What Are the Cons of Buying an HDFC Co-op?

The cons of buying an HDFC co-op include financing issues, high flip taxes, subletting restrictions, building governance issues and the risk of regulatory changes negatively affecting the value of HDFCs.

Click on the sections below to learn more about each disadvantage of HDFC apartments.

HDFC Financing Issues
HDFC Flip Taxes
HDFC Subletting Restrictions
HDFC Governance Issues
HDFC Regulatory Risk

Securing a mortgage for an HDFC is more challenging compared to a traditional co-op due to income limits, regulatory risks, poor building financials and governance issues.

Even if you’re able to get a mortgage on an HDFC, you may need to make a larger down payment. Financing hurdles with HDFCs limit the pool of potential buyers when you decide to sell, and this may yield a lower price and more prolonged sale process.

HDFC Income limits present a significant hurdle for getting a mortgage. The juxtaposition of low income limits and high sale prices for some HDFCs makes it impossible to obtain a reasonably sized mortgage.

This is because the purchaser must remain within the building’s income limits while not exceeding the 43% debt-to-income ratio ceiling observed by most lenders. As a result, many HDFC buyers tend to be high-asset individuals who can swing a large down payment or pay cash.

Poor building financials, which are commonplace for HDFCs, add to the complexity of getting a mortgage. Many lenders are reluctant to approve HDFCs if the building has inadequate reserves or is operating at a loss. This scenario is quite common for HDFC co-ops.

Another reason why many lenders steer clear of HDFCs is due to the risk of regulatory changes.

Many HDFCs benefit from a property tax exemption called the DAMP cap which is set to expire in June 2029. As this date nears, the city is likely to impose new regulations on HDFCs.

Regulatory changes may adversely affect the value of HDFC apartments. Lenders don’t like anything which may adversely impact the value of their collateral.

Lenders also have issues approving HDFCs due to documentation and communication issues. Getting a building approved by a lender requires extensive paperwork and coordination between the bank and the building’s management or designated board member, if self-managed.

Many HDFCs lack organization, have limited documentation, and are slow to respond to third parties such as the purchaser’s lender and attorney.

In short, securing a mortgage on an HDFC is a complex process due to income limits, regulatory risks, poor building financials and governance issues. Just remember, if it’s challenging for you to obtain a loan, it will also be difficult for the buyer to secure financing when you decide to sell.

HDFC buildings usually impose a substantial flip tax on resales. The exact flip tax varies by HDFC and the length of ownership. HDFC flip taxes are significantly higher than for traditional co-ops.

HDFC flip taxes typically range from 30% to 50% of your profit, and oftentimes more. Moreover, the definition of profit, and consequently which closing costs are deductible, varies from one HDFC to another.

Due to their high flip taxes, HDFCs are not a good choice if you intend to sell after only a few years.

HDFCs typically have stricter subletting rules compared to traditional co-ops. This limits your flexibility as an owner and reduces the pool of prospective purchasers when it’s time to sell.

In most cases, HDFCs limit subletting to a maximum of 18 months within a 5-year period.

However, HDFC subletting rules can be even more restrictive depending on an HDFC’s governing documents and any agreements binding the HDFC and/or the property.

While it’s never a good idea to buy a co-op if you need maximum flexibility, most traditional co-ops offer adequate flexibility to rent out your apartment when plans change unexpectedly. The same cannot be said for HDFCs, so tread with caution.

HDFCs are typically smaller buildings that often suffer from poor management, deferred maintenance problems, and weak financials. This makes it harder to obtain a mortgage and increases the odds of being assessed once you’re an owner.

Many HDFCs are self-managed, meaning they do not employ a professional third-party management firm to conduct regular inspections and coordinate necessary repairs. While many self-managed HDFCs are run quite well, it can be hit or miss.

Even if an HDFC is professionally managed, it doesn’t guarantee that the building or its financials are good shape.

Smaller buildings like HDFCs rarely have the financial resources to hire top-tier management companies. Consequently, the quality of an HDFC’s managing agent, if one exists, can vary widely.

Having a bad management company isn’t just an issue when you’re buying. Imaging having to deal with an unresponsive or incompetent building manager if your apartment is being flooded by a leak from upstairs.

Aside from management issues, most HDFCs operate with limited budgets, reflected in their significantly low monthly maintenance fees.

This means there is a higher likelihood that an HDFC may require significant capital improvement projects in the future. As a buyer, this translates to an increased risk of being assessed compared to a building that has been diligent in its routine maintenance.

Selling an HDFC can be nothing short of a nightmare if the building is poorly managed. Essential documentation, such as recent financial statements, may either be unavailable or of low quality, posing difficulties for potential buyers during both pre-contract buyer due diligence and the loan application process.

Moreover, the buyer’s attorney may encounter difficulties in obtaining responses to their due diligence questionnaire. If an HDFC is self-managed, you are reliant on the cooperation of neighbors (co-op board members) to facilitate the sale. This responsibility typically falls into the hands of a single board member. What if you don’t get along?

Buying an HDFC is risky due to the potential for future regulatory changes. As recently as 2017, NYC HPD (Housing Preservation & Development) proposed a new Regulatory Agreement in exchange for extending a property tax break for HDFCs.

This new Regulatory Agreement proposed a serious of highly controversial changes such as lower income limits, purchaser asset tests, and sale price caps.

Regulatory changes may adversely affect the value of an HDFC apartment to a much greater degree than with traditional co-ops or condos in NYC.