What is “post closing liquidity” in NYC Co-ops?
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In the process of buying an apartment in New York, several concepts are essential to understand. Calculating Coop post-closing liquidity for a mortgage in NYC is one of them. In summary, it means what it says: after closing, how much money will you have available? You need far more than a down payment to buy a co-op in New York City. When purchasing a co-op in NYC, you will need to meet the building’s post-closing liquidity and debt-to-income ratio requirements. Many co-ops have specific requirements. Others take a holistic approach to evaluating a buyer’s financials. This information will be presented in your board package before scheduling an interview.
What is post-closing liquidity?
It means the amount of liquid funds a buyer will have after they close on their home. Buyers should consider what their liquid assets will be after their down-payment and closing costs are paid. To get to this number, you will have to look at your finances and total assets. Then, subtract the downpayment plus any other closing costs involved. The final amount will show your available cash on hand.
In other words, Coop post-closing (post-close) liquidity forecasts how many months’ worth of apartment carrying costs you will have readily available in liquid assets after you close on your apartment.
What post-closing liquidity Do Co-Ops Require?
This concept becomes relevant when you are purchasing a co-op. Condos do not require a specific amount of cash if you are planning to get a mortgage. However, this figure will likely be taken into account by your lender. This means that regardless of the type of property you are buying, you will need to have some cash put aside if you plan to finance it.
Generally, co-op boards will require post-closing liquidity of 24 months of your mortgage & maintenance payments. As a result, you should aim to have 24 months of cash or cash equivalents post-closing. Some buildings require even more. For example, if a buyer has 24 months of post-closing liquidity, it means that he or she has enough liquid assets to pay the monthly co-op maintenance and mortgage bills for 24 consecutive months.
What Is Considered Liquid assets?
An asset is liquid if you can convert it to cash in a day or two. Buyers frequently ask us about their life insurance. Well, according to this definition, the cash surrender value of your life insurance plan would generally be included in the calculation, but the death benefit would not be included. The definition of “liquid assets” is open to interpretation and varies by the co-op board.
- Liquid Assets:
- Cash and Cash Equivalents (CDs)
- Money Market Funds
- Government Bills and Bonds
- Stocks and Bonds
- Vested Stocks and Options
- Illiquid Assets:
- Unvested 401K, IRA, SEP IRA, Roth IRA
- Pension and Keogh Plans
- Life Insurance
- Personal Property and Real Estate
- Unvested Shares or Deferred Compensation
Like many aspects of real estate in New York, the definition of liquid assets will vary by building. Some co-ops are more flexible and will allow you to include your 401k, life insurance, and other retirement funds. Unfortunately, other coops (and this is becoming the trend) will require all liquidity to be cash or cash equivalent. The latter includes bonds, stocks, etc. Not having enough available cash post-closing is one of the top reasons a board might reject you.
What is the formula for post-closing liquidity in NYC?
There is not a unique way to calculating Coop post-closing liquidity. When preparing your REBNY financial statement, NestApple will assess your post-closing liquidity for each property you are interested in to determine whether you are qualified to pass the co-op board. We will factor in the monthly maintenance, assessments, your monthly mortgage payments, and taxes/mortgages/rental income on any other properties you own.
We usually take (Liquid Assets – Down Payment – Estimated Closing Costs) divided by (Monthly Mortgage P&I + Maintenance + Assessments + insurance)
What is the typical rule for co-ops in NYC?
It is typically two years’ worth of carrying costs. Most boards in co-ops will require two years’ worth of carrying costs. They want to ensure that you have enough cash to cover the mortgage payments + maintenance + taxes. Therefore, this is a number they will meticulously analyze. Before submitting an offer on a co-op, it’s essential to have your buyer’s agent confirm the co-op’s financial requirements. If a building does not specify its post-closing liquidity requirements, a conservative rule of thumb is to have at least two years of post-closing liquidity.
To conclude, you can use your cash rebate paid by NestApple to add to your formula and be able to meet the threshold for post-closing liquidity.
Georges Benoliel
Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.
