What Is the Average Post Closing Liquidity Requirement for Coops in NYC?
What is the definition of post-closing liquidity and why does it matter in NYC? If you are buying a co-op apartment in NYC, post-closing liquidity is one of the co-op financial requirements which the board will review as part of the co-op board application process.
What is post-closing liquidity?
Post-closing liquidity is the amount of liquid funds a buyer will have once the down payment and buyer closing costs are paid at closing. 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.
Months or Years
Post-closing liquidity in NYC is typically quoted in months or years. 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. Listing agents in NYC also refer to post-closing liquidity in years. For example, “The buyer has 2.5 years of post-closing liquidity, not factoring in her vested 401K assets.”
It’s important to note that the definition of ‘liquid assets’ varies by co-op. While some buildings may allow a buyer to include vested 401K or IRA assets, other buildings will only allow cash or cash equivalents to be counted towards post-closing liquidity.
The definition of post-closing liquidity can be obtained by reviewing the co-op purchase application instructions or asking the managing agent.
Here is an example of the post-closing liquidity requirements listed in a co-op purchase application:
The minimum total net liquid assets (Excluding for example funds in tax qualified accounts such as 401(k) accounts) available after purchase of the apartment must equal at least 2.5 times the annual apartment carrying charges (Co-op maintenance, assessments, if any, and any apartment loan payment).
What is the formula for post-closing liquidity in NYC?
The formula for post-closing liquidity is as follows:
Months of Post Closing Liquidity = (Liquid Assets — Down Payment — Estimated Closing Costs) / (Monthly Mortgage + Maintenance + Assessments)
Here is an example of how post-closing liquidity is calculated:
Cash (Excluding Deposit): $75,000
Contract Deposit: $200,000
Money Market Funds: $100,000
Vested 401K: $50,000
Purchase Price: $1,000,000
Estimated Closing Costs: 2% ($20,000)
Co-op Monthly Maintenance: $1,250
Co-op Monthly Assessment: $200
Monthly Mortgage Payment: $4,000
Without 401K balance, post-closing liquidity is 28 months:
= ($75,000 + $100,000 — $20,000) / ($1,250 + $200 + $4,000)
= 28.44 months of post-closing liquidity
With 401k balance, post-closing liquidity is 38 months:
=($75k + $100k + $50k — $20k) / ($1,250 + $200 + $4,000)
= 37.61 months of post-closing liquidity
Pro Tip: It’s important to include any monthly co-op assessments when computing post-closing liquidity. Even though assessments are temporary increases in maintenance, most co-op boards will want to know that a buyer can absorb the assessment expense while still passing the building’s post-closing liquidity requirements.
What is the typical post-closing liquidity rule for co-ops in NYC?
A typical New York City co-op will expect buyers to have at least one to two years in post-closing liquidity. Before submitting an offer on a co-op, it’s important 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. Even if the managing agent won’t share the building’s financial requirements, your buyer’s agent may still be able to find out which types of assets the board will count as ‘liquid assets.’
What qualifies as liquid assets when calculating post-closing liquidity?
The definition of ‘liquid assets’ is open to interpretation and varies by co-op board. As a general rule of thumb any asset which can be converted to cash in 24 hours is considered ‘liquid.’
Cash and Cash Equivalents (CDs)
Money Market Funds
Government Bills and Bonds
Stocks and Bonds
Vested Stocks and Options
Unvested 401K, IRA, SEP IRA, Roth IRA
Pension and Keogh Plans
Personal Property and Real Estate
Unvested Shares or Deferred Compensation
Pro Tip: Not all listing agents are made the same. Despite what they may say, some listing agents may actually have no idea what the building’s official policies are on post-closing liquidity and the definition of liquid assets. To avoid being misled by a listing agent, it’s always a good idea to have your buyer’s agent confirm the requirements directly with the managing agent before submitting an offer.
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Disclosure: Hauseit (https://www.hauseit.com) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. The services marketed on Hauseit.com are provided by licensed real estate brokers and other third party professional service providers. Hauseit LLC is not a licensed real estate broker nor a member of any multiple listing service (MLS).