Maintenance Charges: The Hidden Devil...!
A: They are. If your monthly maintenance + real estate charges equal more than 1.65x the total square footage, then you better make sure the asking price of the property has been lowered to compensate for the higher cost of carrying the apartment! Read this post to see why! Originally Published November 29, 2005.
The situation is experienced by almost all buyers of NYC real estate at some point in their apartment search.
How Does Total Monthly Expenses Affect the Value of an Apartment?
THE MONTHLY COSTS TO CARRY A PROPERTY IS DIRECTLY RELATED TO THE AFFORDABILITY OF THE PROPERTY ON THE OPEN MARKET. PUT SIMPLY, THE HIGHER THE MONTHLY COSTS TO MAINTAIN A PROPERTY THE LESS AFFORDABLE THE PURCHASE PRICE WILL BE TO THE BUYER POOL
Your monthly maintenance charges consists of different fees depending on whether you are buying a Co-op or Condominium in NYC.
For CONDOMINIUM: Includes fees associated with the overall uptake and maintenance of the building and its services.
For Co-op: Includes fees associated with the overall uptake and maintenance of the building and its services + real estate taxes.
Since Maintenance Fees are variable fees, chances are you will be faced with Rising Monthly Maintenance Fees at one point or another. So, in order to make a Wise Investment with your 100's of Thousands of Dollars, it is important to understand why they fluctuate and its effects...
Each building is like a different company, lets say a publicly traded company for arguments sake. Some publicly traded companies, like for instance INTEL CORP. (NASDAQ: INTC), owns a great place in the market for semiconductor chips which can be analogous to owning an apartment in a great location of NYC; lets say 84th & Madison Avenue. Chances are, this will not change unless an outside force, such as a natural disaster should hit the area.
The marketing and branding that INTEL spends so much money on, can be analogous to the outside appearance of the building, or building amenities. Is the lobby extravagant? Is there a roof-deck? Gym? Doorman? Well, you get the picture.
Finally, the quarterly earnings report that INTEL releases every 3 months can be directly compared to the 2 years of financial statements that the buyer's attorney will go over before advising you to SIGN THAT CONTRACT!! Needless to say, I hope you have a INTEL type of report, rather that one that resembles ENRON or WORLDCOM!!
Starting to make sense to you?
The building's maintenance fees have a direct relationship with the financial health of the building you are about to buy in. If there were major repairs recently on the building such as roofwork or facade repair, than chances are the operational costs of these projects took a nice chunk of change out of the building's reserve fund. For all you first timers out there:
BUILDING RESERVE FUND: Monies put aside by the building, and paid by the owners or shareholders, to be used to pay for the overall maintenance and upkeep of building and its services. Building amenities such as a 24HR Doorman, gym, or roofdeck, will increase the overall costs of running the building and these services.
TIP: The building should have at least 4 months worth of overall monthly building expenses in the reserve fund for future repairs. Anything less, raises a red flag, and leaves the board little options OTHER THAN charging a maintenance assessment at some point down the road!!
For me, I like to use the following formula for assessing whether or not an individual apartment's maintenance charges are a signal of strong financial sense.
MAINTENANCE FEES/TOTAL SQUARE FEET
For instance: A 800 Sq. Ft. 1 Bedroom apartment in a Co-op Building Charges $760/Month in Maintenance.
760/800 = 0.95
NOW YOU TRY IT AT HOME & USE THIS GRAPH AS A GUIDE!
LOW MAINTENANCE/STRONG BUILDING FINANCIALS = UNDER 1.15
AVERAGE MAINTENANCE/AVERAGE BUILDING FINANCIALS = 1.15 - 1.65
HIGH MAINTENANCE/WEAK BUILDING FINANCIALS or UNDERLYING ISSUES (such as a landlease) = OVER 1.65
*NOTE #1: Since Co-op Maintenance Charges include your real estate taxes, you must COMBINE the monthly carrying charges (CC) and the real estate taxes when calculating for condominiums.
**NOTE #2: Just because you came out with a figure over 1.65, using that formula, doesn't mean your building is about to go down the toilet! There can be a number of reasons for this, such as recent building work done that led to a temporary monthly assessment. It just means that the VALUE of the property poses a risk at resale, due to the high monthly costs, and will result in a lower purchase price than apartments that have a maintenance score under 1.0.
In the end, you MUST buy the best VALUE FOR YOUR MONEY, that has the best chance for APPRECIATION IN RESALE, come time for you to sell.
Posted by Jermaine Needs
Fri Apr 7th, 2006 11:20 PM
Must NYC condo building sponsors, upon conversion, fund a reserve fund of at least 3% of the total value of the units pursuant to NYC Local Law 70, or has that been changed?
Thanks,
Jermaine
Posted by Pierre
Wed May 31st, 2006 02:57 PM
My appartment has 400 sq foot plus 450 sq foot of terrace. So the total is 850 sq foot. My total maintenance is $621 per month. The calculation should be 621/400 or 621/850?
Thanks
Pierre
Posted by UrbanDigs
Wed May 31st, 2006 03:10 PM
Pierre,
Outdoor space does NOT count as interior livable space and is NOT counted when caluclating price per sq ft for valuation purposes or for the above mentioned maint. valuator.
So, it would be $621/400 or $1.55 a sft that you are paying in common charges + taxes (assuming this is co-op). You can sell the higher monthly's to potential buyers by explaining to them they are higher due to the private outdoor space that you have. All in all, its not that bad and shouldn't be much of an issue.
I see monthlys that high w/out a property having outdoor space!
Posted by french
Thu Aug 3rd, 2006 10:30 PM
what should be the formula for outdoor space?
Posted by Noah
Thu Aug 3rd, 2006 11:06 PM
Outdoor space is NOT considered livable space so coming up with a formula in relation to the topic in this post would be unuseable due to so many variables about the outdoor space.
If your reffering to a formula for outdoor space and its relation to maintenence charges in terms of evaluating, I would say to expect a 10-20% increase in maint charges for apt's with a terrace.
Posted by Jeanhee
Wed Jan 31st, 2007 11:05 PM
Do/should loft areas get counted in the overall square footage of an apartment? Does it matter if full height/not full height?
Posted by Noah
Tue Feb 20th, 2007 11:03 AM
Jeanhee - hard question to answer but I would think technically no. However, the broker might add the loft/sleeping area into the total sft for marketing purposes.
Anyone else have a more concrete answer for this? Where's Jonathan Miller when you need him! Would an appraiser count loft/sleeping loft space into total size of unit?
Posted by ileen
Tue Feb 20th, 2007 12:46 PM
In manyy coops, higher floors have higher maintenances than lower floors . Should you expect higher ratios in high floors or should the selling price be adjusted down? Any rules of thumb for calculating this?
Posted by Noah
Tue Feb 20th, 2007 01:03 PM
iLeen - excellent point and yes you are right.
Since higher floors in co-ops are allocated more shares and are therefore more valuable, the ratio must be adjusted accordingly.
I would think that you RAISE the original scale up by .1 or so per 10 floors to compensate. If you are in apt 20F, than add 0.2 to each of the stated ranges I mentioned to compensate.
Posted by newbie
Tue Feb 20th, 2007 01:34 PM
Great article, Noah. When comparing coops to public companies, do you see a trend for more transparency with coop financials?
Even though you & your lawyer can do all the due dilligence before signing the contract, it seems you never really know the financial health of a building until you have lived there. Things may seem fine on paper but just HOW well is the board managed? Who is managing the finances? Is the treasurer soley responsible for signing all checks? Is the CPA firm auditing the finances truly objective or the brother of one of the board members?
Given that your apt is such a HUGE investment it seems logical that coops should be subject to similar disclosure requirements as other companies.
any thougths?
Posted by Noah
Tue Feb 20th, 2007 01:46 PM
newbie - I certainly hope so and think so! I think the market will change as technology improves and the internet makes real estate much more transparent than it is now.
It would be narrow minded to think that in 3-5 yrs time we will still only have what is offered now.
What would be very interesting is to have a community where building occupants can openly discuss whats its like to live in the building, how its managed, quality of services, and how the liberal the board is.
Posted by Kevin Boer
Wed Feb 21st, 2007 02:20 AM
I'm assuming maintenance fees are not tax-deductible?
Posted by newbie
Wed Feb 21st, 2007 09:02 AM
I agree it would be interesting...but I also wonder how many coop owners would be willing to be so open on line (i.e. negative comments about the board) as the result could impact the values?
I did come across a www.wallfly.com where applicants can rate coop boards. The info isn't complete but it's a start.
Also, given that coops are private companies they are not required to disclose anything to the general public.
Not to throw water on the idea...just pointing out some challenges. As the ratio of condos/coops increases the market may work itself out and coops will have to be more responsive to buyers' needs.
....my add'l 2 cents
Posted by Marjorie
Tue Feb 27th, 2007 10:42 PM
how about when utilities are included in the maintainence..how should that be figured into the equation?
Posted by Chris
Mon Mar 12th, 2007 12:55 AM
Great insight on maintenance fees!
Yes, I really want to know what happens to the ratio when the utilities are included in the maintenance fee.
Thanks,
Chris
Posted by Kurt
Tue Apr 3rd, 2007 07:01 AM
good blog
Posted by anon
Fri Apr 20th, 2007 10:23 AM
do you know if there is usually an average percent increase for maintenance from year to year? or is it more normal for a co-op to increase their maintenance once every few years to compensate for inflation, work being done, etc.
Posted by terri k
Mon Jan 7th, 2008 09:46 AM
could u reply back privately? u dont check this site. I dont live in NYC and dont know the first thing about if I should buy or rent! the maintenance fees are high. If i rent a place can i make sure I am guaranteed to have the place for lets say, 5 years?? I dont want to throw money away in rent but dont want to go back and forth tryignto find a place every year? do you know any resources i could use to get my self a renters or buyers agent, someone to help ME and work for ME NOT the seller?
Posted by Steph
Wed Jan 14th, 2009 08:17 AM
Hi,
My condo maintenance is almost $1000 monthly for a 3-bedroom. This includes common charges of $735 and charges for permanent loan debt service, debt service reserve and replacement reserve. The rate is expected to increase again in 2010 and again in 2011. Fortunately, I don't have a mortgage but, the high maintenance is an issue for anyone that might need a mortgage. This is so frustrating since I'm looking to sell this property. Hope I'll not be forced to just give the apartment away.
I'm just wondering if I have any recourse to the increasing high maintenance fees.
Thanks.
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Posted by Lenny
Fri Dec 4th, 2009 12:45 PM
Hi Moah:
I am looking to purchase a NYC coop that has a high maintenance/square foot ratio (2.1) due to its being two apartments combined.
Is there a formula you use that reflects the proper price rebate associated with such high maintenance?