coops with less than 20% down payment (Prospect: sales, apartments, foreclosure)

[lionandmouse]

Hi all,
We'll be moving to Queens this summer - looking mostly at Jackson Heights and Astoria. Our income and credit are very good, but we weren't planning on moving, so we don't have 70-100k saved up for a down payment. We've heard that some coop boards will allow 10% down payments, but can't get a sense of how common that is. We have to move for my new job, and we have kids so we would prefer to buy now so we don't have to move again in a couple of years. But does anyone have any advice on how a family with a solid income and great credit can buy a coop without 20% down payment?
Thanks!

[bluedog2]

2 possible ways that I know of.There may be other ways that I don't know of.

1) try to get a SONYMA Mortgage.I think you have to be a 1st time homebuyer.You can purchase with 5% down and boards sometimes waive their downpayment requirements because the State acts as a guarantor.SONYMA Products for First-Time Homebuyers

2) Look for sponsor owned coops.These are not subject to co op board approvals and sponsors will sometimes sell to you with only 10% down if you have really good credit and have a pre approval from a bank. It's a bit tricky but this is how it works:You get pre approved by a bank for a certain amount before looking.This is a good idea no matter what,even if you want to buy a non sponsor unit.If you find a sponsor unit you want to buy,negotiate the price you want and then tell them you only want to put 10% down but that you will sign a contract stipulating 80% financing even though you are going to get a 90% mortgage.You are taking a bit of a risk because the contract will require you either come up with the full balance at closing or default, in which case you will lose the 10% you put up at contract.You have to be absolutely sure you will get a loan for the 90%from a bank.This might sound a little scary but it is done frequently.I can vouch for it because I did it and it worked fine.You have to have really,really good credit( mine was over 800) and be in communication with your bank for this to work smoothly.

There may even be some sponsors who will enter a contract stipulating 90% financing but I am not sure.

Another good thing about sponsor apartments is that they usually have been totally renovated with new kitchens,baths,appliances,etc.

[lionandmouse]

Thanks, that is really helpful!

[jcoltrane]

Originally Posted by bluedog2

2 possible ways that I know of.There may be other ways that I don't know of.

1) try to get a SONYMA Mortgage.I think you have to be a 1st time homebuyer.You can purchase with 5% down and boards sometimes waive their downpayment requirements because the State acts as a guarantor.SONYMA Products for First-Time Homebuyers

Are you stating the "State" guarantees Maintenance Payments?

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Cooperatives have a few primary concerns:

1) Affordability. That leaseholders can actually afford the apartment; that the proprietary tenant can well afford mortgage and maintenance payments

2) foreclosure. That an apartment will not be foreclosed upon and cause the coop hassle and monetary costs.

3) Maintenance. That proprietary tenants can well afford payments. That in the event the coop is forced to foreclose that there is sufficient equity to recover monies owed and the cost of foreclosure.

4) Assessments. That proprietary tenants can well afford any Assessments levied by the cooperation for capital improvements and/or recapitalization, etc.

Down payments of less than 20% does not demonstrate the above capabilities.

The viability is NOT guaranteed. Cooperatives can be financially troubled, and do fail. Failure can leave shareholders financially devasted AND without a home. So, the financial viability of the coop is equally and perhaps of greater import than the afforability of the down payment for prospective purchasers.

Yes, the best way to circumvent the coop requirements is to negotiate and purchase directly from a Sponsor.

The problem with that is in comprehending the interests involved. It is in the interest of the Sponsor to SELL apartments in order to recoup investment and hopefully achieve profit. To such an end, turning over a financially viable cooperative is not necessarily in the interest of the Sponsor. The interest of the Sponsor and that of the Coop are not one and the same.

Consequently, while a Sponsor may be willing and flexible, such may not be in the interest of the cooperative, and it is an interest in the cooperative which you are purchasing.

A low down payment, circumvention of the coop requirements is NOT the sign of a financially well structured cooperative. It is often a sign that there will be, in the short term, future maintenance increases and Assessments.

A potential purchaser must question such a Sponsor. One MUST wonder if the maintenance payment, as advertised, the collective maintenance income for the cooperative is viable to sustain the cooperative/building. Has the Sponsor been too flexible with financials?

A low down payment requirement, behind the scene finagling, is a sign of a bad purchase, a desparate purchase is NEVER A GOOD IDEA.

Prospective purchasers NEED to do your homework. If one is not knowledgeable or capable, then hire someone competent to do the DUE DILIGENCE.

It is better to work and save for a couple more years, and deal with the hassle of moving. A better down payment will give you more and cheaper options in seeking a mortgage, as well as in choosing a cooperative, and in making a long term successful purchase.

Patience!

[lionandmouse]

thank you jcoltrane (and love your id name!). after i posted i began to realize the same thing. was it groucho marx who said he wouldn't belong to any club who would have him? i began to realize that the coop board has absolutely nothing to gain in taking a risk on someone who can't afford a 20% down payment, and that any board that would accept us as we are (our solid income is based on both of us having brand new jobs in the past year!) is probably not a good investment FOR US. as swayed as i am by the constant echoes that now is the time to buy, i think that for us, now might just be the time to be patient, and rent.

thank you!!!!!

[jcoltrane]

Luck!

[bluedog2]

Originally Posted by lionandmouse

thank you jcoltrane (and love your id name!). after i posted i began to realize the same thing. was it groucho marx who said he wouldn't belong to any club who would have him? i began to realize that the coop board has absolutely nothing to gain in taking a risk on someone who can't afford a 20% down payment, and that any board that would accept us as we are (our solid income is based on both of us having brand new jobs in the past year!) is probably not a good investment FOR US. as swayed as i am by the constant echoes that now is the time to buy, i think that for us, now might just be the time to be patient, and rent.

thank you!!!!!

You are right to a point.

It is not always the case, however that someone CANNOT AFFORD to make the proper downpayment. Sometimes there are people (and I was one) who have reasons for not wanting to make a certain downpayment even though they may be fully capable of it.I made a decision that I would rather keep my liquid assets invested elsewhere, where they are earning much more than the 4.125% cost to me of financing my loan.I also factored in (and wanted) the larger tax deduction that comes with a larger interest payment.Different considerations go in to everyone's individual approach.

Also,Co op boards have no say in how a sponsor handles a sale.In my building the downpayment requirement for non sponsor sales is 25% and they don't waive that under any circumstance.They have no choice but to accept the sponsor purchasers.So what a sponsor does,does not necessarily say anything about the culture or financial condition of a building...especially if it is an older,established Co Op where the sponsor units left are less than 10% of the units in the building.

Each CO Op building has a unique set of circumstances re financial condition,underlying mortgage,reserves,physical condition of the property,percentage of sponsor units,whether they allow renters in the buildiing,history of maintenance increases,maintenances compared to comparable buildings,etc,etc.It is up to you or your representative to do the research and figure out whether the Co Op is solid ... and the building may be very solid even though a sponsor might sell one of his units with a 10% down payment.The two things are not necessarily related.Whether they are or are not is up to you to determine.

A good source for information on any building is ACRIS: ACRIS: Online City Register

You can look at the complete legal and financial history of a building and examine all documents,agreements,mortgages,sales transactions,etc.
It also helps to go to wherever the CO Op keeps the minutes of the Board of Directors Meetings to examine them for information about any possible major problems,expenses the building may be facing.

I did all of the above (and more) and satisfied myself that the building I was buying in to was quite solid....despite the fact that a sponsor who owns 8 apartments in a 120 unit building was willing to give me a pass on a lower than usual downpayment.

Another thing to examine is the number of sales in the last 5 or 10 years vs sales before the recent bust.I was happy to see that there were relatively few sales in my building in recent years.A large majority of the owners bought there apartments 10,20 and 30 years ago.I liked knowing that there were not a lot of people in the building who bought during the bubble,that most of the owners paid miniscule prices and could therefore likely easily handle costs.The stability of long term owners was also reassuring.There was a very low average yearl number of turnovers an there was a long list of UCC termination filings( mortgage payoffs),meaning lots of people had no loans on their apartments at all.You can see all of this on ACRIS.

I too would be hesitant to buy in a CO OP where 10% was accepted as the "normal" down payment.

You really have to do all this research and be just as careful whether you are putting up 10% through a possible sponsor sale or putting up 50% to meet a board requirement.And it wouldn't hurt to start the looking,investigating process now even if you decide not to buy for a while.You will learn which buildings are worth keeping an eye on,what the insides look like,what apartment sizes and the floor plans are like,etc.It takes a long time.

Good luck whatever you decide !

[jcoltrane]

Originally Posted by bluedog2

You are right to a point.

It is not always the case, however that someone CANNOT AFFORD to make the proper downpayment. Sometimes there are people (and I was one) who have reasons for not wanting to make a certain downpayment even though they may be fully capable of it.I made a decision that I would rather keep my liquid assets invested elsewhere, where they are earning much more than the 4.125% cost to me of financing my loan.I also factored in (and wanted) the larger tax deduction that comes with a larger interest payment.Different considerations go in to everyone's individual approach.

Yours is the exception, not the rule.

Additionally, just to play devil's advocate, and based soley on the info provided; to make your premise pay, the ROI of your "liquid assets" would need to exceed the interest paid on the mortgage over the life of the investment(s). Additionally, you will need to consider the interest cost that could have been saved if the investment amount had been applied to reduce the mortgage principle.

Lastly, if none of the investment/ROI is never used to paydown the mortgage principle, and the principle is never paid down, then the ROI would have to exceed the interest cost over the life of the mortgage.

Oh and of course, the interest tax deduction must be accounted.

All in all, such a decision cannot be generalized, though I think it *might* be prudent to pay down the mortgage principle, and put the monthly interest cost savings, either toward further principle pay down; or to monthly infusions into a good low cost mutual fund.

Food for thought.

Also,Co op boards have no say in how a sponsor handles a sale.In my building the downpayment requirement for non sponsor sales is 25% and they don't waive that under any circumstance.They have no choice but to accept the sponsor purchasers.So what a sponsor does,does not necessarily say anything about the culture or financial condition of a building...especially if it is an older,established Co Op where the sponsor units left are less than 10% of the units in the building.

The above is generally not accurate in regard to the role of the Sponsor.

It is the Sponsor who sets up the cooperative, of course under the aegis of the Attorney General's office. The decisions the Sponsor makes in determining the cooperative (and the Sponsor makes all such decisions) and those which he imposes upon the coop effect the financial, shape, health and well being for a couple decades and beyond.

There is no greater factor, beyond the Sponsor, save the Attorney General.

Older coops where the Sponsor continues to own an inventory of rent stabilized/controlled apartments, and/or where the Sponsor has a controling interest are problematic. In many such situations the Sponsor's interest will outweigh the interest of the coop. Such as the contrasting down payment requirements you describe in your coop's circumstances,

I do not favor government subsidized cooperatives; nor most initiated during the modern era boom of the 80s. Most of the LLs of that era converted their buildings, took all the money, and left the coops with a deteriorating pile of bricks, and/or a financially overburdened cooperative (in new/newer buildings this is a particular caveat).

@bluedog2,

Apparently, you have made a good effort at due diligence and I commend you.

Just curious, did you investigate the physical condition of the building, and were you informed of the coop's plans/requirements re capital improvements?

[bluedog2]

Originally Posted by jcoltrane

@bluedog2,

Apparently, you have made a good effort at due diligence and I commend you.

Just curious, did you investigate the physical condition of the building, and were you informed of the coop's plans/requirements re capital improvements?

Yes,definitely.In addition to looking at board minutes,I asked about the age and history of the roof,elevators,heating system,wiring,brick repointing,etc.I also had a relative who is a building contractor look at these things.
There are always things one might miss of course but now that I have been living in the building for a while and now that I go to building meetings myself I can see for sure that the building is in great shape...especially for it's age(1930's).

The sponsor relinquished control of the board to the owners 20 years ago when sales of apartments went over 50%.Now there are very few sponsor units left but the sponsor is still the managing agent of the building and the apartment owners are happy with that relationship.At this point we could fire them as managers if we were dissatisfied.It is a large,very reputable company.

One other tip for anyone who might be investigating CO OPS....in addition to all of the due diligence outlined earlier there is also 1 very easy way to double check on the financial condition of a building : ASK YOU BANK. All the major lending institutions keep lists of CO OP and condo buildings throughout the city with ratings of the financial health.There are some buildings where it is impossible to get loans because of various potential "problems" that have been detected by banks and some buildings where it is difficult to obtain loans .There are also buildings that have a very high rating as to financial health and stability and where most banks are happy to write loans.I asked my bank on day 1 whether the building had a good rating.He laughed and told me that the building had an excellent rating and said that very few people ever asked that question.

Am not sure but they may even adjust your interest rate upwards or downwards a bit depending on a building's rating, the same way they do if your credit score is 850 v 750 or 700.

[jcoltrane]

Seems as if you have served yourself well. Above and beyond the average purchaser. Your efforts are an excellent example to all.

Congratulations and continued good fortune.