or anything quickly converted to cash.

These cash reserves ensure you can pay your mortgage and maintenance costs for at least two years after closing. In some cases, co-ops will make exceptions if you have limited assets but a high salary or a low salary but substantial assets. Retirement funds and real estate are excluded.

Calculating post-liquidity

Your post-closing liquidity is calculated by dividing the sum of your liquid assets through your monthly co-op carrying costs. For example, you have a monthly mortgage payment of $7,500 and a maintenance fee of $2,400 with liquid assets of $200,000. Your post-closing liquidity would be $200,000/$9,900 = 20.20. This gives you about 1.5 years of post-closing liquidity.

Co-op Debt-to-income ratio

To ensure that the co-op remains sustainable, the board requires that all buyers keep up with payments. This makes your debt-to-income ratio just as important in calculating your finances. The typical ratio required by most co-ops is between 25-30%. As mentioned above, there will be exceptions to this if you have many liquid assets. Board members will also consider your employment record and multi-year income history. They like to see a record of consistent employment and a steadily increasing income.

When self-employed, this could become a problem. In that case, you’ll most likely need at least three years of tax returns along with a notarized letter from your account for the board to see whether your income has gone up or down in that time. Coop boards may also take into account your earning potential. If your current income does not match the board’s requirements or your assets aren’t enough, but you can demonstrate the increased income’s potential, they may make an exception. The board may request a year’s maintenance to be held in escrow in such a case.

Calculating the debt-to-income ratio

Working out the financial requirements for buying a co-op can often be tricky. To calculate your debt-to-income ratio, you must compute your total income and find the percentage of your debts. For example, if you have a monthly income of $6,000 and monthly bills of $2,200, your debt-to-income ratio is 36%, as $2,200 is 36% of $6,000.

Hiring a qualified buyer’s agent will make the process much more comfortable and faster, but even with that, expect the buying process to take some time.

Co-op House Rules

The board creates and enforces house rules about everything. Whether pets are allowed inside, what sort of renovations are permitted, and restrictions on noise levels at certain times. Unlike condo boards, they have the power to evict an extremely disruptive shareholder and force them to sell. What makes a co-op an attractive choice is a more available inventory, often larger and at a lower price than condos. Buyers who want a more affordable option should consider buying a co-op.

The Co-op Search

Once you’ve done your research and enlisted the services of an experienced buyer’s agent, then it’s time to start looking for your perfect co-op. This part doesn’t differ much from the condo search process. You’ll still need to plan a wish list, decide on neighborhoods you would like to live and attend viewings and open houses quickly due to the competitive marketplace. When signing in for an open house, write your buyer agent’s contact info. The listing agent can follow up with them instead of assuming they are now representing you under a dual agency. This is more considerate of your broker’s time as it’s hard for them to help you if you don’t know where you want to live, what you’re looking for, or your price range.

When you have a better sense of what you’re looking for, let your buyer’s agent know, and they can begin sending you some property suggestions. Try to be reasonable with your demands, as the inventory in New York City is not exactly overflowing. Be prepared and move fast when needed to secure the co-op you desire.

Making and Negotiating an Offer

Now that you’ve found the perfect co-op, it’s time to make an offer. If you’ve signed up with an experienced buyer’s broker, they will guide you through the offer process by running comps and estimating fair value. They’ll explain everything about the purchasing process and closing day and what happens between offer, acceptance, board package, interview, and closing. They will also introduce you to an experienced real estate closing attorney.

Once your offer is accepted, your attorney will conduct legal due diligence, including reviewing the building’s financial statements, board minutes, and the lien search. Remember, in the case of a co-op; you have to upsell yourself; otherwise, your buyer’s agent will take care of this. Any offer; on a co-op should include, at a minimum, the following:

• Offer Amount
• Address of the property you are making an offer on
• Amount of financing or the down payment amount
• Any contingencies
• Bank approval letter when financing
• Mortgage Pre-Approval or Proof of funds if you purchase all cash
• Completed REBNY Financial Statement
• Attorney contact information
• A short profile

The above will be sufficient for the vast majority of co-op listing agents. Your buyer’s agent will draft, submit and negotiate your offer with the listing agent on your behalf. You’ll be informed if the offer is accepted or a counteroffer is made.

Dealing with multiple offers

You may end up in a best and final offer situation if multiple competing offers exist. In this case, all bidders will make their highest and best offer by a specific deadline, with the best complete offer being accepted. Keep in mind that real estate offers in NYC are not binding. Nothing becomes legally binding, even in writing, until the downpayment has been paid to the seller and both parties have signed the purchase contract. Remember that your deal is not “In Contract” and binding until the seller confirms and returns it to your attorney.

Offer Accepted Now Deal Sheet

Once you have an accepted offer, the seller’s broker will circulate a deal sheet to your attorney, attorney, and brokers. This is to put the two attorneys in touch to state the terms of the deal and any contingencies. After your attorney has negotiated the purchase contract, you meet to review everything before signing on the dotted line. Once done, you’ll also hand over a check for a 10% contract deposit.

Your attorney will then deliver all this to the seller’s attorney for countersigning. What follows is a tense day or two for a response. If the seller is good, you should have a fully executed contract within that time. However, there are cases where the seller shops a buyer’s offer and goes with a better offer. If that happens, there’s nothing more than to match the offer if the option is potentially extended.

Completing the Board Application Process

If you’ve made it this far, you are now “In Contract.” Neither side can now back out without legal penalties. The one exception to this is if the co-op board rejects the application. If that happens, then you can exit without penalty. Once you have a fully executed contract, you should immediately start compiling your co-op board application – when working with a buyer’s agent, they will make this process much more manageable. Once you have a signed contract, you can begin soliciting friends and co-workers for personal and professional reference letters. Typically, these take the longest time to collect, so the sooner you start, the better.

Ensure that everything on the board application is complete. If something doesn’t apply to you, write “N/A” instead of leaving it blank. Your buyer’s agent will help you with this and guide you through the process. You must follow all the co-op board application instructions to the letter and submit all requested supporting documents.

If you are taking out a mortgage for the purchase, you’ll need a loan commitment letter and an Aztech Recognition Letter, which your broker or bank will help you with.

You should take your board application very seriously, as any mistakes or un-submitted paperwork could cause delays or lead to the complete purchase falling through. It would help if you also had it neatly organized and collated with a table of contents and page dividers. You’ll have a lot of paperwork by the end, so it should be well-ordered and presented when delivered to the listing agent for final review before submitting.

Have your buyer’s agent discuss it with the management company if you are uncertain of anything or want to know how strict or liberal the co-op board is.

Passing the Board Interview

Now we come to what is, for many buyers, the most nerve-wracking part of the co-op buying process the co-op board interview. The co-op board interview in NYC has a pretty bad reputation for being intrusive and unpleasant. It is rarely as bad as many people make it out to be. Remember to keep it short, sweet, and polity want to meet you in person to know what you’re like and make sure you make a good neighbor.

Your buyer’s agent will inform you further on what to expect. Answer any questions they ask and stay on topic. Often, they’ve already approved your application after seeing that you are financially qualified. Still, you should be well prepared and read up on how best to pass the interview.

Prepare for Closing

If everything goes well, you’ll receive notice from the managing agent that you’ve passed the board interview within one or three business days. You may even get an informal indication after the board interview if lucky. Once the co-op board approves, you’ll need an all-clear to close with the bank.

Your attorney will work with the seller’s attorney and your bank to coordinate a closing date and process for the sale that works for all parties. Keep in mind that a commitment letter will be needed from your lender for the purchase application submission. Ensure that your lender is ready to close your purchase once boarding is approved.

Final Walk-through

Your buyer’s agent will schedule a final walk-through of the apartment, usually the day before closing or even the same day. Use this opportunity to take one final look at the property before the closing and make sure it hasn’t substantially changed since you last saw it. The apartment should be in the same condition as you last saw it; otherwise, any issues must be noted and photographed; we recommend mentioning them to your attorney immediately. (remember to take those photos!)

Check that all the appliances, toilets, showers, sinks, lights, and electrical outlets are working. You should also check for any damage that may have been caused by the movers when the sellers moved out.

The Closing Process

Since COVID, many closings are now orchestrated remotely. Most closing days occur at the managing agent’s or seller’s attorney’s office. Usually present will be the seller and buyer attorneys, bank attorneys, and a closing coordinator from their management company to guide everyone through the closing process. The buyer and seller will usually be present unless they have given their attorneys the power to act on their behalf. Typically, the brokers are not present at the closing.

Congratulations!

There you go! You are now the proud owner of your New York City co-op apartment. When looked at in isolation, the whole process can seem long and complicated, but it is straightforward. When laid out like this with an experienced buyer’s agent will make the process run much smoother because, as you can see, there are many steps to buying a co-op. Educating yourself about every step is essential and staying well organized. When done right, co-op purchases are not so bad after all.