Tuesday, October 29, 2013
Recently a column in Forbes magazine offered a list of ten things to obsess about when buying a residential property for more than $3,000,000.
The list included, besides location, open views and light, high ceilings, a practical layout, good architecture, a washer and dryer in the apartment, double paned windows, a gym, extra storage, excellent condition and a good reputation for the building.
Hard to disagree with any of those. However there are some less obvious but extremely important
things to consider when buying a co-op or condo.
They can make the difference between a home that's also a good investment and a home that's a bad one.
Let's start with co-ops.
Of course, a low maintenance is desirable. If it's very low, there are two possibilities.
The best one--and lucky you if you find an apartment in a co-op like this--is that the co-op owns retail space on the ground floor and gets money from it.
There are some buildings downtown that get so much money from their retail space that nobody pays any maintenance and everybody may even get some income.
However, the other possibility is that no work has been done on the building in years, the roof is about to fall in, people keep getting stuck in the elevator, and every time it rains...well, you get the idea.
So be sure to check into what repairs have been made to the building recently, if repairs are planned in the near future, and if so, how much money is available to pay for them.
Ask also whether or not there have been any assessments, or whether any are planned. Repairs cost money. It has to come from somewhere.
It's important to know what percentage of the maintenance is tax deductible. This is the part that pays the real estate taxes and, more importantly, the interest on the underlying mortgage.
A high tax deduction on the maintenance in a full service building is a red--or at least pink--flag that should be checked out.
If the tax deduction is much more than 50%, a typical amount in a full service building, the building's underlying mortgage may be disproportionately large.
Your broker should be able to find out the amount of the underlying mortgage allocated to the apartment you're considering (this is not difficult). In a well-run co-op, this amount will be equivalent to no more than 25% of the sales price.
Speaking of the underlying mortgage, if you're planning to finance this purchase, the financial statements for the co-op will also tell you how soon the mortgage will come due. If it's within a year or two, you may have trouble getting financing. Ask your mortgage broker's advice on this.
What about a high maintenance with a low tax deduction? Possibly there is a large amount of service--24 hour doorman, porters, etc., in a building with only a few units.
The cost of the service is shared by far fewer tenant-shareholders than in a larger building, and of course is not tax deductible, which jacks the maintenance up considerably.
This is perfectly legitimate, and this kind of situation is desirable for many people. But if you want the privacy of a small building with the convenience of a lot of service, you have to pay for it.
Also, this kind of co-op may not have an underlying mortgage. People who live in buildings like this often have a real distaste for debt of any kind. So the only deductible part of the maintenance is what pays the real estate taxes.
Private outdoor space will also raise the maintenance. Maintenance is based on the number of shares allocated to the apartment, and apartments with outdoor space are allotted more shares.
In a typical-size full service building, maintenance should be not much more than $2.00 per square foot, preferably less. Average maintenance for 45 recently closed two bedroom apartments in full service co-ops on the upper east side was $1.85 per square foot.
Any questions so far? E-mail me at email@example.com or call 917-991-9549, and I'll be happy to answer them.
More to come.