The basics
- Cooperatives (co-ops) are a common type of real estate in NYC
- They’re more affordable than condos, but come with higher maintenance fees and other rules
- First-time home buyers who are looking at co-ops may be surprised by the complexity of the process
Difficulty: Hard
Information sources: Experience of multiple home buyers
Note: this is not professional advice, nor an exhaustive outline of an often long and arduous process—just a heads up
What to expect when shopping for a co-op in NYC
- Co-ops are cheaper than condos, but unlike condos, when you buy a co-op you’re not buying the apartment itself; you’re buying shares in the company that owns the building.
- Monthly maintenance fees for co-ops tend to be higher than for comparable condo units. But they also usually include more utilities, building services, and often, property taxes.
- Maintenance fees are an important factor in the purchase of a co-op. Aside from being a significant part of your monthly housing cost, they can affect your property value. High maintenance fees will make it harder for you to resell the unit.
- It’s not always possible to get a truthful review of the co-op’s management company from the seller or neighbors, but you should try. The management company runs the day-to-day operations of your building, and after moving in, you will probably deal with them more than you deal with your board. Some management companies are great, and treat shareholders like customers. Some are trash.
- Co-ops all have different “house rules,” but the co-op board, seller, and seller’s agent may not agree to share those rules with you before you’re under contract or have a pending application.
- Mortgage loans sometimes fall through, causing months of wasted time and money for all parties involved. For this reason, sellers and sellers’ agents like to see “pre-approval letters” from banks, and other signs that you are highly likely to get approved for your loan, like an agreement that you will make a large downpayment.
- When you’re ready to sign a contract to purchase, you’ll need a lawyer. There are many lawyers who specialize in real estate purchasing—they will look over your contracts, review the co-op’s financial history, and help you coordinate your “closing.”
- The whole process will take months, and the last sprint to your closing date is brutal; this is when you, your lawyer, your agent, the co-op, their lawyer, the bank, the seller, and their agent, and their lawyer ALL have to complete their work, coordinated at the same time, meeting one another’s deadlines, and then schedule a meeting for every single person to be in the same room and sign a million documents.
What to expect from the co-op board
- As soon as you can, you should read the house rules carefully to understand all the restrictions on shareholders. You can also ask about common concerns: Would you be permitted to rent your unit, and if so, is there a time limit and fee? Do they allow pets? Airbnb rental? (You may not plan to rent the apartment out now, but plans could change one day so these questions will help you understand your options if your financial situation changes or you ever decide to move.)
- House rules will also reveal any extra costs or processes related to renovations and moving in. Many co-ops charge fees for both, and will require special insurance for any repair work, driving renovation costs way up (something to consider if you’re choosing between similarly priced apartments in different conditions.
- You should inquire from the seller (if they’re nice), or a neighbor, about how often the maintenance fees are raised—this will tell you whether you should worry about your monthly costs going up unexpectedly. It’s also an indication for how well the co-op board manages the corporation.
- Remember to also ask about assessments. Some co-op boards will keep maintenance fees down, and charge temporary assessments instead. Some assessments are normal, and usually happen when the building needs money for repairs. But if other shareholders tell you there is almost always an assessment, that’s a red flag.
- After entering a contract to purchase a co-op, you will be asked to submit an application to the co-op board. This could include credit checks, multiple reference letters, interviews, an application fee, and many other documents.
- Co-op boards meet at different cadences, and some are very slow, so their timing might delay your approval. A delayed approval may cause the interest rate you lock for your mortgage to expire before you’re able to close. That creates a risk that your interest rate will end up being higher than you expected.
What to expect from your bank
- When choosing a lender: it can speed the process up if you choose a bank that has recently made a loan on another sale in your co-op. This means the bank has already assessed the co-ops financials and won’t need to do it again.
- The cost of buying your co-op will include something called “closing fees,” which should also be a deciding factor when shopping for a mortgage lender. Sometimes you can bargain with the seller to cover the fees.
- Your lender will ALSO ask you for a lot of documents, separately. (First time home buyers: imagine a lot, then multiply by three.) This may include tax returns going back a few years, bank statements, pay stubs, affidavits explaining unusual credits to your account (worth noting if you’re getting assistance on your down payment).
- If someone is helping you with your down payment (a.k.a. transferring a lot of money to you), note that gifts over $10,000 are taxed. Your bank will also want to know where the money is coming from, and will not count it toward your ability to keep up with monthly payments.
- Things lenders like to see: employment (people who are self-employed with unpredictable income patterns will have a harder time getting approved for certain loans). They want to see that your monthly income will more than cover your estimated cost burden (mortgage, maintenance (and property tax), home insurance). They will want to see that you have the cash for your downpayment.
- Your credit score impacts the loan you’re eligible for. The higher your score, the lower your interest rate will be. You can also lower your interest rate by paying a higher down payment.
- There is a lot more to background to share about mortgages, home equity, and whether or not co-ops are a good investment in your financial future. For example: part of the value of owning property is how you can leverage that equity to build more assets (for retirement, reinvestment, etc.)—your equity in a co-op is proportionally less useful than that of a condo or house. But this is not what this post is about, so let us know if you want to read more about that!
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