How Much Money Do I Need Liquid to Buy a Coop?
^ don’t mind me, just eating away my savings
You know when there’s a word that triggers a strange association with something completely unrelated and it’s all you can think about? This is about 80% of the reason I laugh at inexcusably inappropriate times (the other 20% falls in some murky gray area) and similarly occurs in my head anytime someone mentions “liquidity”:
In just trying to find this clip, I went down the rabbit hole and ended up watching 20 minutes of Austin Powers clips on Youtube. Hold the phone, Mom and Dad – how did you comfortably watch these movies with us, multiple times. “The Spy that Shagged Me” came out when I was 11 – beyond the bad teeth and excessive amounts of body hair showcased in the film, I honestly don’t understand how a 5th grader could be so nonchalantly inundated with phallic-shaped imagery and relentless sexual puns, only allowed to re-enter the world asking people, “Do I make you Horny?” and remarking casually, “Oh, Behave.” While Austin Powers exposed us to both Beyonce before she morphed into the Lemonade slinging She-God that we now worship and to the best Danny DeVito cameo ever, I think its lasting legacy should be accredited to softening our generation to the very casual thought of an evil dictator hijacking some nuclear weapons and holding the world hostage. Because sans sharks with laser beams attached to their heads, that’s essentially North Korea right now, right? Austin Powers, so avant garde.
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So getting us back on the map, LIQUIDITY. I’m asked by most prospective buyers how much money they need liquid in order to purchase in New York and the answer is quite multifaceted. Since the process is so different for co-ops compared to condos, and really any other purchasing option across our fair nation, today we’ll cover the common question, “What do I need liquid to purchase?” from the more demanding building structure – co-ops.
^ what coops want to see when they open a board package
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*disclaimer* these are general guidelines, as each coop is different with requirements, some much easier and others markedly tougher. Rule of thumb, if you meet the qualifications outlined below, you will have access to the wide berth of the market. The co-op’s board of directors will establish how much of the purchase price may be financed (typically 70-80%, however sometimes less) and the minimum financial requirements for prospective buyers. While the specific requirements will vary per coop, the three scrutinized areas are: employment/income, debt-to-income ratio and post-closing liquidity.
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1. Employment/Income – Most boards like to see strong employment for about 3 years. While they do understand employment changes and interim graduate school, the standard ask is that you’ve held the same or similar position or been with a particular company during that period of time. At the end of the day, a stable or rising income is preferred. For those self-employed folk or individuals who are bonus/commission heavy, boards will request 2-3 years of income verification.
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2. Debt-to-income ratio – The target number for debt-to-income ratio for coops should be about 25% – meaning, your housing costs (mortgage plus maintenance) should not exceed more than 25% of your gross monthly income. You also must look at your overall debt picture, as boards will consider your other monthly recurring obligations to paint a picture of your strength as a candidate.
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3. Post-closing liquidity – Typically with co-ops, the board will want to see that you’ve retained ‘post-closing liquidity’ – which is usually two years’ worth of maintenance and mortgage payments in the bank. For example, if your maintenance costs are $2,000/month and your mortgage is $3,000/month, you will need to have $5,000 for 24 months, or $120,000, remaining in cash after your down payment and closing costs.
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Outside of your down payment, your closing cost for a $1,000,000 co-op will be an estimated $18,500, taking into account the mansion tax ($10,000), and lawyer and lender fees (~$8,500). Additional to these costs, you will need to show 12-24 months of carrying costs, which is the sum of your mortgage and maintenance fees, in your bank accounts (~$62,500 – $125,00). The alternative is always the condo route; however note: the closing costs for coops are lower than they are in condos. While condos do not have a post closing liquidity reserve requirement, your mortgage lender will still want to see that you’ll at least have two to three months of reserves on hand after closing.
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Ultimately, the coop board wants to minimize the risk of bringing in an owner who has a high risk of defaulting. If you can no longer afford to pay your common charges, then that financial burden is passed along to the other shareholders in the building. Additionally, foreclosures weaken a building’s overall financial picture. So while it’s not exactly a very pleasant process to have to experience upfront, in the end, it benefits you as an owner to live in a building with with other financially stable owners. If you cannot meet the requirements on your own, there are other ways to make your purchase happen (i.e. co-purchase, guarantor, gifting, sponsor apartments, etc).
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Please feel free to let me know if you want to discuss any of the above in greater deal and discuss the other options with Condos, New Development, Townhouses…really anything.