What is “post closing liquidity” in NYC Co-ops?
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In 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: after closing, how much money will you have available? It would help if you had far more than a down payment to buy a co-op in New York City. When purchasing a co-op in NYC, you must meet the building’s post-closing liquidity and debt-to-income ratio requirements. Many co-ops have specific needs, and 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 number of liquid funds a buyer will have after closing their home. Buyers should consider their liquid assets after paying the down payment and closing costs. It would help if you looked at your finances and total assets to get to this number. 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 plan 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 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, they have enough liquid assets to pay the monthly co-op maintenance and mortgage bills for 24 consecutive months.
Why do I need it?
It is good to have a safety net if you run into financial difficulties. Hopefully, it would help if you never had it, but it will help you sleep better at night. Co-op boards want to see minimized distressed sales, which hurt comps in the building. Lenders want to ensure you can pay back the borrowed funds, even should you experience an unexpected and unfortunate event.
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. 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:
- Petty Cash and Cash Equivalents (CDs)
- Short term Money Market Funds
- Government Bills and Bonds
- Stocks and Bonds, mutual funds
- 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. Even if the managing agent doesn’t share the building’s financial requirements, your buyer’s agent may still be able to determine which types of assets the board will count as ‘liquid assets.’
What is the formula for post-closing liquidity in NYC?
There is no a unique way to calculate 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, mortgage payments, and property taxes/mortgages/rental income on any other properties you own.
We usually take (Liquid Assets – Down Payment – Estimated Closing Costs) divided by (Monthly Mortgage payments i.e. P&I + Maintenance + Assessments + homeowners insurance)
What is the typical rule for co-ops in NYC?
It is typically two years’ worth of carrying costs, and most co-op boards will require two years’ worth. They want to ensure 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. A conservative rule of thumb is to have at least two years of post-closing liquidity if a building does not specify its post-closing liquidity requirements.
To conclude, you can use your cash rebate paid by NestApple to add to your formula and meet the threshold for post-closing liquidity.
Do Banks Require Post-Closing Liquidity?
Your lender also wants to make sure you have a reserve. Depending on the bank, they like to know that you have enough liquidity to cover at least one year of the mortgage and monthly maintenance fees after paying the down payment and closing costs. After all, if you do not have anything saved up in a rainy day fund, you could face a potential foreclosure if something happens, such as a job loss. Therefore, while your condo may not require you to have a reserve fund, the bank will almost surely want to see one.
Your lender will likely allow this money to come from elsewhere, such as a relative’s gift. However, a bank will want to ensure you have some post-closing liquidity and meet its other requirements, such as its debt-to-income ratio.
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.
