The Fallacy of "investing" in a NYC COOP Apartment
Started by almond
over 16 years ago
Posts: 1
Member since: May 2009
Discussion about
I believe that NYC coop apartments are more inflated than the internet bubble was at it's peak. People like the idea of real estate as an investment. After all why should the money you pay for a roof over your head every month go out the window in the form of rent? A NYC coop is far from an investment at this point. A coop began as a group of renters who decided to pool their resources and buy a... [more]
I believe that NYC coop apartments are more inflated than the internet bubble was at it's peak.
People like the idea of real estate as an investment. After all why should the money you pay for a roof over your head every month go out the window in the form of rent?
A NYC coop is far from an investment at this point. A coop began as a group of renters who decided to pool their resources and buy a building. These former renters don't physically own the apartments they live in, they only own shares in a corporation. The coop has a huge loan on the building, and mostly likely always will. Most people buying into the corporation move in without the slightest idea of the monstrous liabilities they are buying into. Lawyers and brokers are supposed to be aware of the finances of a coop, but they often overlook the poor finances of the coop and allow their clients to walk right into the trap.
You are at the mercy of a board once you move into a coop. Before moving in, you have NO IDEA if the board members are competent. They are often incompetent, selfish, and controlling.
Also, how is it possible that older board members who bought into the coop 20+ years ago for small sums (often under $50k, sometimes much less) can have the same priorities as a newer member who bought into the coop for $1,000,000? The older board members have long ago paid off their personal mortgages and are only responsible for the monthly maint. They are often happy to add a montly assessment to all the shareholders' expenses with a complete disregard for the more recent buyer who has spent 100's of thousands of dollars buying into the coop! Yes, the coop veterans are generally the ones who will vote in favor of improving the building by adding a gym, renovating the lobby, creating a common area on the roof, adding a swimming pool...which is NO SURPRISE considering that they don't have a million dollar mortgage to deal with. I once lived in a coop in which the older residents were trying to add an improvement to the property that would have suddenly cost me a substantially extra amount per month. Lucky for me that proposal was shot down by an extremly slim margin, otherwise I would have been cursing the selfish jerks who had decided that I would pay an extra monthly charge for something I DIDN'T EVEN WANT! I sold very soon after that and have been renting ever since.
Add to that the fact that most coops have extremely strict rental rules, and the buyer does not have the security of being able to rent their property out if they come under financial stress.
The term "condop" has been used to describe coops that have less strict regulations. A building is either a coop or a condo, it can't be both. A condop is a coop. Therefore, a condop can have irresponsible, selfish, and incompetent board members as well.
I have sometimes heard people refer to the tax benefits of the monthly maint on a coop. This is a misconception as well. A higher percentage tax deduction on the maint merely indicates that the building has a larger loan, therefore more interest is being paid. It is that interest which becomes tax deductable to the coop shareholder. Paying more maint for the sake of a deduction is a losing strategy on your personal balance sheet.
The only way a coop can be worthwhile as a value investment is in the case that it is SUBSTANTIALLY cheaper to live there than it would be to rent a similar property. At today's grossly inflated prices, this is simply impossible. Those who bought into the coop when it was reasonably priced decades ago are the ones who have gained the most from this sham. And those who have bought and then sold in the past 10 years have gotten lucky that there has been a feeding frenzy; this is the equivalent of buying a worthless dot com stock in the late 90's and selling it before the bubble burst. The myth will perpetuate..."my buddy Johnny bought his coop for $200k in 1998 and sold it for $600k in 2005, I want to buy a place so I can make a nest egg for myself like that". WRONG. At some point people will become wise to all this and scrutinize the NYC coop concept more closely (as well as EACH INDIVIDUAL coop's finances), and then a lot of people will be in big trouble.
I wish the NY Times would do an article from this perspective. Certainly it would make a lot of people very upset.
[less]
Response by NWT
over 16 years ago
Posts: 6643
Member since: Sep 2008
Way to be succinct. Two misstatements that caught my eye:
"The coop has a huge loan on the building, and mostly likely always will." No. Some do. Most don't. It depends on when the building converted, how much capital expenditure has since been financed that way, etc.
"The term "condop" has been used to describe coops that have less strict regulations. A building is either a coop or a condo, it can't be both. A condop is a coop." No. A condop is a condo, one of whose units is a co-op.
If I could be bothered to read the rest of the blah blah blah, more misstatements would turn up.
Ignored comment.
Unhide
Response by manhattanfox
over 16 years ago
Posts: 1275
Member since: Sep 2007
nwt --- way to wordsmith and ignore the bulk of the post.
Almond, you are correct to realize that coops' have risk. Controlling, incompetent Boards are one of them. Restictions for renting are another. As you aptly stated, "protective" measures can hurt you when you need it most. You should place your capital and invest it in that which makes you comfortable.
Ignored comment.
Unhide
Response by nyc10023
over 16 years ago
Posts: 7614
Member since: Nov 2008
Yes, but much of the prime housing stock in Manhattan consists of co-ops. So what's your alternative, if you have/want/need to live there?
Ignored comment.
Unhide
Response by Topper
over 16 years ago
Posts: 1335
Member since: May 2008
Anytime I'm considering a coop I always ask how much of the underlying building mortgage would be associated with the unit (or shares) that I'm considering buying. I then mentally add this to the purchase price to know the real cost.
I don't think I've ever had a broker know this. They always have to come back to me.
I'd note, though, that that "associated" mortgage is generally not huge. But it is meaningful. And I would have very little control over it.
To be fair, the underlying mortgages of many coops may be there to support the retail space in those buildings which also generates offsetting revenue.
Ignored comment.
Unhide
Response by OldWest
over 16 years ago
Posts: 112
Member since: Jun 2008
Since the tax deduction percentage includes the taxes paid, your logic and facts are false. One cannot tell how much of a mortgage -- if any -- there is on a co-op by looking at that %.
Even a building with no mortgage has a percentage of common charges that a co-op shareholder may deduct. Few escape the clutches of the real estate tax man.
A condo owner pays taxes and maintenance with two different checks. A co-op shareholder pays with one.
The "misconception" you refer to is your faulty facts and comprehension.
A condo can be overpriced. So can a single family house or a co-op. To say that X is over-inflated is a fine opinion to have but you don't even make the argument.
Co-ops have traditionally been priced lower than condos -- all else being equal -- for very simple reasons:
There are still fewer condos than co-ops in NYC. New construction is helping to change the balance
Foreign buyers typically do not qualify for co-ops and restricted supply to that market equals higher prices
Some people do not like them -- partially for the reasons you ranted about, partially because they don't like opening their finances to strangers -- though some condos are requesting similar info these days
New construction is almost 100% condo (for sale properties) and there is a premium for new, amenities, etc
That said, the spread between condo and co-op will fluctuate. What that spread is is dependent on the market. But to say that co-ops are "inflated" begs the question: IN RELATION TO WHAT?
I happen to think co-op prices will decline at a slightly larger rate than condos for now. But that's an inventory rationale (see MS's absorption rate graphs). I also think there are better deals to be had in co-ops right now and for next 18 months.
Any asset can be a good investment if done right. Any asset can be a crappy investment when done wrong.
Your blanket statements when coupled with your outright factual errors lead me to believe you are speaking from a personal and poor experience -- which you reference. That doesn't it make it so for everyone. But hey, thanks for playing.
Ignored comment.
Unhide
Response by barbiduleny
over 16 years ago
Posts: 14
Member since: Sep 2008
To each their own, sure I would have rather bought into a Condo, all prices equal, however the substantial price/sqft difference between coop and condos was enough to steer me towards coops. I'd rather have a 1000sqft 1 bed in a coop than 600 sqft glorified studio in a condo, even if have to deal with 'rules'... As long as you know and accept these rules upfront.
Your arguments would probably more convincing if less bitter and attempting to extrapolate from your single personal experience to the whole market... My experience with my coop has been diametrically opposite to yours (my board is reasonable, the building is very healthy financially). It doesn't mean that i am now going to claim that coops are the best and condos are for suckers.
Ignored comment.
Unhide
Response by skippy2222
over 16 years ago
Posts: 202
Member since: Jun 2008
I agree and disagree with some of your statements. Will not belabor them as they have been clearly stated above. I would say, however, I have been in coops and condos, and in my experience, the newer people with he higher mortgages generally want to upgrade the building and are willing to pay the assessments to upgrade and renovate when the older people are very content with their shabby surroundings and their low payments. They have been living there forever and feel it is "just fine."
Ignored comment.
Unhide
Response by BrodskyOrg
almost 15 years ago
Posts: 2
Member since: Feb 2011
I think NYC coop prices are going to soon exceed their prior peak. The market has bounced back in a big way, and inflation is steadily on the rise.
'/%3e%3c/g%3e%3c/svg%3e)
Way to be succinct. Two misstatements that caught my eye:
"The coop has a huge loan on the building, and mostly likely always will." No. Some do. Most don't. It depends on when the building converted, how much capital expenditure has since been financed that way, etc.
"The term "condop" has been used to describe coops that have less strict regulations. A building is either a coop or a condo, it can't be both. A condop is a coop." No. A condop is a condo, one of whose units is a co-op.
If I could be bothered to read the rest of the blah blah blah, more misstatements would turn up.
nwt --- way to wordsmith and ignore the bulk of the post.
Almond, you are correct to realize that coops' have risk. Controlling, incompetent Boards are one of them. Restictions for renting are another. As you aptly stated, "protective" measures can hurt you when you need it most. You should place your capital and invest it in that which makes you comfortable.
Yes, but much of the prime housing stock in Manhattan consists of co-ops. So what's your alternative, if you have/want/need to live there?
Anytime I'm considering a coop I always ask how much of the underlying building mortgage would be associated with the unit (or shares) that I'm considering buying. I then mentally add this to the purchase price to know the real cost.
I don't think I've ever had a broker know this. They always have to come back to me.
I'd note, though, that that "associated" mortgage is generally not huge. But it is meaningful. And I would have very little control over it.
To be fair, the underlying mortgages of many coops may be there to support the retail space in those buildings which also generates offsetting revenue.
Since the tax deduction percentage includes the taxes paid, your logic and facts are false. One cannot tell how much of a mortgage -- if any -- there is on a co-op by looking at that %.
Even a building with no mortgage has a percentage of common charges that a co-op shareholder may deduct. Few escape the clutches of the real estate tax man.
A condo owner pays taxes and maintenance with two different checks. A co-op shareholder pays with one.
The "misconception" you refer to is your faulty facts and comprehension.
A condo can be overpriced. So can a single family house or a co-op. To say that X is over-inflated is a fine opinion to have but you don't even make the argument.
Co-ops have traditionally been priced lower than condos -- all else being equal -- for very simple reasons:
There are still fewer condos than co-ops in NYC. New construction is helping to change the balance
Foreign buyers typically do not qualify for co-ops and restricted supply to that market equals higher prices
Some people do not like them -- partially for the reasons you ranted about, partially because they don't like opening their finances to strangers -- though some condos are requesting similar info these days
New construction is almost 100% condo (for sale properties) and there is a premium for new, amenities, etc
That said, the spread between condo and co-op will fluctuate. What that spread is is dependent on the market. But to say that co-ops are "inflated" begs the question: IN RELATION TO WHAT?
I happen to think co-op prices will decline at a slightly larger rate than condos for now. But that's an inventory rationale (see MS's absorption rate graphs). I also think there are better deals to be had in co-ops right now and for next 18 months.
Any asset can be a good investment if done right. Any asset can be a crappy investment when done wrong.
Your blanket statements when coupled with your outright factual errors lead me to believe you are speaking from a personal and poor experience -- which you reference. That doesn't it make it so for everyone. But hey, thanks for playing.
To each their own, sure I would have rather bought into a Condo, all prices equal, however the substantial price/sqft difference between coop and condos was enough to steer me towards coops. I'd rather have a 1000sqft 1 bed in a coop than 600 sqft glorified studio in a condo, even if have to deal with 'rules'... As long as you know and accept these rules upfront.
Your arguments would probably more convincing if less bitter and attempting to extrapolate from your single personal experience to the whole market... My experience with my coop has been diametrically opposite to yours (my board is reasonable, the building is very healthy financially). It doesn't mean that i am now going to claim that coops are the best and condos are for suckers.
I agree and disagree with some of your statements. Will not belabor them as they have been clearly stated above. I would say, however, I have been in coops and condos, and in my experience, the newer people with he higher mortgages generally want to upgrade the building and are willing to pay the assessments to upgrade and renovate when the older people are very content with their shabby surroundings and their low payments. They have been living there forever and feel it is "just fine."
I think NYC coop prices are going to soon exceed their prior peak. The market has bounced back in a big way, and inflation is steadily on the rise.