Cooperatives and Condominiums and Rentals, Oh My!

To say New York City has a real estate landscape unlike any other in the country is not an exaggeration. First of all, roughly 60% of the city’s housing units happen to be rentals. For comparison, the national average is the exact opposite, with nearly 65% of all U.S. homes owner-occupied.

Other than condops (let’s not get into it) and townhouses (which generally start around $4 million), there are two primary types of purchased habitats in New York: the cooperative and the condominium.

Let’s start with the cooperative, or co-ops, for short. Before 1980, close to 90% of all buildings were rentals. In the early 1980s, the co-op conversion craze started when sponsors or developers would convert rental buildings to co-ops. At the time, the city’s economy was in shambles, mortgage rates frequently topped 15% and rental laws capped income for building owners. Co-op conversions were an easy way for building owners to cash out quickly.

Instead of owning the property, with a co-op property, you lease shares of a corporation for a 99-year period. This arrangement allowed shareholders to screen and approve other potential shareholders of their private corporation, which happened to be a residential apartment building, essentially skirting Fair Housing laws in the process. But that’s a story for another time. Today, the majority — about 65% — of purchased (non-rental) buildings in New York City are cooperatives.

The co-op sales process starts just like any other property: You put it on the market, set a price, get offers, negotiate and accept an offer. However, unlike the rest of the country, here in New York City, the deal then goes to real estate attorneys who negotiate the contract before you sign. But here’s where it gets interesting: The buyers must also fill out a co-op board application — a minor thesis on their personal and financial wherewithal. The board package is submitted to the co-ops managing agent, who reviews it to make sure it’s filled out correctly, and then it goes to the board for their approval. If the board application passes muster, the buyer goes to a board interview. If the board denies the buyer at either stage, the deal is done. It’s over. The third-party board has killed the deal and ended what is often a two-month process! This makes Manhattan extremely unique from the rest of the country because the majority of the property that you can purchase here is subject to approval by a separate board based on your finances, generally.

Meanwhile, the condominium process is a bit more straightforward. Roughly 35% of the purchase market consists of real property in the form of condominiums. In the condominium purchase process, there is no pass/fail. You own the four walls and have a separate tax lot for the property that you're purchasing. There is a board application, but it’s called a sales application, which is just as comprehensive as the co-op board application, but there is no pass or fail. It’s just a waiver right of first refusal that the condo board has to issue. If they don’t seem to like the buyer, the board has the right to purchase the property for the same price and terms that are on the contract of sale, and the prospective buyers are just out of luck! But, after 22 years of selling property in New York City, I’ve only seen this happen once. It rarely happens because condo buildings generally cannot afford the average sale price in New York City of $1.3 million for a one-bedroom.

If you’re looking to purchase in New York City, getting a strong real estate agent to help you navigate these different types of purchase structures is extremely important. Making sure that you can pass a co-op board even before you start looking at a property is absolutely critical. If you are looking to buy in New York City or have any questions about the buying or selling process, please reach out. We’d love to help.