Underlying Mortgage Refi The Challenges of Financing in Small Co-ops and Condos

Home comes in many shapes and sizes. Some prefer the elegance of prewar apartment buildings, while others lean towards the high-tech brilliance of a brand-new building. And there are those who like the small-town, neighborly feeling of a brownstone with only four, five or six units. Fortunately, in a city the size of New York, there’s a great deal of variety, no matter what your taste. 

But for those who prefer a smaller, more tight-knit community, living in a co-op with just a few units comes with its own set of unique challenges — and many of those challenges involve financing, both for the building as a whole and its individual units.

Vacancy Issues

Lenders like both stability and the ability to spread risk. Interestingly, stability is often a strong characteristic of small co-ops. Residents buy in and tend to stay for decades, even more so than in larger buildings. In brownstones, which represent a large proportion of small co-ops, each apartment is unique. The decision to buy is often predicated upon the purchaser finding a space that is exactly what they are looking for, as opposed to the more ‘cookie-cutter’ units available in much larger, more recently-constructed buildings.

On the other hand, the ability to spread risk is substantially reduced in a small co-op. It’s simply a matter of numbers; you have four or six shareholders, instead of four or six dozen or more. According to Harley Seligman, Vice President at the National Cooperative Bank (NCB), a national lender dedicated to co-op financing: “The big issue [with small buildings] is that your collateral is less dispersed amongst the shareholders than in a larger building. That’s the crux of the issue. A lender would naturally rather have a mortgage on 50 units than two units. The other issues that apply to small co-op buildings reflect more practical matters  —  i.e., if only three people live in the building — who’s keeping an eye on things, and running the building?”

From a lender’s point of view, says Stuart Bruck, Director of Mortgage Brokerage at Time Equities in New York City, “lenders underwrite a co-op in two ways. One is to value the property as though it was a rental. When there are four or six units in the building and one becomes vacant, the percentage of vacancy relative to the whole property is dramatic.” Two vacancies in a 40-unit property is a 5 percent vacancy rate, which may be acceptable to a lender —  but two vacancies in a four-unit building is 50 percent. That can end a deal right there.


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