Monday, August 27, 2012

Condos: Myths vs facts. And some of the facts may surprise you.


MYTH:  You can always rent your condo.

FACT:  It’s not that simple.  Yes, most of the time you can.  But believe it or not, some condos (Towers on the Park, at the northwest corner of Central Park, for one) do not allow rentals at all.  

Many condos discourage rentals by charging high move-in/move-out fees.  The problem is, banks don’t like to finance purchases in condo buildings that have too high a proportion of renters.  So if you're planning to finance, be sure to have a reliable mortgage broker qualify the building before you sign a contract.  (Whether you're financing or not, you may not want to live in a building with a high proportion of rental tenants.) 

Also, many if not most condos do not allow rentals of less than a year.  This saves wear and tear on the building, as well as on the board of managers, which brings us to….

MYTH:  There’s no board approval involved in buying or renting a condo.

There are condos and condos. 
Some fairly scream restraint and refinement.
FACT:  The board of managers must sign a waiver of right of first refusal, which the buyer or renter must apply for. 

While this does not usually involve an interview,  an application is involved, and it may ask for as much information as a co-op application, complete with business and personal references, a letter from the applicant’s employer, a financial statement plus substantiation in the form of bank statements,  statements from financial institutions (UBS, Merrill Lynch, wherever you keep your money), a reference from the applicant’s last landlord or managing agent, and perhaps more.

Of course, if the board doesn’t like something about the application, its only recourse is to buy or rent the apartment at the contract or lease price.  This happens approximately never.  

But, while I have no evidence to back this up, I would not be surprised to learn that boards in extremely sought-after, expensive condo buildings might actually exercise this option if they were truly horrified by the idea of having a particular applicant as a neighbor. 

Some just scream.
In any case, the application is necessary, and the board must review and sign a waiver of its right to first refusal.  This can take a while, depending on the managing agent, the board and the time of year (the wheels grind very slowly in August).


MYTH:  You can do anything you want to in your condo.

FACT:  You are governed by zoning laws.  If your condo is zoned residential, you cannot legally operate a commercial business in it.   

Of course you can work at home. 

For years, before my late husband got an office, our apartment was his business address.  Instead of Apartment #, he used Suite #.  Made it sound more office-like.

MYTH:  Condos don’t have rules.

FACT:  Condos have rules just like co-ops.  Several do not allow dogs.  One allows only pets of 20 pounds or less.  Your tuna-stuffed 25-pound domestic shorthair will not be welcome unless he goes on a diet.

I know of at least one condo where smoking is not permitted anywhere in the building, including inside the apartments.

This brings me to the “cond-op.”  Developers advertise “cond-ops” as “co-ops with condo rules.” 

And which condo’s rules would that be? 

The fact is, a  “cond-op” is a co-op with few rules.  If it’s newly constructed, it’s a land-lease co-op; otherwise it would be a condo.  For more on this subject, see http://www.withconfidence.blogspot.com/2011/05/what-exactly-is-cond-op-and-what-are.html

NOT QUITE A MYTH, BUT NOT A FACT, EITHER:   A condominium must own the ground the building sits on.

FACT:  This is true in nearly all cases.  But the condominiums in Battery Park City rest on ground owned by the city.

NOW FOR THE GOOD NEWS:  Absentee ownership, investment ownership, unlimited renting, pets, parents buying for children, corporate purchases, pieds a terre and other things co-ops frown on are USUALLY or at least often permitted. 

The down payment on a condo can be as little as 10%.  Banks like condos (at least those that meet certain requirements; don't forget the mortgage broker qualification mentioned above) because in the event of a default, the bank is first in line to collect. 

A condominium can’t default on its underlying mortgage because condos cannot have underlying mortgages, as most co-ops do.  This also means that there’s no hidden debt in the purchase of a condo. 

FULL DISCLOSURE:  I live in and own a condo.  This happened completely by accident.
101 Warren Street, built in 2006, and
perhaps the most sought-after building
in the Tribeca area.It turned a rather 
uninteresting neighborhood into a
destination. 
We (then it was we, now it's I) bought our apartment 26 years ago. We fell in love with the view. We were babes in the woods about real estate at the time; both of us were in advertising. We had no idea of the differences between a condo and a co-op.For us, the apartment itself was far more important than the form of ownership. 

But your needs may be different.  If you don’t have a lot of cash for a down payment, or if it’s possible you’ll want to spend a couple of years away some time soon and will need to sell or rent your property, the condo form of ownership may be essential.  

If you’re planning to make the residence your permanent and primary home for, say, eight or ten years or more, you may well be better off in a co-op. 

Bottom line, if you choose a condo, don't automatically assume that there are no rules.  Every building, co-op or condo, has rules.  Read them carefully before you sign the contract. 



Thursday, August 9, 2012

In defense of the much-maligned co-op. (Yes, I know, everybody wants a condo. But everybody isn't always right.)


There was a time when the only people who bought condominiums were those who couldn’t meet a co-op’s financial requirements.

Now it seems that everyone wants a condo.  And some of the most sought-after buildings in the city—15 Central Park West and 101 Warren Street, for example—are condos.

Some years ago I heard Barbara Corcoran tell an audience at the Harvard Club that they should all buy condos.  She couldn’t come up with a single reason why anyone would want a co-op.
  

The legendary Dakota, New York's oldest co-op,
at Central Park West and 72nd Street.
Built between 1880 and 1884.
I was quite amazed to hear this as at least three quarters of the Corcoran listings at the time had to be co-ops.   She must have felt very, very strongly on the subject to speak so badly of her own listings.

The perception is that if you live in a co-operative apartment, not only will your neighbors know all there is to know about you including your uncle's pajama size, they will also tell you exactly when you're allowed to blow your nose and when you're not.

There are, of course, advantages and disadvantages to both forms of ownership.  It's just not as simple as many buyers think.

So Barbara, in case you’re reading this, here are some good things to say about co-ops.

Today in New York, there are almost three times as many co-ops as condos, so right off the bat, if you're interested in co-ops, you have a great deal more choice.   

You'll also find that, by and large, co-ops are significantly less expensive than condos.  To some extent this is because so many of the condos are newly constructed or new conversions and have a lot of bells and whistles.  But even older condos come with premium prices.

In the last twelve months, the average price in Greenwich Village for a prewar two bedroom co-op with a doorman was about $1,860,000.  The average price for a similar condo was about $2,580,000.

Co-ops are the reason New York has had so few foreclosures, while the rest of the country has had so many.  You just can’t buy a co-op unless you can comfortably afford it.  The co-op board won’t let you.   Everybody who buys in a co-op has to qualify financially.

That means that not only will you not run into financial trouble, but neither will your neighbors. It's unlikely that you'll ever be asked to absorb their share of the building’s expenses. 

If a co-operative needs, say, a new elevator, it can borrow the money, using the building as security for the loan.  The interest will be tax deductible.  And the part of the principal that's attached to the shares you own can be added to your base when you sell, thus lessening the amount of capital gains tax you will pay. 

Condos can’t do this.  It’s very difficult for a condo to borrow money.  So the condo association either has to already have the money in a reserve fund or must levy assessments.

 
 Michael Gross's history of one of New York's
most sought-after co-ops, "740 Park, The Story
of the World's Richest Apartment Building"
was published in 2005 (Broadway Books).
Another thing:  co-ops generally frown on anyone but the owners living in a given apartment.  That means little chance of living next to a 19-year-old whose parents bought him the apartment and whose parties start at 1 am.  Or a stream of different friends of an owner who uses the apartment as a hotel room for guests.


Co-ops generally do not approve of investment buyers.  Most have restrictions on subletting.  So you can be assured that there won't be too much turnover among your neighbors, and that, as owners, they'll have the same concerns you do about maintaining the common areas in the building. 

Co-op boards generally favor buyers who have the same interests they do, especially financial interests. 

If you're very happy about your building's exceptionally low maintenance and don't mind that its lobby looks like a time capsule from the 1970s, you probably don't want new neighbors who want to spend the co-op's money to renovate it.

If you’re an artist who needs a large, high-ceilinged space to make art but who isn’t rich and famous yet, you may not want to spend money on amenities like roof decks and exercise rooms.  You'll be wary of new neighbors who do.   

Some co-op boards may actually turn down buyers because they're too rich.  They don’t want the building’s character to change. (Note that co-ops almost never give a reason for a turndown.  They're not required to, their lawyers tell them not to, and they don't.)

On the other hand, when you’ve got actual Picassos and Turners on your walls and ancestral diamonds and emeralds in your safe, your apartment can be a target for thieves.  You won’t mind paying extra for an attendant in every elevator in addition to a doorman and concierge, just to make sure your valuables stay yours. 

If you're the type who designs your apartment with an eye to seeing it in Architectural Digest, you won't mind spending money to make sure the lobby has a similar look of affluence.

You may not like the idea of borrowing money. When the building needs a new roof, you may prefer just to write a check.  And you would like your neighbors to feel the same way.

Thus, some buildings seek tenant shareholders with extraordinary resources.  Not only do they require that apartments be paid for entirely with cash, not financing, but applicants must be able to show vast amounts—sometimes as much as $100 million—in liquid assets. 


Of course there are a whole lot of co-ops whose requirements fall in between these two extremes.  But chances are, if you're in a co-op, your neighbors will have the same financial interests you do.

All in all, there's a lot to be said for the co-op form of ownership.  Next time I'll tell you the good news about condos. 


(By the way, just in case you don't already know this, the main difference between a co-op and a condo is that a co-op "owner" actually owns shares in a corporation which owns the building.  He has a proprietary lease for his apartment.  A condo owner owns the real estate--the floors, walls and ceilings of his apartment.)