Issue 98 — The ABCs of Coping with Co-ops

Many folks outside of NYC have never even heard of a co-op, let alone considered purchasing one. However, in NYC, co-ops abound, so let’s dig in to discuss what they are, the pros and cons of buying one, and how to ace the often-dreaded board interview.

A co-op structure means that you are buying shares into a proprietary lease. You do not own the unit outright as you would a condominium in which you own the deed and title, but rather, you are buying shares into a corporation.

Bonus: Now is an opportunistic time to buy into one. The slowdown has impacted most co-ops because many who are buying don’t or cannot sublet the property, or if they do, it’s for a short window of time, and a vacancy fee is charged. People moving for a job relocation or due to hardship are at the mercy of the co-op board to decide whether they will allow subletting. Given this slowdown, we are now seeing some co-ops consider adjusting structures, such as loosening the post-closing requirements or even changing the downpayment percentage. This will create a way for more buyers to afford purchasing into the building. This ensures the co-op shows traction even in softer climates, helping maintain the building’s value.

There are certainly people who prefer buying into condos over co-ops. Foreign buyers typically like how condos not as invasive and allow much more flexibility with their property. Condos are also more attractive to pied-a-terre buyers who want the ease of a second home in the city and the freedom to come and go. Condos are better for parents who want their children to be able to use them but to rent them out without restrictions, too.

Some co-ops require owners to live in a unit for one to two years before they are allowed to rent it out. Other co-ops only allow units to be rented out for a fixed amount of time. So, if you are buying as an investment, a co-op may not be your best bet.

Co-ops tend to work best for growing families who want an end-user home, don’t travel as much, and aren’t planning on renting it out. They also work well for those who want more for their money, as co-ops tend to cost much less, especially regarding closing and monthly costs. This is because maintenance in a co-op usually carries a portion of taxes, not a separate tax as in condos, making the monthly fees more feasible.

However, co-ops require full transparency around a buyer’s financial portfolio, including salary and earnings, tax returns, debt-to-income (DTI) ratio, and bank statements. Typically, a co-op board will want to see post-closing liquidity equal to at least two to three years of monthly mortgage and maintenance. The more stringent the building, the higher the amount of cash they require as a downpayment to indicate how liquid the buyer should be. There’s no set formula in a co-op. In fact, you will never get a straight answer about what that requirement looks like, though a rule of thumb is that a 50% down cash building requires at least 1 to 1.5 times the purchase price in the account post-closing. Buyers who cannot meet that specific formula may be able to instead show a projected trajectory of growth in earnings, especially if they are still in their primary earning years. Some boards may be flexible by looking at the totality of the candidate, not just the financial history. Others may be more stringent, preferring an average DTI of no higher than 28% but ideally below 23%.

While this scrutiny might initially sound daunting or overly intrusive, it’s important to remember that every buyer has gone through this same vetting process. All are held to the same standard, which tends to result in people being responsible for their unit’s upkeep and payments. There’s safety in this review. In comparison, a condo owner may have enough money to purchase the unit but then be unable to pay the common charges and taxes so that the unit could go into arrears. The burden could then be on the building to carry or subsidize those monthly costs to prevent banks and appraisers from flagging a potential foreclosure in refusing to issue a loan. That seemingly extreme version has significant impacts in a small condo. For example, if the owner in arrears has the highest percentage of interest in a five-unit building, it could stop sales from getting done, turn off other buyers, and therefore lower the value of the condo.

On the plus side, the discretionary admissions process creates a collective-based experience. Many buyers find this strong sense of community comforting and believe they are more likely to have things in common with their neighbors. Let’s also not forget that New York City prides itself on its “private-club culture.” So, it should be no surprise that many buyers are attracted to co-ops’ exclusivity.

Relatedly, when buying in a co-op, you work as a shareholder with other shareholders and need permission to do what you want in your unit, such as renovate or put it up for sale. The board must approve the listing price should you decide to sell. Some buyers find this aspect too controlling; others are willing to compromise to have the chance to live in unique buildings — namely pre-war conversions on Fifth or Park Avenues, which boast an inherent rarity on the marketplace since they will not be built again. Renovations must be carefully reviewed within these types of structures, as older buildings are not made like newer ones. Hence, there are the typical “wet over dry” rules (such as not allowing a bathroom over a bedroom) to mitigate water damage or other issues.

By far, what causes the most stress for potential buyers is the co-op board interview. Overall, however, there is nothing to be worried about. The interview process is like a job interview or business meeting. You should wear professional clothing and not invited to ask questions. You are there to be responsive to the board’s queries. The goal is always to keep everything congenial and neutral. Never offer more information than is requested. Now is not the time to ask about potential renovations or the building’s timing for approval. The interview is mainly for the board to get a sense of who you are.

It helps to know that the board generally comprises a president, a treasurer, a head of reparations, and a design committee—and that board members are shareholders who usually serve for a four- to six-year period. The size of the building determines how many people are allocated to each division. Some segments deal with unit sales approvals, some with the operating budget, and some with overall building upkeep and improvements, such as window abatements.

The interview typically lasts about an hour and rarely goes over that. In my own board interview, they just asked about my income. I had no debt, but my then-husband had to explain why he owned a house in Levittown (he had bought the house for his parents). Try not to feel interrogated or like you are on trial. It’s just a business transaction.

That said, make sure to fully disclose where the money comes from so there are no surprises. Boards are required to do their due diligence in screening each potential resident, including their full financial snapshot.

The listing agent will guide you on what the board likes to see. Your broker will also help you prepare for the interview, review what the building allows in terms of financing, and provide information on the building’s culture, type of inhabitants, etc.

To recap: Choosing a co-op can be a very smart choice for people who value market stability in prestigious neighborhoods, want a greater sense of community, don’t want high turnover, appreciate the stringent admissions process (both financial and otherwise), and intend to stay put and plant roots. Many of the older buildings in the city (most of which are co-ops) have tremendous prestige and elegant architecture. For those who find the rules of a co-op to be more for their benefit than a nuisance, a co-op can offer a wonderful home.

As someone who spends a great deal of time working in both the condo and co-op markets, I see the value in each. Therefore, I recommend keeping an open mind and including both types of buildings in any new property search!s