Understanding the Difference Between Condos vs. CO-OP’s and How to Be Prepared

The Weekly Recap

The CPI number came in hotter than expected for January driven by an increase in housing costs which forced some negative trading days on the market and made rates tick up a bit. Japan and the UK have officially fallen into a recession after both economies contracted for the second straight quarter. Some Fed governors are saying they need to see more data indicating inflation is approaching 2% before it begins easing rates, all but assuring we will not see a rate cut this quarter. The S&P closed over the 5,000 mark and the average pizza pie in NYC is now almost $34.

Understanding the Difference Between Condos vs. CO-OP’s and How to Be Prepared

As the real estate market heats up with more buyers entering the space and as inventory remains limited, it’s important to know how what you’re looking at may not necessarily be conducive to your situation or your overall goals. In NYC, instead of dealing with wood-framed homes, we deal with selling and buying pieces of concrete in the sky, and the two most common places those large pieces of concrete exist are in Condos and CO-OPs.

Condos

Condos make up about 35% of total market share in NYC. As new projects are completed, that number will continue to increase as all new buildings are Condo and not CO-OP. There are some great benefits to owning a condo:

• Condos have a lower barrier to entry only requiring 10% down in order to purchase.

• Condos do not care how much money you will have after closing on an apartment, if you have a $1 million and want to buy a place for $1 million all cash, the Condo will give you a high five and welcome you to the building.

• If you are an investor or looking for a non-primary residence, going the condo route is the way for you as you can rent the apartment immediately after closing and can come and go as you please if you choose to keep it as a secondary or tertiary residence.

• They are newer buildings with more updated appliances and features

• The monthly costs for owning a condo (aside from your mortgage) are known as Common Charges (fees for upkeep of common areas) and your taxes.

• Condos are also considered ‘real property’ and you receive a deed upon closing.

CO-OP

CO-OP’s make up a majority of the housing inventory here in NYC and this is where you need to be the most prepared and understand that your affordability may be affected by whether or not the building is a Condo or CO-OP. There are some things to be aware of when looking at CO-OP’s:

• CO-OP’s require a minimum down payment of 20%, some may even require minimums of 25% or as much as 50% down.

• CO-OP’s need to know where the money for the down payment comes from as some buildings may not allow gifting, parents co-purchasing, parents buying for children etc.

• They are not investor friendly, the standard sublet rule is that you must live in the home for two years, then can rent it out for 3-5 years (depending on the board) and then at the end of that timeframe either move back or sell the home. Pied-e-terre’s are also not common.

• The monthly cost in a CO-OP is known as Maintenance (includes your taxes) and owners receive a Stock and Lease instead of a Deed when they complete the purchase.

• CO-OP’s also require two things that Condo’s do not. The board looks for two things in your financial statement, one is Debt to Income Ratio (DTI) and what your Post Closing Liquidity is. Lenient boards will allow 35% DTI while more strict ones will require less than 25%. The DTI is based on OWNING the apartment you are trying to purchase, not what your liabilities are before owning it. The Post Closing Liquidity requirement is how much money you have in the bank AFTER closing. Standard requirement for a CO-OP is TWO YEARS of mortgage and maintenance in your account after closing.

  • Using the $1mil condo example, if you had $1mil and wanted to buy a $1mil CO-OP all cash you would really need to have another $25k-$60k (depending on maintenance cost) in the bank in order to purchase for post closing liquidity.

    • Or if you had $200,000 to put down, although that is 20% of the $1mil purchase, you might only be able to afford a $750,000 CO-OP because you would need cash left over for two years worth of mortgage and maintenance in your account in order to pass a board.

• The board process is very invasive and there is an interview once your application is accepted.

With CO-OP’s seemingly way more daunting than Condos, the question may be, “Why would anyone buy in a CO-OP?" There are benefits, CO-OPs are larger than their condo counterparts and are anywhere from 10-30% cheaper than a condo. With the invasive application process you can live with confidence that your neighbors are above board and with the restrictions for investors, the building is less transient with short term stays or renters cultivating more community.

Market Performance

Here are how some other indexes and asset classes have performed as of this mornings opening bell.

NYC Market Update

Here is a view of new inventory that has come onto the NYC market over the past week as well as newly signed contracts in Manhattan. The market is HOT with a 58% increase in contracts signed week over week.

Mortgage Rate Update

Mortgage rates ticked up slightly this week as consumer prices came in higher than expected. The economy has been performing well so far this year and rates may stay higher for a little longer especially after the Fed signaled there would not be a March rate cut.

News You Can Use

• US Inflation Tops Forecasts in Blow to Fed Rate-Cut Hopes Bloomberg

• Consumer Price Index is Hotter Than Expected in January Axios

• Decembers Inflation Number Was Lower Than First Reported CNBC

• Yellen Touts Inflation Progress Despite Latest Stubborn Gain Bloomberg

• Why Rate Cuts Won’t Make Buying a House Much Easier Axios

• Fed’s Barr Says He Supports Powell’s Careful Approach to Rate Cuts Bloomberg

• Investor Expectations For Interest Rate Cuts Keep Slipping Into the Future Axios

• US Shoppers Cut Back on Retail Spending in January Wall Street Journal

• US CPI Data to Show Services as Key Driver of Disinflation Bloomberg

• Credit Risk Scores Turning From Red to Amber Cue Soft Landing Bloomberg

• Euro-Area Economy is Losing Momentum, EU Says, Slashing Outlook Bloomberg

• NYC Named Priciest Pizza City New York Post

The Deep Insight

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