NYC Co-ops More Protected Than Condos?
A: What a great topic to discuss as the housing market continues to remain flat-to-down across most parts of the country. In New York City there are basically 2 property choices for most buyers: Co-op or Condo. Should the housing market take a short term temporary hit down the road, what apartment type do you think will be more protected? I'm going with liberal Co-ops.
Here are some reasons why I think sellers of condominiums might have to stretch lower than sellers of Co-ops should the housing market hit a rough patch down the road.
1. Speculators/Foreign Investors Buy Condo's NOT Co-ops: For those speculative investors in New York City, buying a condo is a must due to the liberal transaction process associated with the legal structure of condominiums. Most condos allow the buyer to put ONLY 10% DOWN, SUBLET THE PROPERTY, experience NO BOARD INTERVIEW, and a RIGHT OF FIRST REFUSAL APPROVAL PROCESS (rather than passing the co-op board members) all of which allows the seller to market the property to a much larger buyer pool.
According to NY-Condos.com:
Prospective buyers lacking U.S. citizenship will find that New York condos give them the chance to own a U.S. apartment without having to suffer from a weak dollar, along with potential for short and long-term appreciation.Whenever you are talking about buying a property for investment purposes rather than to live in for the next 15 years (especially one in a foreign land), you must also consider the prospect of hard times and being forced to sell should something not turn out as expected! It only adds to the list of condo owners in NYC that might be forced to sell in a housing correction.
2. Financially Weak Homeowners Buy Condos: Lets face it, if you know you are going to buy rather than rent in NYC but don't have enough assets to put 20% down and still have enough to show a co-op board, than you will learn quickly that you will have to sacrifice space or location and buy a condo; your only other choice is to find a condop or a sponsor sale. However if you have a secure job with rising salary, sufficient liquid assets, and low debt than you are in good position to pass most co-op boards and less likely to be forced to sell in hard times.
Using this logic you could predict a situation in a rising interest rate environtment where more condo owners will be forced to sell their apartments. Any homeowner who has to sell for financial reasons usually has to sell quickly; to sell quickly you MUST price below market value!
3. Most New Developments Are Condo: Think about all the new development that has taken place in New York City over the past few years. Now think about all the development that is almost finished and about to start! As the market cools, are these guys going to be able sell their units for $1,300+ a square foot when premium exisiting products go for much lower? Percentage wise, new developments will have to lower prices more aggresively than existing co-op owners who are already offering discounts simply because they are co-op. Some developers refuse to lower their pre-construction pricing which will result in unsold units all the way to the occupancy date; where does that leave the speculative investor who paid $1,300/Sq. Ft. in the first round of pricing a year earlier?
Considering these 3 concepts I would think that liberal co-op buildings (those co-ops that allow 80%+ Financing, subletting, pied-a-terres, parents buying for children, and guarantors) to be well protected as owners will be LESS LIKELY to be forced to sell once the actual decision to sell is made. Any homeowner that has more time to sell can afford to keep their property on the market long enough to 'get their price'. Maintaining building pricing is very important as future sales are largely priced based on the most recent closed deals in the building.
If condo owners are forced to sell at way below market value simply because they need the money or want to cash out, it will hurt the building as a whole and particularly hurt those who are looking to sell soonafter as appraisers will wonder why some units sold for much less!
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