A co-op, or housing
co-operative, refers to a group of people or a company which acts as a legal
entity and owns real estate with one or more residential buildings. This real
estate is collectively owned by the members of the co-op, each of whom has the
right to occupy a particular apartment but does not exclusively own it.
Membership of a co-op is obtained by purchasing shares in the co-operative.
This type of housing tenure allows members to pool their resources together to
leverage their purchasing power. Thus, the cost of the services associated with
the ownership of the building per member is reduced.
The members of the co-op select who may live in
or join the co-operative. This differs from condominiums, where the owners of
the condos do not have the right to decide who buys other condo units. In a
condo situation, a purchaser obtains the right to occupy a particular suite in
the building through title transfer. With a co-op however, the cost of
maintaining, repairing and replacing the housing structures or even renovation
is shared among the members. Also, the building mortgage can be obtained by the
co-operative instead of the individual owners.
In New York City, the housing co-operatives are
referred to as corporations. These co-ops are notorious for being very
restrictive, and in the past they have not accepted foreign buyers as members.
They increase the marketability of their estates by including gymnasiums and by
renovating the buildings. However, with the sale of a $70 million co-op to a
Chinese buyer at the Sherry-Netherland, many New York co-ops are now
considering foreign buyers. Though foreign buyers are now beginning to be
accepted, the co-ops do screen prospective buyers to ensure that they have
valuable assets in the United States. With the purchaser’s asset in this
country, the co-op’s money will not be lost in a foreign country if the
purchaser fails to pay up.
High
Interest Rate
Interest rates can influence the purchasing
power of an individual in the real estate market. An increase in the interest
rate decreases the demand for real estate property due to the higher cost of
obtaining a mortgage. At the same time, the prices of real estate properties
will be reduced as the market is over supplied. As a result of the increased
interest rate, the demand for co-op apartments has decreased leading to a
reduction in the price of the apartments. This situation seems to have occurred
in the sale of the Sherry–Netherland co-op at $70 million, considering that the
initial listed price was $95 million. Conversely, at reduced interest rate, the
cost of obtaining mortgage is lower.
International
Investors
Buying a co-op does not mean purchasing an
apartment in a co-op building, rather it means buying shares of stock in the
corporation that owns the co-op building. The investor is entitled, through the
proprietary lease given by the co-op board, to live in a particular apartment
in the building. Recently, the co-ops are relaxing their rules about accepting
wealthy foreign investors as these investors tend to be able to pay higher
prices than domestic buyers. Also, the co-ops require a cash down payment up to
80% of the purchase price which may prevent many domestic buyers from investing
in a co-op. However, wealthy international buyers can pay all cash and many of
them believe that a high equity building is a better opportunity for investment.
Moreover, co-ops buildings are cheaper than condos and constitute up to 75% of
New York residential buildings.
Currently, co-ops compete with condos in New
York real estate market. The sale of condos rose to 5,150 sales while that of
co-ops was at 6,805 sales in 2015. This confirms that the wealthy investors are
after the condo towers. With the increasing sales of the condos in the New York
real estate market, the co-ops boards are quietly relaxing their restrictive
rules against foreign buyers to compete with condos. However, only time will
tell if this trend will continue.
Financing
Purchase
In 2014, the French Ambassador to the U.S was
rejected by the co-op board of River House due to his inability to pay cash for
the co-op. However, the same co-op board later allowed financing just like a
condo. Other co-ops boards such as 898 Park Avenue, 1021 Park Avenue and 1185
Park Avenue have followed suit. Previously, financing restrictions were used to
keep away unqualified investors. This restriction had reduced buyers’ interest
in the co-ops market as the buyers are required to make a cash payment. Thus, the
demand is reduced, and in turn, the price of co-ops is reduced. Co-ops boards
that restricted financing before are now considering it, as some even allow up
to 50% financing.
Buyer’s
Identity
Some co-ops boards have allowed domestic buyers
to acquire co-ops through trusts and even have allowed some to purchase co-ops
through partnerships and limited liability corporations. Such transactions were
allowed only if conditions such as occupancy and transfer restrictions are put
in place. However, those that are now accepting foreign investors still ensure
that the buyer has substantial assets in U.S, as it shows whether the buyer can
afford the apartment and the maintenance fees if accepted.
The co-ops boards adopted these changes to
prevent the market from crumbling or from being overtaken by condos. With the
influx of 65,000 condo units in Manhattan, the co-ops have no option but to
make adjustments and compete on the same level. Some shareholders may decide to
put the co-op buildings up for sale or even convert them to condos with the
tenants facing eviction.
Luxury condos are elegant and attractive but
they are more costly than the co-op buildings. With the recent fallout between
the dollar and foreign economies, more foreign buyers will not be able to
invest in condos. However, investing in co-ops will be cheaper for the foreign
investor and even promises possible returns which cannot be realized with a
condo.
