Jonathan Miller, one of my favorite NYC real estate thinkers (and appraisers) put together a piece showing the end of a “tight market” in NYC with an increase of resale apartments, both condominiums and cooperative units.

Given that inventory has come up 15% year over year, this is an accurate call.
I’ve been thinking about a different, slightly narrower, facet of the same idea.

I’d like to explore the idea that there’s been a growing pricing gap between cooperative apartments and condominiums, making coops seem like a bargain.

Based on what I’m seeing, this feels very true at the moment.
We saw the same gap widening before the 2008-2009 recession and certainly have seen the gap grow from 2010-2016.

What causes it?

First, the ease of purchasing a condominium makes it a more broadly appealing asset than a cooperative apartment.

Second, the cost of money has been so cheap that even expensive condominium

units are easy for qualified buyers to leverage.

As nearly 50% of the available listings on the market are condominiums, buyers have had lots of options at the high end.

Lastly, the new development condominiums, leading the charge, have changed the mentality somewhat over time: buyers have become increasingly enamored by completely renovated apartments.

Given the cost and time of renovating, the appeal of the new has driven buyers into the arms of developers.
And yet, as we see prices flattening across the board, I’d like to look at all the reasons that cooperative apartments feel like they offer a great deal of value – more than condominiums do – at the moment.

Of course, before I dive into this – I’m making the following assumptions about a buyer:
1) The buyer wants to use the apartment as a primary residence
2) The buyer files taxes in the US and has a tax ID number
3) The buyer has verifiable assets in the US
4) The buyer can show 2 years of monthly carrying charges (mortgage and maintenance) in post-closing liquidity
5) The buyer has a 20-25% minimum downpayment
6) The buyer has a sense of humor (optional)
Here are the ways in which the coop seems to be offering more value right now:

Safety of Investment

Just in reviewing five items listed above, you can see that in order to buy in a cooperative, you need to be amply qualified.

Generally speaking, a coop board will not approve a sale or a buyer if the price is unreasonable or if the buyer cannot be counted on to cover his/her carrying charges.

As annoying as the qualifications might be to a buyer, the risk of shareholders (i.e. coop owners) defaulting on their monthly charges becomes very low, and as a result, the volatility of coop sale prices is far lower than for condominiums.

There is almost no speculative aspect of cooperative purchases, in fact.

Prewar vs. Postwar

The rarity of a Prewar condominium, that is, a condo that was built before WWII, makes it very sought after.

Conversely, there is an abundance of Prewar cooperative product!

The charm that so many buyers want in their apartment – this is available at a price usually 15-20% below that of a condo.

As $2000 per square foot has become commonplace in many new condos, price per square foot in coops has remained far lower.

Some studios remain close to $1000-$1200 per square foot.

1-bedrooms creep above that level, while one must often start looking at 3- and 4-bedroom apartments to see coop apartments reach such prices on a square footage basis.

And while we’re on the subject of square footage…

Square Footage

This is the bugaboo for many buyers in NYC.

Cooperative apartments generally are not sold by the square foot; they are sold by the room.

This makes a side-by-side comparison rather difficult.

Add to this the element of mysterious measuring

of

condominiums, especially in brand new projects.

The same apartment that once was called 750 square feet may now be marketed at 850 or 900 square feet.

The measurement methods are disclosed in a building’s offering plan.

This legerdemain can be frustrating to a buyer, who has become increasingly data driven.

In the end, coop pricing based on some sense of size and dimension often feels more accurate, and the apartments themselves offer rooms whose dimensions are harder to find in the same “size” condos – that is to say, 2-bedroom coops may offer larger living rooms.

All square feet are not equal, and coop square footage may be a bit “truer.”

Based on vintage, buyers know the general room sizes that they are going to get.

Location

More and more, condo developers are finding creative ways to develop sites, and location certainly is one of the hardest things to recreate.

Therefore, established coops have the advantage of already being where you want to live.

Conversely, if a condo is located in a very prime location, the price per square foot is even steeper.

For instance, while a Central Park West cooperative even in the best buildings might be $3000-$4000 per square foot, the comparable condominium will be $5000-7000 per square foot.

One could assume that the persons buying either of these

units

units would be equivalently qualified.

How much can you carry?

Carrying Charges

I find this quite interesting.

Apart from land-lease cooperatives, which have their own special math, cooperatives generally are taxed at a lower rate than condominiums.

Here, too, square footage measurement comes into play.

There are situations where cooperatives might cost $2-$2.50 per square foot to carry (meaning: the total cost of RE tax, services, and sewage, water, and underlying building mortgage), but the cost spectrum usually depends on the size of the building’s underlying mortgage, and not on the RE Tax.

As real estate tax goes up and up, this ratio becomes ever more apparent.

The costs of labor impacts coops and condos alike, but if real estate taxes are lower for coops, this ends up being an advantage in the long-term.

Renovation Quality

In a resale situation, a buyer can renovate to his or her own tastes in either a coop or a condo.

But with cooperatives, the chances are high that one would have the opportunity to purchase a “wreck” – in the current market, these types of apartments are heavily discounted.

Just as Prewar condos are rare, since condominiums are a newer entry into the market and still comprise only 30% of all housing stock, odds are unlikely that condominiums will be in very poor condition.

Plus, the fact that the competition for condominiums is not just primary buyers but the entire world means there is less discounting of units in bad shape.
So, if a buyer can purchase a coop unit in need of a full renovation, the end result post-renovation is a property that immediately unlocks value, and can be sold with a premium. The buyer able to purchase an estate apartment is highly advantaged.
The flip side of this is that in new development, each apartment has an identical quality of finish.

Many new developments are gorgeous, but if you decide to sell, you may be in competition with identical apartments. As we see in some recent new development secondary sales (aka resales), this can put downward pressure on values.

The benefit of cooperative sales is that nearly any sale will have unique circumstances.

There are a variety of upgrades you can make to a cooperative, depending on the building, to add value and help with resale pricing.

Closing Costs

The closing costs of purchasing in a condo have the following fees that coop purchases do not:

• Title Insurance
• Mortgage Tax

This can add 2% to your closing costs on the way into a purchase. Not to mention that if there is an opportunity to refinance: in a condo, you may have to pay these costs every time you refinance!, but in a coop, the closing costs are generally de minimis.

It’s nice to have some flexibility

Flexibility

It’s funny – the word flexibility generally is not associated with cooperatives, given their strict rules and such.

But with many cooperatives, the age of the buildings, with extra windows, more plumbing risers, etc., often give a buyer a bit more flexibility of how to lay an apartment out, were one to renovate.

This is a not a small thing: as people’s lives change, the flexibility to create a space that suits them, in the same space where they live, may be no small thing.

I’ve heard people complaining that cooperatives need to update their rules to be more competitive with condominiums.
Looking at the list above, I think that cooperatives are doing just fine.