Have you ever been searching for an apartment and you find a great deal? You call the listing broker and before you know it, you’re divulging all your personal finances - your income, cash in banks, retirement funds, student loan debt, car payment, and even the blood type of your first-born! And then it hits you: all you wanted to do was make a request to see the apartment. Wtf? You feel naked, vulnerable, and definitely skeptical of this real estate agent so you decide to continue this search on your own for as long as possible because obviously you’re being taken advantage of somehow. You’re determined to avoid agents whenever possible and you’re certainly not giving any more personal financial information to strangers. Who do they think they are anyway?!
I promise you that we’re not being nosey. There’s a good reason why I need a sample of your first born’s blood:
If you’re looking to make a real estate purchase in NYC then you’re considering one of the most exclusive properties in the world. Most of NYC is comprised of coops, and coops require board approval and board approval requires full financial disclosure. Oh, and just to keep you on your toes, every single coop is different, so each has its own set of rules and requirements.
If you want to truly understand the difference between a coop and a condo and not the textbook definition, watch this:
Sounds complicated, I know. Thankfully, I love complicated just ask my husband.
The good news? Coops are hands down the best bang for your buck if you’re looking for a primary residence or second home / pied a terre. But in order to secure the deal, you’ll need to cooperate by providing your broker with a financial snapshot to start with. Blood samples come later.
If you’re looking for an investment property to rent out, coops can be a phenomenal option if you happen to find one that allows immediate and unlimited subletting. (A needle in a haystack but they do exist!). Coops are way cheaper than condos when considering price per square foot, but they are only a deal if a) you find one that works with your intended use and purchase structure and b) you financially qualify within their set of rules.
Omg the rules! Where are these rules written?
No Where. Coops are like apple products. They come with no written instructions. They’re supposed to be intuitive. So, Consider me your personal Genius Bar of Coops.
1) Debt to Income Ratio
2) Post Closing Liquid Assets
(You want to have 2 - 2.5 years worth of expenses, in liquid assets, post closing.)
Debt to Income ratio. In other words: Money Out vs Money In.
This is your monthly set expenses *Money Out (like mortgage, maintenance, student loans, car loans or any other mortgages. Credit cards are not considered expenses if you pay them in full every month) vs Gross Monthly Income / Money In (Gross = before taxes people. So, whatever your salary is, divided by 12 OR if you have multiple streams of income - then take what is reflected on your tax return and divide by 12).
DTI should be 29% or less. Most coops won’t even consider a DTI of 30%.
Let’s Try Some Examples, Shall We?
*Warning! Math Geek Moment!*
For example, if your total income is $120,000 / yr, then your monthly income is $10,000. 29% of that is $2,900. So, your mortgage and maintenance (and any other debt you have) cannot exceed $2,900 per month to qualify. If the maintenance is $1,000 then your mortgage cannot exceed $1,900. How much of a mortgage is that? About $400,000. (I estimate $1,000 in monthly payment per every $200,000 borrowed.) emember, this is not your purchase price, this is how much you are borrowing. *Don’t forget to subtract your down payment from the purchase price.
You can work backwards too come along with me Math can be fun!
An apartment costs $1,000,000. Assuming a 20% down payment, do you meet the DTI requirements?
1,000,000 - 200,000 (20% down payment) = 800,000 borrowed.
800,000 mortgage = approx $4,000 in mortgage payments.
Let’s say the maintenance is $1,800/month, your total monthly payments are $5,800.
$5,800 / .20 = $20,000. You must make $20,000/month or $240,000/year.
But wait! There’s more! Remember, there are 2 Formulas to deal with.
Post Closing Liquid Assets.
Once you establish what your expenses are going to be (mortgage + maintenance + any other revolving debt payments) take that number and multiply it by 24. You should have this amount of CASH minimally in the bank after you close. In other words, after your down payment and closing costs, this is the necessary cash left over. Don’t have that kind of dough? Ask mom and dad for a loan. We call this “gifting.” You can use a temporary “gift” to pad your portfolio and give it back the day you close. Gifting is super common in NYC.
Liquid cash can be stocks & bonds as long as it’s not in a retirement account. Retirement accounts are not liquid, unless you are over 59.5 years of age and then it is considered liquid. Real estate assets are not liquid. And as a matter of fact, if you own other real estate, you’ll have to include those real estate taxes and insurance as part of your expenses along with the mortgage if one exists.
Remember when I said that all coops are different? Many of them require more than a 20% down payment. Maximum financing can be anywhere from 75 - 0%! The higher the required down payment, the better deal, in terms of purchase price, you stand to get because this will affect price.
For example: Fifth Ave has Some of The Best Deals I've ever seen! I swear! Why? Because not only are many of them estate sales (because if you make it to Fifth Ave, that’s probably where you’re going to die) but many don’t allow financing at all! This means you have to find a buyer who is willing and able to pay all cash and who has 4x the purchase price in liquid assets post closing.
It’s obvious that the best opportunities are available for the most qualified buyers; such is life. And, what’s a great deal for one, may not be a great deal for you. I know of a phenomenal deal for $3M - a loft in Flatiron where the carrying costs are $600! But do you have $3M? Shit. Me neither. Because if I did, I’d buy it in a NY minute.
But do you now see why it’s so important that I gather a financial snap shot? Only then can I tailor the best deal for you using the two formulas. Squirm all you want. You’ll thank me later when you score on a 2 bedroom in a townhouse on the upper east side with a working fireplace and a washer dryer for $485,000 and maintenance of $650/ month. Worth the trouble? You bet your sweet ass it is.