By Jaylon Brigham
While many parents or parents-to-be dream of raising their kids in a house in the suburbs with a big yard, more and more parents are opting to raise their kids in urban environments. New York City is no exception. While the thought of raising kids in the concrete jungle was once unthinkable for many parents, many families are now either moving to – or staying in – the city, drawn by the short commutes, diverse communities, and wealth of cultural opportunities for their kids.
One of the biggest challenges to living in New York City with children is finding a place to live. In addition to the standard questions about neighborhoods, affordability, safety, and school districts, finding a home in the city requires learning the lingo of the New York real estate market and the unique types of properties found here.
Unlike the suburbs, where you buy a piece of land with a house on it, residential property in New York City comes in many different forms, and is generally divided into three types: cooperatives (coops), condominiums (condos), and townhouses. Knowing the differences between each type of real estate is critical to making an informed decision for your family.
Coops: Your Home as a Stock Certificate
Coops are truly unique to the New York real estate market and represent more than 70% of all resident-owned real estate in NYC.
Coops are also among the most challenging concepts to understand in residential real estate. Oddly, coops are technically not even real estate in the legal sense. Instead of purchasing a deed to property, you purchase a stock certificate representing shares in a corporation (the cooperative) that owns the apartment building. Your shares in the coop entitle you to a “proprietary lease” to occupy a specific apartment.
The shareholders of a co-operative apartment pay a monthly maintenance based on the number of shares they own. The maintenance fee includes real estate taxes, mortgage interest on the building itself, employee salaries, building upkeep, etc. The number of shares each apartment is assigned depends on the size, view and location of the apartment.
Below are some of the unique attributes of coops.
Selectivity. The co-operative’s Board of Directors, typically elected by the shareholders, may accept or reject potential shareholders without having to provide a reason, although they may not base a decision on a person’s race, ethnicity, religion, or other legally-protected basis. The qualifying standards vary from building to building.
Financing. Each co-operative has its own rules regarding how much financing a prospective shareholder may assume. Many buildings insist on a substantial down payment. Others require as little as 20%. While most buildings allow the prospective purchasers to use financing, many limit the kind of loan products that they allow the purchaser to use.
Income Requirements. Coop boards favor purchasers whose debt to income ratio does not exceed 25%, while more liberal boards might allow as much as 30% or more. Debt to income ratio refers to the total between the monthly mortgage payment and the monthly maintenance payment as a percentage of the purchaser’s gross monthly income.
Asset Requirements. Another important factor a coop board takes into consideration is how much liquid assets a prospective tenant will have after the down payment and closing costs. While most coops ask for 2 years’ mortgage and maintenance left in liquid assets, other more liberal coops might be satisfied with as little as 6 months. A simple rule to know is the higher the down payment requirement, the higher the liquid asset requirement. Liquid assets cover monetary assets and investments of the purchaser excluding retirement investments such as 401(k)s, IRAs, etc. unless the purchaser is at retirement age.
Tax Benefits. Of the maintenance charges shareholders pay each month, a significant percentage is often tax deductible; specifically, that portion which is applied to real estate taxes and interest charges on the building’s mortgage. These percentages may vary greatly. And, if the purchaser uses financing, naturally the interest on the loan, with certain limitations, may also be tax deductible.
Renting Your Coop. When a shareholder wishes to sublease, permission must be granted by the Board of Directors. Some buildings sharply limit subleases. This avoids the transient feel of rental buildings, as well as condos where an owner is free to rent out his unit at any time.
Coop Application Process. Buyers are required to provide detailed personal financial data including one or two years’ tax returns, bank statements and personal and professional reference letters. They must also be personally interviewed by the building’s Board.
Additional Fees. “Flip taxes” are a common feature in co-operatives. While it is called a “tax,” it is actually a fee imposed by the co-op, which uses the money to build up the capital reserve and/or pay for improvements to a building. Generally, the fee is one to two percent of the purchase price (although other formulas exist) and is payable by the buyer or seller, depending upon the co-op’s rules or market conditions.
Closing Costs. Closing costs are considerably less expensive for coops when compared with condos as there a no title insurance fees or mortgage recording taxes.
Condos: A Slice of Real Estate
Just like your single family homes in the suburbs, condos are actual real estate for legal purposes – only they are housed in apartment buildings. Condos are an increasingly popular concept in New York City, mostly seen in new developments all over the city. Instead of shares in a corporation, a buyer receives a deed to the apartment itself. Each owner is responsible for their own real estate taxes and mortgage payments. Unlike coops, condominium buildings cannot have an underlying mortgage. A share of the building’s common charges for maintenance and upkeep are billed to the owner on a monthly basis.
Real Estate Taxes. Owners are responsible for real estate taxes.
Insurance. Owners will need to maintain insurance coverage on the dwelling.
Financing. It is easier to obtain financing for a condo than for a coop. In some cases, it is possible to finance the entire amount of the purchase price of a condo.
They are the ideal choice for non-U.S. citizens or for those with their assets held outside of the United States given that co-ops are unlikely to approve a buyer whose funds are not in the U.S.
Application Process. In most cases, the application process for condos is less formal than for co- ops. An applicant with sufficient financing is almost always accepted.
Renting. The rules about leasing condos are very relaxed. The board cannot turn down a renter and leave the owner with no alternatives. If a renter is rejected, the board is obligated to rent the apartment under the same terms and conditions expressed in a bona fide lease agreement. For this reason, condos are much better suited for investors.
Closing Costs. Closing costs are considerably more expensive for condos and townhomes when compared with coops as there are title insurance fees and mortgage recording taxes involved with the purchase of a condo.
The purchaser receives a deed to the land which is recorded in the office of the county clerk.
Townhouses: A Home of Your Own
Townhouses represent a much smaller, though highly coveted, percentage of the NYC real estate market. While coops and condos can be somewhat confusing, the purchasing and upkeep requirements of a townhouse are similar to owning a house in any other American city or suburb. Small multifamily dwellings are included in this category and offer the opportunity to offset expenses with rental income from other units. The owner is responsible for the upkeep and costs associated for the entire house as well as real estate taxes.
Which One Is Right for You?
That depends on your budget, preferences, timeline as well as employment/income and asset status.
In general, co-op apartments are more competitively priced than condos. If you like the close-knit community feel with few transients, aren’t bothered by stricter rules of coops, and have the financial wherewithal the coop requires, then a coop may be the right choice for you.
A condo is preferable if you think you may want to rent the apartment out at some point or if you don’t want to be subject to a challenging application process or be bound by strict financing requirements of coops. Even though condos are more expensive, they have no financial requirements. As long as you find a bank to loan you the money you’re looking for, you’ll be good to go.
If you want to stay in the city but live in a house without anyone living upstairs or downstairs from you and no board dictating any rules for you, then you should consider a townhouse if you can afford it. Keep in mind that townhouses cost several million dollars, so while there are no boards dictating financial rules, the market imposes its own.