The Nuances of Buying a Manhattan Co-op versus a Manhattan Condo

Those moving to New York for the first time and those New Yorkers who grow tired of paying rent and looking to purchase their own place are all likely to end up dealing with a choice that most homeowners outside New York do not face: whether to opt for a co-op or a condo. The pros and cons of each are discussed here.

Co-ops

First, what is a Co-op? Short for co-operative, the concept of a co-op is a phenomenon that has been around for decades, mainly limited to the borough of Manhattan. In New York City, approximately 70 to 75% of all apartments available for purchase (and close to all pre-war apartments) are in co-operative buildings. These co-ops are owned by an apartment corporation. Hence, when you buy a co-op in a co-op building, you are actually buying shares of the corporation, which entitles the buyer or in this case, the shareholder, to a proprietary lease, authorizing the lessee exclusive use of an apartment in the building.

Essentially, unlike buying a house or a condo, you do not actually own your apartment. You own shares of the apartment corporation that owns the co-op building. The bigger your apartment, the more shares of the corporation you own. Shareholders contribute a monthly carrying charge (often called a monthly maintenance fee) to cover building expenses, which covers heat, hot water, insurance, real estate taxes, and staff salaries among other things.

Co-op Pros

Compared to condos, they are generally less expensive. A recent NY Times article noted that with all things being equal, “the value of a condo is about 9% more than the value of a co-op.”  Others have suggested that the figure for entirely equivalent properties could be as high as 30%.

Additionally, the real estate tax portion of the monthly maintenance fees is tax deductible.

The Nuances

Prospective buyers must be approved by a co-op Board of Directors. The approval process is often time-consuming, tedious and rigorous, requiring detailed information regarding the finances and background of the buyer.

The Board of Directors can determine how much of the purchase price can be financed and usually require higher down payments than condos.

As the monthly maintenance fee paid includes the underlying mortgage for the co-op building, the fees are generally higher for co-ops than for condos. Nonetheless, with regards to the underlying mortgage, the amount attributable to each unit is tax deductible. Some co-ops do not have an underlying mortgage, but a vast majority of them do. On the flip side, some condos may also have underlying mortgages.   

Another distinction between co-ops and condos is that many co-ops limit or forbid subletting. Each co-op building has its own set of rules regarding these limitations.  

Condos

The other 25 to 30% of apartments available for purchase in New York City are mainly condos, short for condominiums. These are becoming more popular and new construction is almost entirely condos. Like buying a house, condos are considered “real” properties. Buyers get a deed instead of stocks in a corporation.

Condo Pros  

Condos come with more flexibility as you can finance up to 90% of the purchase price and sublet them without restriction. 

There is no need to go through any sort of Board approval process when buying a condo.

Monthly maintenance fees are lower for condos as the fee does not include an underlying mortgage for a condo building. However, in this case, real estate taxes (usually paid annually) are not included in the monthly maintenance fee. This means that condo fees are not necessarily lower when you factor in the fact that real estate taxes are a separate payment that must be made.     

The Nuances

As mentioned before, condos are generally more expensive.

Unlike co-ops, the monthly maintenance fees are not tax-deductible, but the real estate tax paid separately is. 

Options are limited as there are way fewer condos than co-ops in the city.

Co-ops or Condos?

Overall, condos may be more attractive to buyers who want more flexibility in terms of financing and subletting, keeping in mind that they are usually more expensive and limited in supply. Co-ops, on the other hand may be more attractive to buyers who really just want to buy an apartment to live in, and do not mind going through the arduous Board approval process for a generally less expensive apartment.  

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Could New Mortgage Rules Make Obtaining A Mortgage More Difficult

While lending restrictions seem to be very stringent right now, there are new regulations that are set to be in place in 2013 which could make them even stricter.

If you have been paying attention to the news in the mortgage industry, you may have heard about some of the new mortgage rules and regulations that are set to take effect in 2013.  If you are unfamiliar with them, following is a brief explanation:

  • The Basel III Agreement calls for higher bank capital standards and are designed to increase regulatory requirements on a lender’s leverage and liquidity.
  • The “qualified mortgage” rule refers to a borrower’s ability to repay the loan if it is granted to them. In order to receive a qualified mortgage, the bank must determine that you are reasonably expected to make payments every month. However, there have been no clear guidelines in the new legislation as to what determines a qualified mortgage, so lenders have a safety net built into the regulation which makes it more difficult for borrowers to sue a lender for granting a mortgage to someone who was less than qualified to repay it.
  • The “qualified residential mortgage” rule states that banks and lending institutions that approve mortgage-backed securities should hold on to 5 percent of the loan. This rule gives banks more responsibility in determining to whom they decide to loan money to for mortgages. By incorporating the idea of “risk retention,” this will make lenders more hesitant about who can qualify for a mortgage loan.

Analysts are expecting these three new rules to severely limit the number of mortgages that will be given to home buyers when they go into effect in 2013. According to a report by the American Action Forum and quoted in an article in the Wall Street Journal, the new guidelines are expected to increase the costs for borrowing for millions of new home buyers across the country. The credit restrictions are going to increase more so than they already have and fewer people are going to qualify for a mortgage.

Using the lending standards that were prevalent in 2001 as a baseline for “more normal lending standards,” the study by the AAF examined the current regulations and the guidelines that are to be set in place next year. The study found that today’s credit lending standards for mortgage borrowers would decrease the number of loans by  between 14 percent and 20 percent in the next three years. This could reduce sales of homes by as much as 13 percent. As a result of the slowed home purchases, there would be a 1.1 percent decrease in the GDP by 2015, which is something that definitely will not help the economy.

While there are few, if any, people arguing that we should go back to the loose standards of 2001 that resulted in the housing crisis in the last decade, some are saying that policymakers should not over-regulate the mortgage industry and make the standards too high for home ownership. Others say that the Dodd-Frank rules would give more protection to consumers without creating stringent rules that would choke the housing market out of new buyers.

Which side of the fence are you on? Do you think the new Dodd-Frank regulations that are set to go into effect will have a positive or a negative impact on the mortgage industry? Should there be some changes to the regulations to make them work better?

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Are You Benefitting from the Mortgage Interest Deduction?

The mortgage interest deduction has been on tax forms for many years. Would it affect you at all if that deduction was no longer available?

There has been a lot said during the presidential campaign in recent months about taxes, mortgages, and deductions. One of the most hotly debated topics on the campaign trail is the mortgage interest deductions that you can claim on your taxes. While some politicians and lawmakers want to do away with this deduction, there are others who say we should keep it.  A recent article in the New York Times questioned whether it is actually an effective deduction that benefits the majority of homeowners and society at large. 

According to Joseph Rosenberg with the Urban-Brookings Tax Policy Center, most homeowners chose to not claim the mortgage interest deduction when filling out their taxes. The reason for this is because most of them do not itemize their deductions. In fact, according to Rosenberg, only about 30 percent of homeowners claim this tax deduction each year instead of taking the standard deduction.

Another finding by this policy center is that most of the taxpayers who itemized deductions on their tax forms were typically upper-middle class families and upper-class families. In those two categories, the households that earn between $100,000 and $500,000 benefit the most from the mortgage interest deduction.

So why are households with a higher income taking advantage of the mortgage interest deduction more often than the households with a lower income? The answer is simple – those are the households that stand to benefit the most from the deduction. According to the policy center’s calculations, this deduction for the households with the higher incomes can account for as much as 1.5 percent of their after-tax income. Compare that to the 0.3 percent and the 0.7 percent for households making $40,000 to $50,000 and $50,000 to $75,000 respectively, and you can see why the upper income brackets would itemize their deductions to take advantage of it. In addition to that, many of the people making between $100,000 and $500,000 have a vacation home. Under the current mortgage guidelines, they can deduct the mortgage interest on both of those homes, as long as it does not exceed more than $1 million all together. Some opponents of the deduction say we should do away with it since it is only benefitting the upper class households without offering much help to the lower income earners.

Proponents of the deduction have a different viewpoint. People like Robert Dietz, who is with the National Association of Home Builders, says that some households could be considered middle class even if they are earning $200,000 a year. In some of the metropolitan parts of the country, a $200,000 annual income could be considered average when compared to the surrounding households. The $200,000 income might sound high, but households that make this much are generally living in areas where the cost of living is much higher.  Dietz also says that the highest rate of mortgage interest deductions where taken by homeowners between the ages of 35 and 45 – a time when they are buying their first home.

Where do you stand on the mortgage interest deduction? Are you for keeping it the way it is or doing away with it altogether?

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