Tuesday, June 1, 2010

Three Keys to Every Co-op Purchase in NYC

In Manhattan, it is standard practice to submit a financial statement and pre-qualification letter with every offer to a co-op. Even brokers with condo exclusives want to see a pre-qualification letter when you submit an offer. It is an important part of any negotiation to show your strengths and being pre-qualified will elevate your position when the seller is considering your offer. With lending standards continuing to tighten, it is in a buyer’s best interest to not only determine what they qualify for but to ensure the building qualifies too.

Most buyers spend a good deal of time combing the internet first and further determine their apartment and neighborhood preferences by attending open houses. Many believe they can afford an apartment at a certain purchase price, but rather than look at apartments you can’t afford afford, it is recommended to speak with a mortgage broker first.

It makes sense to look at what you can afford because this will help tailor your search from a financial perspective. Below is designed to explain three key components of every co-op purchase and to help smooth out the process.

Pre-Qualification Letter – If you are looking for a good interest rate, it is wise to contact a number of recommended mortgage brokers. Both banks and brokers offer a wider selection of lending options and it is a good idea to understand all of your options. It is important to know your borrowing potential, especially now with lenders tightening credit standards. In just 5-10 minutes on the phone a good lender will qualify you and present you with a pre-qualification letter for the file. This will offer you piece of mind, confidence and will help you understand what your monthly obligation will be after closing.

Financial Statement – Most co-op boards require a financial statement as a part of the board package and it is a standard to include this in the offer. Brokers typically use a standard REBNY (Real Estate Board of New York) form and using an Excel version makes it easy to organize the buyer’s finances and present them in an organized fashion. For the offer, general (rounded) numbers are acceptable, but when preparing the board package you will need to be specific and provide supporting documentation. It is good to fill this out early in the process and have your broker look it over to determine your purchasing power. Most co-ops in Manhattan look at the over financial health of the applicant (credit score, total income, time with employer, type of employment) but nearly every co-op requires the following minimum requirements.

  • Debt to Income Ratio – This ratio typically needs to 28% or less. It is determined by adding up all of your monthly debt plus the new mortgage and common charges (maintenance and taxes) divided by your total gross monthly income including any bonuses.

  • Liquid Cash Reserves – Most co-ops require 2 years of mortgage maintenance and taxes to be in “liquid” reserves after closing. They do not consider IRAs, 401Ks Keoghs, TIA CREFFs, or Real Estate assets to be liquid. Brooklyn co-ops are a little more liberal with this reserve requirement. It is best to inquire with the listing broker and get their idea of what the board finds acceptable.

Attorney – Some buyers are tempted to use a friend or family lawyer, a “generalist”, or an out-of-town attorney, but this is historically a risky choice. My suggestion is to use a Manhattan-based real estate attorney, or if purchasing in Brooklyn a NYC based attorney with experience in the buying and selling of co-ops and condos. The reason is because they will offer important advice throughout the process and conduct due-diligence on the apartment and building you are going to purchase. This is a must expense for even the most savvy investors and it is highly recommended to use a real estate attorney that knows the business. They will look over the co-op’s minutes, budget, tax statements/returns, contract, and prospectus/ offering plan. They will review all of the closing papers and walk you through the closing. They will also advise you of terms in the contract and make you aware of all of the issues after negotiating to an accepted offer. You will want a responsive and even keeled risk assessor to determine the potential issues and determine any potential future risks with your investment.

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