New York City’s affordable HDFC co-ops, explained

New York City’s affordable HDFC co-ops, explained

Everything you need to know about HDFC co-ops, one path to affordable homeownership in New York City

By Emily Nonko  Mar 25, 2020, 8:56am EDT

New York City’s affordable housing stock mostly consists of rental apartments, but for those who are in the market to buy, there is one reliable source for homeownership on a budget. Housing Development Fund Corporation cooperatives, better known as HDFC co-ops (which are also advertised as “income-restricted” or “restricted sale” apartments), are often priced much lower than a typical NYC apartment, but require buyers to meet certain income caps while also having significant financial assets on hand.

These unique requirements mean that apartments in great locations with surprisingly low prices (for New York real estate, anyways) often end up languishing on the market. But if you’re a buyer that fits the requirements and is willing to put in a bit of legwork—including doing some research, and working with a team of HDFC experts—affordable homeownership could be within your grasp.

First off: What are HDFCs?

HDFCs are a form of affordable co-op housing intended for New Yorkers to live in long-term, as opposed to being used as investment properties. Most came about after the city seized thousands of derelict apartment buildings in the late 1970s, began fixing up the buildings, and allowed tenants to buy them for nominal amounts and turn them into low-income co-ops. A majority were concentrated on the Lower East Side and in Upper Manhattan, as well as throughout Brooklyn and the South Bronx.

According to the New York City Department of Housing Preservation and Development, there are now roughly 25,800 HDFC co-ops across 1,200 designated HDFC buildings. These function more or less like typical co-ops, though rules and regulations differ significantly depending on bylaws and each building’s board. The state of the buildings will also vary.

What about the finances?

What sets HDFCs apart from traditional co-ops is the financial structure. Most buildings receive partial tax exemptions and subsidies to keep operating costs and maintenance charges for shareholders minimal. But the buildings aren’t regulated by the city, with individual co-op boards governing themselves by instilling price caps for selling apartments as well as flip taxes and income caps.

Buyers must meet strict income requirements either tied to New York City’s area median income or a formula based on the apartment’s utilities and maintenance fees. Some HDFCs might require that buyers earn no more than 165 percent of the area median income—which is $74,700 for one person, according to HPD—while others are limited to buyers whose income does not exceed 120 percent. Then there are those open only to buyers who don’t earn more than six or seven times the monthly maintenance, utilities, and original purchase price per month.

Different HDFCs also use different kinds of flip taxes, including flat fees, percentages based on the amount of the sale, and percentages based on how long the seller has owned the unit. The money from flip taxes goes back into the building’s coffers to be used for taxes, insurance, updates and repairs.

Who qualifies to buy?

Originally, the apartments were sold to residents for a mere $250. For years the units were resold for moderate amounts, but the past decade or so has brought super-gentrification to some of the neighborhoods in which HDFCs are plentiful. Resale listings have popped up for as much as $1 million (though that high of an asking price is rare), and buyers have increasingly made all-cash offers. As a result, prices have trended up for HDFC coop housing in recent years and made many out of reach for low-income New Yorkers. Currently on Streeteasy, income-restricted apartments in Manhattan range between $170,000 for a studio to more than $1 million for a three-bedroom.

The rising price of HDFCs, coupled with their financial restrictions, presents prospective buyers with a frustrating conundrum. You’ll need to cough up a down payment worth tens of thousands of dollars while still earning less than a building’s income cap. The modern-day HDFC buyer tends to be one with a lower income but significant assets: retirees, young buyers with financial assistance from parents, and those with trust funds or an inheritance.

What’s the buying process like?

Kimberly Lewis, a Brooklyn-based wallpaper designer, bought an HDFC co-op three years ago. “I originally didn’t know what HDFCs were,” she says. As she scoured listings, however, she noticed the location and price of HDFC co-ops and found she “was lucky enough to check off all the boxes [to be an HDFC buyer],” as she puts it.

For her, the first step was narrowing down HDFC buildings in her preferred neighborhoods. She then set up alerts on real estate websites like Streeteasy, Zillow, and Craigslist, so she’d know when listings came up at each building. “The restrictions are pretty straightforward,” she says of income limits in each building. The catch, of course, is that different buildings have different restrictions, so not everything will be the right fit.

Lewis searched for listings through the Urban Homesteading Assistance Board, which is known for HDFC assistance; its resources include a “market and match” program with unit listings and a list of HDFC-oriented attorneys. She also took a HDFC homebuying class with the organization. “It was a way to learn more about these types of properties,” Lewis says.

Most helpful was securing a homeownership counselor through Brooklyn-based Neighbors Helping Neighbors, who helped her understand her finances as well as first-time homeownership opportunities. Her counselor helped her secure a HomeFirst Down Payment Assistance grant, which Lewis eventually combined with a mortgage for the downpayment on a two-bedroom HDFC apartment in South Williamsburg.

Do I need to work with a real estate agent?

“I was mostly working on my own until the end,” Lewis says, “And then I worked with a broker who specializes in HDFCs.” The agent helped her quickly put in an offer “after running numbers and discussing [HDFC] buildings more in detail.” The agent represented both Lewis and the seller on an offer 11 percent below asking price, which the seller accepted immediately since the apartment had lingered on the market.

Though her purchase was more or less a normal real estate transaction with “a little more red tape,” Lewis stresses that having an agent who is familiar with HDFCs is important. Her agent gave her a clear understanding of income thresholds and was familiar with many of the city’s HDFC buildings and their rules. “It helped narrow down my choice pretty quickly,” Lewis says.

The importance of an HDFC-savvy team is echoed by Evelyn Magallanes, an agent with City Living Realty Corp., who has made HDFCs her specialty. She works closely with most HDFC boards in the city, meaning she’s familiar with the various building conditions and financials, their income restrictions, and when units become available.

Magallanes says that “your most important person” in an HDFC transaction is a lawyer who understands the building type. “You just can’t take any lawyer—the deal will die if your lawyer doesn’t understand these well,” she says. The right lawyer will be able to make sense of your own financials, as well as financials of the building, essentially “doing your homework for you,” as Magallanes puts it, to make sure the deal is financially solid. Your broker can suggest the right lawyer, or you can search one through UHAB.

With the right team in place to work out the red tape, “this is like any other type of [co-op] transaction,” says Magallanes. You’ll put in an offer, and if the owner selects it, you’ll go for approval from the co-op board before finalizing the transaction.

What happens after the sale goes through?

HDFCs are run like typical co-op buildings, where you become a cooperative member with the responsibility of managing and maintaining your apartment, while the board makes decisions on building upkeep, maintenance, and rules. Lewis picked her building because it seemed to have a flexible co-op board, and has had “no complaints at all” over two and a half years.

When it comes to subletting, most HDFCs with governing documents clearly state that shareholders are not permitted to sublet for more than 10 percent above the maintenance fee and that all people approved to sublet must adhere to the co-op’s income limits, according to UHAB. But rules will differ depending on each board.

Magallanes says she occasionally hears negative connotations associated with HDFCs. “Some of these buildings, years ago, started with a good amount of debt and they weren’t properly managed,” she says. Now there are plenty of HDFC buildings across the city with healthy financials. “It’s all about education,” Magallanes says. “I can show how the building has handled its debt, had a change in the board, and is valuing the property.”

What happens if I want to sell my apartment?

When you’re ready to sell, you cannot list an HDFC home at the going market rate. In order to maintain affordability, HDFC sales need to adhere to a price range dependent on the formula set by the individual co-op board. If New York’s area median income increased since you purchased the co-op, and the co-op’s resale formula is based off AMI, you’ll be able to sell for more than you purchased. (Here’s a sample resale policy provided by UHAB.)

In the past, HDFC units were only considered good long-term investments, but with prices quickly surging in New York, this is no longer the case. “I’ve seen someone purchase an HDFC for ‘X’ amount of dollars and five years later, when they’re ready to sell, they’re making a huge profit,” Magallanes says. “That wasn’t the intention, but the building grew in a positive way and the neighborhood was booming.”

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