Questions to Ask When Buying a Co-op in NYC

What are the most important questions to ask when buying a co-op apartment in NYC? Is there a checklist of common questions you should ask before submitting an offer on a coop? In this article, we discuss the most important questions for you to ask when buying a co-op in New York City.

Co-op buildings in NYC are known for having stricter financial requirements than mortgage lenders.

Since co-ops have the ability to reject a buyer as part of the board approval process, it’s critical that you find out what the building’s financial requirements are before attempting to buy a co-op apartment in NYC.

Debt-to-Income Ratio

A typical co-op building in NYC will have a debt-to-income ratio requirement, a post-closing liquidity guideline as well as a minimum percentage down requirement for applicants.

The debt-to-income ratio measures the percentage of your monthly income which goes towards the ‘carrying costs’ of the co-op apartment, including the monthly maintenance and mortgage payment. While banks typically look for a debt-to-income ratio between 35%-42%, the average co-op in NYC is looking for something between 25-30% (or perhaps low 30s).

Most co-ops in NYC will require that applicants have at least 1 to 2 years’ worth of maintenance and mortgage payments available in liquid assets after closing and paying buyer closing costs.

As part of the co-op offer submission process, you will asked to prepare a REBNY financial statement which is designed to help illustrate your financial qualifications to the listing agent and seller.

It’s important to note that most co-ops also have a minimum down payment requirement of 20% (and in some cases, 30% or 50%).

The first step in determining a co-op’s financial requirements is to ask the listing agent.

If the listing agent does not know, your buyer’s agent can inquire with the co-op’s managing agent. If the building does not have stated buyer financial requirements, a good rule of thumb is to have a debt-to-income ratio below 30% and at least one year of post-closing liquidity.

In addition to the co-op’s financial requirements, the building may have other policies which will make it more difficult for you to sell your apartment in the future.

For example, does your co-op prohibit parents buying for children, pied-a-terres, co-purchasing or guarantors? The fewer types of purchase structures the building permits, the fewer number of buyers you’ll be able to market to when it comes time to sell.

Are Open Houses Permitted?

Does the co-op permit open houses?

Some co-ops actually prohibit open houses which means that it will be incredibility difficult for you maximize foot traffic when selling your co-op.

Before buying in this type of building, ask yourself: do you want to live in a co-op whose strict, rules-based culture would encourage neighbors or the doormen to rat on you for holding open houses in a good faith effort to sell your own home?

Does the co-op require multiple agents to host open houses?

Does the co-op require that open houses have two agents, one to escort buyers to/from lobby and another to stay in the apartment? This is another red-flag which suggests that the co-op may have a self-destructive approach when it comes to selling. After all, why would a coop that cares about resale value actively make it more difficult and costly to sell its own apartments?

Have there been any co-op board rejections recently?

A building with a history of recurring board-rejections is a serious red-flag. It may suggest that the co-op board is delusional, out-of-touch or outright discriminatory. Before buying into a co-op, you should check to see that there is a fluid history of resales in the building.

Are the doormen nice?

Checking the demeanor of the doorman is another important way to see how you may be treated in the future when it comes time to sell. Is the doorman rude to visitors, or does he or she behave in a pretentious manner? If so, the doorman could be a reflection of the attitude of the residents and possibly foreshadow how they may treat you or your future buyer during a co-op board interview.

How strict is the co-op?

The downside of buying into a ‘strict’ co-op is that your apartment will be more difficult to sell in the future. Before buying a co-op, it’s a good idea to figure out how ‘strict’ the building is both in terms of their financial requirements and overall attitude. Buying a co-op in a strict and out-of-touch building could end up being a nightmare later down the line.

Does the co-op charge a flip tax?

If so, how much is it and is the buyer or seller responsible for paying it? Finding out whether or not the co-op has a flip tax is a key responsibility of your buyer’s agent. Your real estate attorney will also investigate this as part of buyer due-diligence which is done after you have an accepted offer but before you sign the purchase contract.

While not all co-ops in NYC charge sellers a flip tax, a common flip tax is 1-2% of the sale price.

Flip tax come in many shapes and sizes which include a percentage of the sale price, a percentage of profits, a per-share amount or some combination of these methods. A co-op may also change its flip tax from time to time by holding a shareholder vote.

Making sure the co-op’s flip tax is reasonable is an important way to minimize your seller closing costs later down the line.

Co-ops are less expensive than condos partly due to the fact that most co-ops have sublet restrictions which deter investors from buying them.

The condo vs co-op debate in NYC is one of the most widely discussed topics in NYC real estate. However, buying a co-op is a no-brainer if you plan on living in NYC indefinitely since they are 10-40% cheaper than condos and most co-ops still have a reasonably flexible sublet policy.

A typical co-op sublet policy in NYC permits subletting two out of every five years after you’ve lived in the apartment for one to two years.

An example of an inflexible sublet policy would be if the building only permitted shareholders to sublet for up to two years during the lifetime of ownership. Co-ops (and some condos) also charge monthly or annual sublet fees.

When buying a co-op, we suggest that you leverage your buyer’s agent to inquire about the building’s sublet policy, flip tax and co-op financial requirements.

Believe it or not, not all listing agents will actually know the answers to these questions.

In this instance, it’s a great idea to work with a seasoned buyer’s agent who is capable of finding out the answers to these questions and supplementing the listing agent as a source of accurate information.

Co-op buildings with a history of recurring and above-average maintenance increases should be avoided.

One great way to see how financially responsible a co-op has been is to have your buyer’s agent request the most recent five year history of monthly maintenance payments from the listing agent. While not all sellers will keep these records, there’s no harm in asking.

Maintenance Increase History

First things first: it’s totally normal for a co-op to raise its maintenance every year or two to keep up with inflation.

The reality is that the cost of salaries and other expenses do increase naturally over time as a result of inflation.

If a co-op raises its maintenance 2-5% every few years, this would appear to be completely justifiable.

If a building consistently raises its maintenance by more than 5% per year, it may suggest that the co-op has an expense problem, fiscal management issue or is otherwise financially or operationally incompetent.

If you plan on buying into a building with a consistent history of above-average monthly maintenance increases, you should make sure that your valuation of the unit is adjusted to reflect the higher than average carrying costs.

All co-ops in NYC occasionally require costly capital improvement projects in order to maintain the most expensive elements of the building, which include: elevators, roof, façade, and the heating systems (boiler).

If you are buying into a self-managed building or a co-op with a small number of apartments, finding out the condition of these items is especially important since there are fewer shareholders to split-up the cost of future repairs.

Elevator, Boiler, Facade and Roof

If your co-op has an elevator but only 10 apartments, it means that the cost of the elevator replacement or façade work will be divided by just 10 people.

If you are buying into a building with 100 units, the cost of any capital repair work is more manageable since it will be divided across a large number of unit owners.

Before buying a co-op, it’s a good idea to find out if there are any current or anticipated special assessments to pay for building maintenance or capital improvements.

From time to time, co-ops may also vote to raise money to make discretionary building improvements such as lobby or hallway renovations.

Once you are a shareholder, you can voice your opinion on capital improvement projects and potential maintenance increases or special assessments.

It’s not always guaranteed that your co-op building in NYC will permit the installation of washer/dryer units in individual apartments.

While most co-ops have laundry rooms, most of these buildings do not permit apartment owners to have their own units since it may place too much strain on the building’s plumbing systems.

If having an in-unit washer/dryer is a must, your buyer’s agent should request the house rules or other specific documentation which confirms that in-unit washer/dryers are permitted.

In some instances, a co-op apartment may have a ‘grandfathered’ washer/dryer in the unit even if the building no longer permits them to be installed.

Buying an apartment with a grandfathered washer/dryer usually means that you will be permitted to keep them in the apartment.