Good news first: It’s actually possible to purchase an apartment in Manhattan for under $300,000 or so. (Yes, an actual apartment—not a closet! And yes, purchase to own, not rent!) Every so often, a Housing Development Fund Corporation (HDFC) co-op unit hits the market, providing a rare, affordable option for prospective homebuyers.
But the discouraging news? Not only are they pretty rare, these real estate bargains are also a bit of a catch-22: To buy one, you have to have a yearly salary under a certain threshold, but you also have to have significant cash on-hand for down payments (and in some cases, for the entire purchase price). This significantly limits the pool of house hunters who can actually buy this type of co-op. In rare cases, people save up. A lot of times, though, it’s people (think recent college grads) with a modest salary who come into an inheritance or get a financial boost from their families, or retirees with no monthly income but plenty of cash in reserves. Sigh.
New York City’s HDFC co-ops emerged in the 1970s when, during an economic downturn, landlords began abandoning their buildings. The buildings were turned over to residents to manage. It started off as an experiment but since has evolved into a niche way for low-to-middle-income New Yorkers to purchase homes.
The units are typically well-below market value, which means your mortgage will cost less than renting a similar-sized unit, explains Eugene Gamble, a property investor and senior partner with Property Whisperers, a property investment and development company.
Intrigued? Here’s what else real estate experts say you need to know about HDFC co-ops.
The income cap is strict
The first thing buyers need to know is whether they qualify for the income cap of the building, and they need to be able to show those numbers on two years’ worth of tax returns, Franklin says. There’s no universal income cap and formulas for determining income caps vary by co-ops. Hauseit, a “for sale by owner” company in New York, put together a sample guide for calculating income cap guidelines. You can also check out a sample application, which usually asks for bank account information, personal references, and an explanation for why you want to live in the building.
Lucas Callejas, a real estate agent with Triplemint real estate in New York, says it’s important for buyers to consider whether they have any scheduled bonuses or raises coming up. If so, it might be worth asking your company to delay those if you’re close to the income cap.
“Some buildings, depending on the program, will not allow a dollar over the cap,” he explains. Others may have some wiggle room with a small amount of flexibility.
In lower-income cap buildings, retirees with strong financials but low income, as well as gift buys for adult children rule the game, Franklin explains, because so many of these purchases are cash deals.
“Many [units] go to people who may have parents or grandparents with significant cash assets, or folks who left high-paying jobs and now work in fields where they are making less, but find it more rewarding,” Franklin says.
One common misconception, though? You’re not locked into earning the same income for years.
“People get nervous that the building will demand that you never earn more than the income cap after you purchase,” she says. “The building is not going to monitor your income forever and the proprietary lease is not going to be ripped out of your hands if you get a great promotion a year after purchase.”
One more sticky point: Buyers need to find out if the building has been approved for mortgages, says Franklin. “Some buildings aren’t in strong financial health, so banks are unlikely to loan money,” she points out.
Typically, HDFCs require a somewhat low, 10% down payment, explains Debra Bechtel, a professor at Brooklyn Law School who teaches an HDFC-focused clinic; but some “hotter” neighborhoods require all cash.
If the money issue wasn’t enough, buyers must also be approved by the building’s cooperative board. An organization called the Urban Homesteading Assistance Board has a program to pre-screen people interested in living in HDFCs for eligibility.
They’re not investment properties.
Buyers shouldn’t expect to make much money off of an HDFC. Yes, though you’re allowed to have a larger income once you buy the apartment, the next buyer resident will most likely have to make under the income cap at purchase. This is all dependent on your building’s rules, though.
“Resale price is not limited, but understanding that the income cap will govern how much you may be able to get on your resale is very important for managing expectations,” Franklin says.
Additionally, flip taxes (or transfer fees paid to the building to maintain reserves when you sell) are usually high to prevent get-rich-quick schemes.
The unit has to be your primary residence.
“I always make sure my buyers know that this is only really a suitable option for someone using the apartment as their primary residence as HDFCs do not allow people buying for pied-à-terre and have strict sublet policies,” explains Shelly Place, a Triplemint agent.
You’re paying less—but you’re getting less (usually), too.
Many HDFCs require costly renovations to bring them up to reasonable living standards and so it’s possible your out-of-pocket expenses will be higher than many turn-key alternatives, explains Gamble.
HDFC units are designed for people in the low-to-middle income brackets, and as such, they generally carry low maintenance fees, Property Whisperers‘ Gamble says. However, these fees come at a cost: Low maintenance fees mean fewer liquid assets the building has for repairs, and therefore the building may be prone to safety or maintenance concerns.
And while this is true for some buildings, there is a sort of renaissance happening with Manhattan HDFCs. An influx of recent HDFC sales mean buildings have more in their coffers; many are getting much-needed upgrades and are opening up to financing, too, Franklin says.
The takeaway? HDFCs don’t fall in the “too good to be true” category; but they certainly come with some hurdles.