Buying a Co-op
Being Prepared to Fulfill the Requirements of the Board
Manhattan Co-op ownership differs from that of Condominiums in that you own shares in a Corporation instead of holding Title to a piece of property. The Corporation is governed by a Board of Directors. It is this Board that establishes what the requirements are in order to purchase an apartment in their building.
Unlike condominiums a purchaser can be rejected by the coop board. In a Manhattan condominium the board only has first right of refusal and must buy the apartment for the same terms offered. The only way a condo can reject a buyer is to exercize their right of refusal and buy the apartment.
All a buyer needs to qualify for a condo is a down payment, a mortgage and/or enough cash for the balance of the purchase. Condos are very easy to purchase and are much easier transactions for the purchaser, seller and broker.
Many Manhattan condos are trying to be more like coops but legally they can not. Manhattan's most prestigeous pre-war buildings are coops.
Please note that the objective of the Coop Board is simply to Maintain and to Raise the value of the property and the building.
There are three major areas in which the Board addresses this:
The amount of financing allowed by the Board.
Liquidity of the buyer after the purchase has closed.
The cash flow of the buyer.
The amount of financing a Board will allow to purchase in the co-op can range from 80% to no financing at all. The average amount for most co-ops is 75%. Negative amortization and Interest only loans are usually not allowed.
After the closing of a purchase the Board will expect the prospective purchaser to have, in Liquid Assets, three to five years of their debt service. Debt Service is the mortgage, maintenance, and any other financial obligations the purchaser may have. This includes car leases or loans, school loans, other mortgages, home equity loans, credit cards and such. The amount of this requirement varies from Co-op to Co-op and should be verified by your broker. In the more affluent areas such as Central Park West, Fifth Avenue, and Park Avenue the liquidity required may be as much as several times purchase price. The majority of Boards require two to five years of debt service depending on the building. This also should be verified by the brokers.
Lastly, the monthly carrying cost of the apartment should be approximately 25% of the gross income of the purchaser(s.) The total debt service of the purchaser should be in the range of 28 to 30% of the Gross Income.
Because of these requirements, when an offer is submitted to purchase, you will be asked to disclose your basic financial profile. Unless the owner is confident that the prospective purchaser will pass the Board requirements they will not entertain the offer. In a coop the highest offer may not be the best offer. The best offer is the highest offer from the most qualified purchaser.
You will be asked to submit a complete financial statement with an application to purchase once there is a fully executed contract of sale for an apartment in a co-op.
There are exceptions to the numbers above therefore it is very important to discuss your particular financial situation with your Broker. An experienced coop broker can advise you best in these situations. Many agents, particularly newer agents that started in the business during the new construction condo boom have little experience with coop boards and presenting meticulous board packages so they prefer the easy sales in condos. I always enjoy the challenge of getting a client approved by a difficult coop board in an established full service coop.