Archive for First Time Buyers

Douglas Elliman released the Third Quarter report for Manhattan Residential Co-op and Condo sales market.  The Manhattan Sales Quarterly Survey of Co-op & Condo Sales for 3Q-2014 reported here and summarized below was prepared by Miller Samuel for Douglas Elliman.

 “Manhattan housing prices continued to rise in the third quarter.  Rising inventory remained inadequate to meet the high level of demand”

3QTR Manhattan Sales

  •  The supply and demand imbalance has begun to push housing prices higher. Median sales price rose 4.2% to $908,242 from the same period last year. As a result of the shift towards more 3-bedroom and 4-bedroom sales, the overall average sales price jumped 17.4% to $1,684,729 from the prior year quarter.
  • The monthly absorption rate, the number of months to sell all inventory at the current rate of sales, increased to 5.3 months from the prior year record low of 3.6 months. As a result of limited supply and fast market pace, 49.2% of all transactions were sold at or above list price at time of sale.
  • Despite the third consecutive quarter with a year-over-year rise in listing inventory, supply remains 16.1% below the 14-year third quarter average of 6,957. Listing inventory jumped 27.6% to 5,828 from the prior year quarter, with a much larger increase seen with condos than co-ops.
  • Days on market, the average number of days to sell all apartments that closed during the quarter, expanded by 4 days to 92 days, marking the second fastest marketing time in 15 years.
  • Listing discount, the average percentage difference between the listing price at the time of sale and the sales price fell to 1.1% from 2% in the year ago quarter.

Douglas Elliman released the Third Quarter report for Manhattan Residential Co-op and Condo sales market.  The Manhattan Sales Quarterly Survey of Co-op & Condo Sales for 3Q-2013 reported here  and summarized below was prepared by Miller Samuel for Douglas Elliman.

 

“The third quarter was a period of records and near records as sales surged and inventory fell sharply.”

Manhattan_Sales_3QTR_2013

Our third quarter housing market was one of the most active in decades. Manhattan experienced the second highest number of sales in more than 24 years and the most sales in six years. Our agents helped buyers navigate rising mortgage rates, bidding wars and the lowest inventory in 13 years. It’s an exciting period for our real estate market as we look forward to continued improvement into the next year.

  • The 3,837 sales in the third quarter were 30% above last year’s total and second highest only to 3,939 in the second quarter of 2007.
  • Listing inventory dropped 21.9% to 4,567 from the prior year quarter, the lowest since it was tracked in 2000.
  • The sales share of 1-bedroom apartments reached 40.5%, a 15-year high as co-op sales expanded to 62% share 9-year high. The shift to lower priced units in response to rising rates caused overall median sales price to slip 2% although individually, co-op and condo median sales price rose 0.8% and 3.7% year-over-year.
  • Days on the market, the number of days from the last price change to the contract price, collapsed to 88 days from 191 days in the prior year quarter. The elevated year ago level reflected the absorption of languishing older listings as inventory began to fall sharply.
  • Listing discount, the percentage difference between the list price at time of sale and the sales price, fell sharply to 2% from 7.2% in the prior year quarter.

In 1971, the city launched the 421a program as an incentive for developers to build projects on underused or unused land.  Today, a record number of condos have a 421a status.  Ranging from 10 years duration below 96th Street to 15-25 years in Upper Manhattan, the exemptions do have an expiration date.  The exemptions start to decrease annually after the first two years, which usually means rising common charges.

Historically, condos will sell for a higher price if the common charges are low.  While in development, the developer will set the rate for the monthly charges until a board is in place.  Luxury buildings with high-end amenities like rooftop decks, concierges, etc. may have lower common charges while the 421a Tax Abatement is in force.

Once the tax abatement expires, condo boards are generally scrambling to find ways to reduce costs.  Some condo bards have taken the drastic action of terminating their contracts with property management and hiring an on-site manager.  This extreme step takes a dedicated hands-on board to oversee the manager, decrease costs and look for ways to raise revenue.  Board members are generally volunteers, so finding people willing to give their time for the community is sometimes difficult

Some condo boards find other ways to chip away at the expenses; cutting staff, renegotiating mortgage rates, installing high-efficiency lighting in the common areas, and other similar strategies. Some cost-cutting measures come with risk of reduced services, but the upside remains – lower common charges generally create higher selling prices.

 

Inspired by The Real Deal Article by Hayley Kaplan

Feb
04

5 Tips for Buyers Who Use Down payment Gifts

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About a quarter of first-time home buyers use gifts from relatives to fund a down payment for a home purchase, according to data from the National Association of REALTORS®. But lenders are carefully scrutinizing such gifts.

“Basically, the banks want to make sure that you’re not getting a second loan,” Ray Mignone of Ray Mignone & Associates, a financial planning firm, told The New York Times. “If all of a sudden $50,000 pops into your account, they want to make sure it’s not a loan against the property that they’re going to put a mortgage on.”

In a recent article, The New York Times provided some of the following tips in making make these lenders’ checks and balances go smoother for home buyers:

  • Have the money come in a check or wire transfer so that it’s traceable. Lenders often be-come cautious over cash gifts.
  • Have the giver provide the lender with a gift letter, which verifies the money is a gift, the specific amount being given, the relationship to the borrower, and that repayment is not required.
  •  Deposit any gift money into the borrower’s account a few months before applying for a mortgage so the lenders have fewer questions about it, Mignone says.
  •  Consider federal gift-tax regulations: Individual gifts of more than $13,000 must be reported to the IRS and are subject to tax.

Be aware that certain types of mortgages may limit how much of a down payment you can receive as a gift. For example, with conventional loans, lenders may require at least 5 per-cent in the borrower’s own money that is not a gift. However, Federal Housing Administration loans — which are popular among first-time home buyers — do not have any limits on gifts and borrowers can use gifts to cover the entire down payment.

 

 

http://www.nytimes.com/2012/12/30/realestate/mortgages-to-givers-of-down-payments.html?_r=1&

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Jan
23

Trading up? Be prepared to wait

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You’ve decided to move up to a bigger or better apartment.  You have all your ducks in a row, credit score is near perfect, your broker is the best in the business, but you’re not getting anywhere.    Listings are scarce and credit is tight, so you end up sitting out because you can’t find what you’re looking for, have been outbid or you can’t get a good loan.

Two-bedroom apartments are particularly challenging since the market is shrinking in this area, according to Miller Samuel.  The available number of two-bedroom apartments is down by 28.4% from the same period a year ago.   This is largely due to low equity since the fall of prices in 2008; selling may not net enough extra cash to move to a bigger or better place at a price move-ups can afford.  The down payment requirements also come into play here as people need to dig for the cash to make their next move. 

Financing is another barrier to moving up.  Only the strongest borrowers with the best credit scores and income are being approved for loans with the favorable rates.  Others who are self-employed or receive a large portion of their income in commissions and bonuses are meeting resistance, and if they can get approved at all, the rates are appalling.  Without reasonable loans, buyers are watching their dream homes get snapped up by others.

It seems that contracts are being landed by the most aggressive buyers.  They are the first in the door at an open house and can make up their minds quickly.

Tips:

Consider a lease-back - making the sale of your current place contingent on the option of renting from the buyers for a few months to help you find a new place in a tight market.

Get in Early – be the first in the door at an open house.  Many websites like Douglas Elliman allow you to save searches and will send you an email for every new listing that meets your criteria.

Be prepared – Make sure all your paperwork is lined up including your mortgage pre-approval and your financials so you can make an offer on the spot.

Work with the right team – A responsive broker and real estate attorney can make all the difference in a hot market.

http://www.nytimes.com/2012/12/16/realestate/trading-up-can-be-hard-to-do.html?pagewanted=all

Jul
02

Beginner’s Guide to Doormen

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You’re living in a building with a doorman, something you’ve never done before.    It may be a little intimidating, after all, you see them every day, and they know who you hang out with, where you shop online and your favorite takeout.  A doorman can be a great asset to a building.  Most doormen are extroverts; they like being in contact with people.

Here are a few tips to smooth the nerves:

  • Introduce yourself with a nice smile. 
  • Doormen are a great resource for who on the building staff does what. 
  • Be polite, the Doorman is there to help you.
  • Know the limits.  The Doorman may be able to help you hail a taxi or carry your bags from the curb to the elevator, but they probably won’t be able to fix a leaking faucet or vacuum for you, but he will offer the name of the person who does those things for the building.
  • When you request assistance, frame it as a question “could you direct me…” rather than a demand.  As grandma used to say “You catch more flies with Honey”.

A doorman is generally part of the building’s security.  Knowing who belongs – and who doesn’t – is part of his job.  Don’t be offended if a new doorman introduces himself and asks you to state your business in the building.   Just smile, tell him who you are and your apartment number and you’ll be fine.

 

From New York Times article.

May
16

Purchaser’s and Sellers Closing Costs Guide

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Closing Costs Guide-Created by Jerry Feeny

Real estate closing costs can be confusing. These PDFs created by Jerry Feeny,  a well known and respected New York Metro real estate attorney, cover closing costs (coops, condos, townhouses-and other real property)  for buyers and sellers in New York City , The Hamptons and Westchester & Rockland Counties.

We hope you find this guide helpful in ‘demystifying’ the age-old question of buyers, ‘what are my closing costs?’ And from sellers, ‘what costs do I have to pay at closing and what is left over from the sale price?

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Jan
13

Getting Started – Homework for Manhattan Condo Buyers

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With an aging housing inventory, new condominiums have quite an appeal in Manhattan.  Luxury amenities like pools and play areas, high end finishes add to the appeal.

New condos have a few drawbacks, however: often higher selling prices and closing costs as well as difficulties in obtaining loans.  New buildings must have offering plans approved by the state attorney general’s office, detailing important points about the building.  This complex document can be intimidating to the lay person. 

Bringing in a good attorney familiar with new construction to review the offering plan early in the process can save a client thousands of dollars by identifying taxes and fees that can be negotiated.

Tax abatement is another point that bears close scrutiny.    While it is a great selling point because it keeps monthly costs lower for a while, an attorney can help determine the time span of the abatement and what the tax bill could be when the abatement expires.

Closing costs are much higher on new construction.  Expect to pay the transfer tax and the seller’s attorney fees in addition to the customary closing costs for established apartments.

Be sure the building has a temporary certificate of occupancy, required before you can close on an apartment in a new building.  Check the Building Department Website

Financing a new condo can be difficult.  Buyers may be approved for a loan, but it is entirely possible the building will not qualify.   Certain FHA and Fannie Mae requirements may preclude the building, such as flood zone or percentage of sold apartments.  Individual banks may have their own additional requirements.  Many new buildings have preferred lenders and mortgage brokers to overcome this hurdle.

Appraisals must match the purchase price.  It is not unusual to have difficulties finding nearby comparables to the new apartment you wish to buy, causing appraisals to come in lower than expected. 

Inspections are recommended for new construction.  Cost cutting measures like lower-quality windows and problem with floors or exterior stucco may affect the quality of your life.  Significant problems can be addressed in the contract.  Smaller issues like paint drips or broken screens should be addressed on a ‘punch list’.

Doing your homework now can save you a lot of aggravation down the road.

 Inspired by New York Times Article by Jim Rendon, published October 30, 2011

 

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Oct
27

Third Quarter 2011 Long Island Sales Report Released

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Today we released third quarter sales  for the Long Island residential market.  The Long Island Market Overview Q3 2011 reported here and summarized below was prepared by Miller Samuel for Prudential Douglas Elliman.

“Sales activity jumped above last year’s levels, as listing inventory slipped.  Negotiability between buyers and sellers held steady.”

  • Median sales price declined 3.2% to $365,000 from $377,250 in the prior year quarter. Average sales price followed a similar pattern, declining 3.9% to $457,496 from $475,946. The decline is largely attributable to last year’s federal homebuyers tax credit that had pushed sales prices higher.
  • There were 5,141 sales in the third quarter, 18.4% above the 4,343 total in the prior year quarter and 22.3% above the prior quarter total of 4,205. The current total is the fourth highest quarter in three years, led by three quarters significantly impacted by the federal homebuyers tax credit from the second half of 2009 through early 2010.
  • There were 21,462 listings on the market at the end of the third quarter, 1% less than 21,670 listings in the prior year quarter and 5.8% less than 22,772 listings in the prior quarter.
  • The average number of days to sell a property from its original list date to contract date was 116, nominally longer than 112 days in the prior year quarter.
  • The listing discount, or negotiability between buyer and seller, measures the percentage discount from the original list price and the sales price, was essentially unchanged at 6.5% in the third quarter compared to 6.6% in the same period last year.

Sep
01

Qualifying for a Mortgage as a Freelancer

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At one point during the credit crunch, getting a loan as a freelancer was nearly impossible.  While it still remains difficult, the loan approval process is one of the biggest challenges.  Be prepared to submit additional paperwork to prove consistent income.

Tips for home-buying freelancers:

  • Pay off other debts, including credit cards, and build a cash reserve.
  • Identify the source of the down payment, whether a gift or loan from your 401(k), and be prepared to show statements.
  • Prepare for a closer examination.  Review at least 3 years tax returns.  If your income increased substantially from one year to the next, be prepared to explain why and whether you expect it to continue.  If your income declined last year, be prepared to explain that.
  • Check with local banks and credit unions which may be more inclined to spend the time necessary to qualify you for a mortgage.

It is always wise to address any credit problems before beginning the house hunt.  With a little preparation and answers to some tough questions, you may be able to get into the home of your dreams.

Inspired by New York Times article by Vickie Elmer, August 26, 2011.

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Jul
08

Square footage: It’s a matter of opinion!

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I remember seeing a cartoon in the New Yorker Magazine Cartoon Bank showing two mice talking about the size of their in-wall apartment. One said to the other “Counting the space behind the pantry shelves, it’s eleven square feet.”

Nowhere is caveat emptor more applicable than when referring to the stated square footage of a Manhattan apartment.  Many real estate sites have disclaimers like this: “Exact Dimensions can be obtained by retaining the services of a professional architect or engineer.” At best all stated square footage and dimensions are approximate. At worst they are deceptive and misleading.

It is part of the overall marketing plan with most brokers: clean up, de-clutter, professional photos, and professional floor plans.  Brokers want to show the property in the most flattering light.  A floor plan in black and white (lately I’ve seen 3D color floor plans), provides a visual that shows walls, doors, fixtures and open space. 

In addition to the stated square footage, does the floor plan show the whole truth?  Are columns shown in the proper location and proportion to the space?  Are radiators and moldings shown?  How about the thickness of the walls?  Sometimes they are, sometimes not.  While technically correct, some graphic designers will measure from wall to wall, without taking into account such things as moldings and radiators.  But, these things eat into usable floor space.  Many times columns and window and door placements, even wall thickness are just estimates based on educated guesses and knowledge of building practices for a particular building.

For more information on how floor plans are created, see the New York Times article here.

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Jun
03

The Mortgage Maze – A Road map to approval

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In years past, nearly anyone who could fog a mirror could qualify for a mortgage.  Not anymore.  Those days are long gone.  From stricter underwriting to more documentation, face it, getting a mortgage isn’t as easy as it once was.

Be prepared is the name of the game. 

  • As part of your real estate team, in addition to an attorney, financial advisor/accountant and real estate broker, seek out a mortgage professional you can trust.  They will be privy to all aspects of your financial life.
  • Check your credit score and review credit reports
  • Gather your Documents
    • Two years of complete Federal Tax Returns including W-2s
    • Two recent and consecutive period’s paystubs
    • two complete and consecutive months bank statements
    • two complete and consecutive months brokerage account statements
    • one recent quarterly retirement account statements for each retirement account
    • photo ID
    • Mortgage professional will review and point out any potential red flags
    • Complete mortgage application and submit to lender.
    • Get a pre-approval letter.

With the approval letter in hand, your real estate broker will have a better understanding of the price range you qualify and can show you properties that fit your needs and budget.  Your broker will be able to negotiate from a stronger position.  Before you know it, you’ll be moving into your new apartment.

 Adapted from an article written by Richard Martin/SVP/DE Capital Mortgage an affiliate of Prudential Douglas Elliman.

This is the third in a 3 part series.  In Part 1, we discussed the General Principles of a Coop Corproation and the Telltale signs of a GOOD Building.  Part 2 discussed what to look for in Coop Financials.  Finally, we’ll look at:

Assessing a Coop’s Financial Condition

It has been my experience that very few buildings are in such a state of financial disrepair as to warrant a decision on the part of the buyer not to purchase in a particular building.

This was not always the case especially in the 1980’s and early 1990’s, a time that saw a tremendous amount of new conversions and with that, the problems that arise in such situations. Currently, the overwhelming majority of coops have been established for over fifteen years (a very conservative estimate) and has in many ways gotten the kinks out of their financials. They tend to enjoy low or no sponsor ownership, attractive financing and low instances of shareholder default.

In spite of the likelihood that the majority of buildings are solvent, buyers are concerned about the potential for increased maintenance and assessments, these concerns are the main motivation behind their question; “Is this a good building?”

Before forming an opinion, it is essential to understand the following points:

  • Buildings, regardless of their location, age and prominence, need on-going repair and the replacement of parts, systems, and structure.
  • Operational costs are subject to inflationary pressure and therefore are likely to rise.
  • Salaries are subject to union mandates.
  • Taxes are subject to the municipality.
  • The only manner in which a building can raise money is by employing one or more of the following sources:
    • Refinance their underlying mortgage.
    • Exercise their ability to draw upon a line of credit.
    • Raise maintenance. 
    • Institute an assessment.
    • Institute a flip tax on resales.

Based on the aforementioned, it is logical to conclude that ownership costs are going to rise in 99% of the cases.

The job at hand is to assess that a building is being run conscientiously (an imperative) and predict to what extent future costs are likely to rise.

Finally, I recommend a NY Times article which describes some Red Flags in a co op’s statement.

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In Part 1, we discussed the General Principles of a Coop Corproation and the Telltale signs of a GOOD Building.  This post will discuss what to look for in Coop Financials.

Basic Items to Focus on in a Cooperative Financial Statement
  • Liquid Assets.
  • Underlying Mortgage(s).
  • Total Income
    • Maintenance Income
    • Miscellaneous (Other) Income
  • Total Expenses.
  • Income from Operation before Depreciation.
  • Income from Operation after Depreciation.
  • Notes to the Financial Statement.
Liquid Assets
  • Cash and cash equivalents. These constitute money that can be spent irrespective of prepaid items and mandated escrow funds. Cash typically exists in a in an operating account, savings account or is designated as a reserve fund.
  •  A building’s cash accounts should equal at least 2-3 months’ maintenance charges.
Underlying Mortgage(s) 
  • The overwhelming majority of coop corporations have an underlying mortgage as well as a subordinate mortgage. The latter generally appears in the form of a credit line that can be drawn upon as need presents itself.
  • Underlying mortgages are generally 7-15 years in length with the final payment in the form of a balloon payment. These mortgages are considered commercial mortgages and are subject to higher interest rates than found in a conventional mortgage and are subject to pre-payment penalties. Additionally, mortgages of this type are commonly interest-only mortgages and seldom self-amortizing mortgages.
  • When the purchaser of a coop applies for a mortgage, the lender needs to ascertain to what extent the purchase price of the unit relates to its pro rata share of the underlying mortgage. Most often the pro-rata share of the underlying mortgage is usually less than 20% of the purchase price, and in such case, there is no resistance from a lender to lend.

To determine the pro rata share of the underlying mortgage: divide the amount of the underlying mortgage by the total number of shares issued which equals the amount of mortgage per share and multiply that number by the number of shares allocated to the unit in question.

For example:

$8,000,000 (underlying mortgage) / 22,000 (total shares) = $363.63 per share x

147 (unit’s shares) = $53,454 (pro rata share of the underlying mortgage)

$53,454 / $650,000 (purchase price) = 8.22%

Total Income
  • Maintenance income is sometimes referred to as rental income. It represents the sum of money paid to the corporation by the shareholders. Maintenance can be stable, it can increase from year to year, and in some instances, it can go down.
  • A maintenance increase of up to 5% over the previous year would be considered normal whereas an increase in the vicinity of 10% would be considered high; however, every maintenance increase must be looked at within the context of the overall financial condition of the building.
  • Miscellaneous income is income received from non-maintenance sources such as assessments, tax refunds, interest, dividends, flip taxes, proceeds of un-sold shares, commercial income, and laundry income. In most instances, income from non-maintenance sources should not exceed 20% of a building’s total income otherwise it will be a breach of the 80/20 rule and create a tax consequence for the building. In some instances where a building is receiving too much miscellaneous income, it has become necessary for the building to increase their maintenance to comply with this rule.
    • In the past year or two, the 80/20 rule has been made more flexible to allow exceptions to the rule if certain conditions exist. One such condition would be when no more than 20% of the building is allocated to non-residential occupancy, the building may receive more than 20% of its income from miscellaneous sources.
Total Expenses
  • This is the sum of money the coop spent for such items as debt service, utilities, repairs, insurance, service contracts, real estate taxes, management fees, legal fees, and salaries etc.
Income from Operations before Depreciation
  • This is the difference between total income and total expenditures. Ideally,the total income should be equal to or slightly more than the expenditures. Realistically, the income flow might be slightly more or less than the expenditures.
  • The significance of a negative cash flow before depreciation must be assessed in relationship to the existing maintenance level, the level of cash assets and the anticipated need for additional income. A negative cash flow of 5% or more would cause concern if it were the result of normal expenditures and not an extraordinary event. At times a coop may purposely budget a negative cash flow in order to absorb substantial cash reserves, and in doing so, would eliminate the need for a maintenance increase which might have a negative impact on values.
Income from Operations after Depreciation
  • Income after depreciation is a “phantom number” and has no significance as long as it remains a negative. Should it be a positive number, the coop will be liable for federal income taxes.
Notes to the Financial Statement
  • Pay notice to any items that might impact the coop’s need for additional cash flow or asset accumulation such as:
    • Terms of the underlying mortgage(s).
    • Land lease escalations.
    • Rental income variances.
    • Tax liabilities.
    • Late shareholder payments.
    • Assessments.
    • Capital improvements.
    • Impending lawsuits.
Miscellaneous Items
 Sponsor Ownership
  • Ideally, a low percentage of sponsor ownership is preferable to a high percentage of sponsor ownership. The latter places the possibility of a material default in the hands of a single shareholder and restricts or even inhibits a bank’s willingness to lend in the building.
  • In cases where a sponsor or investor entity owns 10% or more of the shares, New York City mandates that such entity provide an annual affidavit that illustrates the differential between the rental income received (if any) and the maintenance due on the units in question.
  • Other issues aside, the essential concern of shareholders is “Does the sponsor pay his maintenance in a timely manner?” The answer to this question is yes in 99% of the situations.
Future Repairs
  • Coops seldom conduct a study to determine the remaining useful lives of the building’s systems and major components. Additionally, coops are seldom required (if ever) by their governing documents to accumulate funds in advance of the need of such repairs.
Ground Rent
  • Ideally, it is better for a coop to own its land rather than to have to lease it. Leasing land is never a positive situation but not necessarily the reason to forgo purchasing in such a building. When evaluating a land lease building; notice the remaining term of the land lease, rent escalations, and renewal options. Pay particular note to when the property is going to be re-appraised for purposes of determining future ground rent.
  • Land lease buildings do not necessarily have high maintenance charges, although they usually do.
  • Land rent does not contribute to the tax deductibility of the maintenance.
  • A “too short” land lease term (15 years or less) with no renewal option would severely impact the values of units in the building. In such an instance, a unit’s value could be defined as the difference between the fair market rental value, less the maintenance charge, multiplied by the number of years remaining on the land lease.
  • It is always advisable for a purchaser to have an attorney review the land lease prior to signing the contract of sale.
Obtaining Updated Information from the Managing Agent
  • Most financial statements reflect the state of affairs on December 31st of the preceding year. Such statements are usually issued between March and May of the following year.
  • It is advisable to obtain updated information with regards to maintenance increases, assessments, and capital improvements when the purchase is to be made between June and December, otherwise, the buyer would be relying on information that is 6-12 months old.
High Maintenance / Low Maintenance
  • Too often, buyers and brokers are apt to state an industry standard for the cost of maintenance in terms of $X.00 per square foot. This way of thinking is erroneous because there are many variable items that comprise maintenance and the amount of people that share in these expenses varies from building to building. For example: a building with 250 shareholders has the same expense for a 24-hour doorman as a building with 25 shareholders.
  • Other variables include:
    •  Terms of the underlying mortgage: amount, interest rate, interest only payments vs. amortized payments, amortization term.
    • Improved building systems versus the status quo.
    • High service versus low service: concierge, elevator operator, lobby attendants, handymen, porters, resident manager.
    • On-site amenities versus no amenities.
Reserve Fund

The lack of a reserve fund, or cash cushion, is not necessarily a negative condition. Having money in reserve is relative to the need of having money in reserve. If there is high need, then a reserve fund is important. If there is low need, then a reserve fund is not as important.

Additionally, money can only be accrued if the coop takes measures to create such a fund from the following sources:

  • Positive cash flow (income over expenses prior to depreciation).
  • Assessments
  • Cash-out refinance of their underlying mortgage,
  • Secondary financing or credit line.
  • Flip taxes.
  • Sale of un-sold shares (if any).
Assessments
  • Assessments are a viable means to create needed cash to pay for improvements or supplement cash flow in lieu of increasing maintenance or borrowing money. Assessments tend to be considered single events (sometimes ongoing) in which case they are less likely to inhibit values as does “too high” maintenance frequently does.
  • Unlike a maintenance increase, an assessment accrues towards the building’s cost basis and in doing so adds favorably to the building’s ability to depreciate against income.
  • Many coops choose not to accrue such funds until the actual need for such funds arises. Coop documents typically do not impose mandates on the accrual of such funds.

In Part 3 we’ll discuss Assessing a Coop’s Financial Condition.

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When you buy a house or a condominium, you are getting real property. When you buy a co-op you are not actually purchasing the physical apartment. You’re buying shares in the cooperative corporation which owns the building in which the apartment is located.  Here’s  more information on coop buying and mortgage process.

Like investing in shares of any corporation you should consider the financial viability of that corporation.  As always, I suggest that before buying any real estate you create your team of trusted advisors which should include a broker, attorney/financial advisor and mortgage banker or broker.

General Principles of a Coop Corporation

  • A coop is a “not for profit” corporation.
  • The coop’s board of directors has a fiduciary responsibility to operate the building in a responsible manner.
  • The coop board of directors generally appoints a managing agent to attend to the day to day operation of the building.
  • Coop corporations, regardless of size, are mandated to publish an annual financial statement that details the nature of their financial affairs. Included in these statements are the following: assets, liabilities, income, expenses

Telltale Signs of a GOOD Building

  • A building that is in obvious good repair and in immaculate condition.
  • A condition where maintenance is commensurate with services and sustains a cash reserve commensurate with the impending need of such a fund.
  • Tax deductibility of maintenance that is under 58%.
  • Cash flow variance within 5% above or below expenses.
  • Assessments dedicated to ongoing capital improvements.
  • A reserve fund equal to two to three months’ maintenance charges.
  • Low or no instance of shareholder or sponsor default.
  • A building that owns their land.
  • A defined land lease escalation as opposed to one based upon an appraisal.
  • An actual income / expense statement that reflects the budget projection.
  • Stable or reduced fixed costs.
  • Exhibits a net loss after calculating depreciation.

Next time we’ll discuss what to look at in a Coop’s Financial Statements.

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