Purchasing a co-op in NYC as a foreign investor can be a difficult, yet rewarding task. According to a recent Wealth Report by Knight Frank, NYC and specifically Manhattan, ranks as one of the top real estate markets in the world. Although one of the most expensive real estate market in the U.S., The city offers many bargains to foreign investors when compared to other Alpha cities such as London, Hong Kong, and Paris.
The definition of a Co-op?
A “co-op” is a specific type of real estate transaction where a corporation owns a building and sells shares in the corporation to each resident. Drastically different from traditional real estate transactions, investors who purchase co-op units do not actually receive a deed or gain legal title to a particular piece of property. Investors are actually purchasing shares of the corporation that owns the building and as a result will receive stock certificates and the legal right to occupy and use a specific unit within the rules and regulations set forth by the co-op board.
Most co-ops have a volunteer co-op board of directors that is elected by the existing shareholders. The board is responsible for creating and enforcing the rules and regulation for the building and its units. These bylaws can dictate anything from the type of renovation projects that can be conducted inside the units, to whether pets are allowed on the premises. Co-op boards are extremely powerful and can even opt to evict a shareholder and force them to sell their unit, if they are not in compliance with the rules of the premises.
Things to Consider When Purchasing a Co-op
While co-ops can pose great investment opportunities for foreign investors, as they are typically 10% – 20% cheaper than traditional condominiums, they are not without fault. The co-op board members must approve all buyers, including foreign investors, in order to purchase a unit in the building. This approval process can take months and co-ops are not required to give an explicit explanation as to why a potential buyer was rejected. Co-ops also feature a variety of other restrictions, such as how you renovate your property as well as your right to lease or sublet your unit, which can make it difficult to generate passive income from your investment. In the event that you choose to sell your co-op unit, the prospective buyer must also be approved by the co-op board, which could have an adverse effect on your financial returns. This is in addition to any additional taxes and fees that might be levied by the co-op board for the resale of your unit.
The Process of Purchasing a Co-op
The process for purchasing a co-op in NYC can vary depending on the transaction, but generally that process is as follows:
Identify Property – It should go without saying that the first step in the process is viewing and selecting a co-op that fits your needs in regards to location, size and amenities.
Obtain Proof of Funds – Many foreign investors will choose to pay cash for a NYC co-op, however, you will need to show proof that you have the funds to acquire the property. This can often be in the form of a financial statement or another form of correspondence from your bank. In the event that you are financing the property, you will need a letter from your bank stating that you are pre-approved for a specific mortgage amount.
Submit Co-op Board Application – This is the process of submitting your offer and personal financial information to the co-op board of directors for review. This is a critical step in the process, as a mistake at this point in the process could result in your application being rejected, in addition to your chances of purchasing the co-op unit.
Conducting a Co-op Board Interview – Assuming that your submitted financials looked credible and that you have the financial means to purchase the co-op unit, you will often be required to interview with the co-op board. This interview gives the co-op board an opportunity to meet you and ask any lingering questions regarding your financial history and background.
Schedule Closing – Upon receiving the approval of the co-op board, you will need to go through the process of closing the transaction, including completing all due diligence and securing legal rights to the property.
Although purchasing a co-op in NYC as a foreign investor is not a simple process, it can be very advantageous to your financial portfolio, if carefully planned. As with any financial decision, you should seek the counsel of a real estate professional that is well-versed in the world of NYC co-ops and have experience working with foreign investors. Having access to knowledgeable advisors will enable you to avoid the critical mistakes, which may be detrimental to the acquisition of your co-op in NYC as a foreign investor.