Buying an apartment for your (grown) kid? Here are 4 things to keep in mind

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While no one knows for sure how many of the city’s half-million co-op and condo apartments have been purchased by parents for their adult children, real estate brokers and managing agents say they have seen more parents shopping for apartments for their adult children since the post-2008 recovery began.

“Over the last two years, I’d definitely say the number of parents who are doing this has exploded, particularly with foreign buyers, but also people who are in the United States,” says Elaine Diratz of Corcoran Sunshine Marketing, which represents 18 NYC new developments with units currently for sale, including 515 East 72nd Street and 123 Third Avenue 

“Particularly on the higher-end, one of the biggest factors driving this right now beyond the vast educational and professional opportunities the city has to offer is that many parents also view New York real estate a great long-term investment they can make,” she says.

Thanks in part to skyrocketing rents, buying a place for a college or grad student can make more financial sense than renting one for them. 

Here are a few things to think about before you act:

1. Co-op vs. condo

Depending on your child’s age, employment status and income level, one of the first decisions to make is whether to buy in a condominium or a co-op building. Co-ops are typically significantly cheaper than condos, but the rules tend to be much stricter and oftentimes allow only the primary owner to live there.

Look at a listing ahead of time and see if it says explicitly that parents buying for kids is allowed. If not, don't assume it's not, but be sure to check early on.

“Some, but not all, co-op boards will let parents buy apartments for their kids, and even with the ones that do, there are generally a lot of concerns,” cautions Michael Wolfe, a property manager and president of Midboro Management.

“The biggest and most obvious would be that if the child can’t afford to buy the apartment themself, then they shouldn’t be living here. That’s why condos are usually a better option in this scenario because they offer a lot more freedom,” he says.

While there's no hard and fast rule when it comes to which kinds of co-ops are more likely to allow parents buying for kids, generally, the high-end buildings on Park, Fifth and Central Park West are less open to it than buildings on less posh streets.

“There can be an inherent resentment among board members and tenants who went out, got jobs and paid for their apartments and now these kids are coming in," warns co-op and condo lawyer Dean Roberts of Norris, McLaughlin & Marcus.

"As a result, and wrongfully or not, owners whose parents bought their apartments are often viewed as privileged and there’s a real worry that, ‘the guy’s not paying his rent, he’s young, he’s new to the city and he’s going to be throwing all night parties and disrupting our way of life,'" says Roberts.

Corcoran Group's Abra Nicolle Nowitz suggests that parents consider co-purchasing with their child rather than simply buying the apartment for them outright, or acting as guarantors (depending on what the building's rules permit).

“Co-purchasing may strengthen the co-op package as it could reassure the board that the responsibility is shared between both parent and child,” she says.

2. Honesty is the best policy

Regardless of whether it’s a co-op or condominium, you need to be up front with the board about what your intentions are from the start.

Also, let them know if you and other family members plan to stay there for an extended period of time or whether your child plans to have roommates.

“The most important thing is to do your due diligence ahead of time and lay all of your cards on the table during the interview,” says Midboro’s Wolfe.

“If the board does allow it and your kids are responsible, then there won’t be an issue as long as you play it straight with them," he says. "The worst thing you can do is go in there and get approved, then stick your kids in there and get hit with a fine or lawsuit because you lied.”

You could potentially be sued for misrepresenting yourself to the board and for non-compliance with the house rules of a co-op or condo.

3. Find a good broker

One obvious way to avoid potential problems is to work with a qualified broker, preferably somebody with experience selling apartments to parents for their kids. Not only will it lessen the strain on your wallet, it won’t waste anybody’s time.

“If a co-op or condo board isn’t inclined to do this, nine times out of ten it’s a set policy and you’re not going to change their mind no matter what,” says Barbara Fox of Fox Residential who bought an apartment for her niece a decade ago.

“A good broker knows that ahead of time," says Fox, "and especially when it involves an intricate purchase like this they need to be walked through the process, which is very tedious and intrusive.”

If you're not seeing enough apartments for sale in buildings open to purchases by parents (or not enough in your price range or target neighborhood), consider expanding your search to include "off-market" listings.  NYC  real estate brokerage Triplemint, a Brick Underground partner, uses technology to mine public records and identify owners who may be ready to sell. You'll meet and deal with owners before their apartments hit the market. (Click here to learn more.)

4. Figure out financing--and the tax implications

Parents should strive to list their children on both the purchasing and loan agreements, rather than just themselves, suggests Federal Savings Bank executive vice president Mordy Husarsky.

“It presents a lot of challenges [tax deduction wise] when they don’t because by definition this type of an arrangement doesn’t technically fall under the category of an investment property or a second home, especially if the parents live out of state," says Husarsky.

Not all co-borrower scenarios will past muster with a board, however.

Some boards may "insist that both borrowers be on the stock and lease, which may have estate planning implications for everyone," says mortgage banker Marc Kunen, managing director of Luxury Mortgage Corp. "Others may require that the child meet a certain debt-to-income ratio regardless of the income and asset position of the parent--and this ratio may be different than the bank's requirement.  

Moreover, not all lenders deal in so-called "kiddie" loans, in which parents and child are listed as co-borrowers, says Kunen.

"In order to make this work, you have to find a lender who allows 'non-occupying co-borrowers' to be on the loan," he says. "Each bank uses different rules in approving these cases."

Some banks will not do it all, he says, while others require that "the occupying borrower be employed with 'suitable' income." 

(In the case of a recent college graduate, he says, "a letter from the employer confirming position, income, and permanency of job is required to assure the lender that the [borrower] has a likelihood of longterm employment.")

Alternatively, says Kunen, some lenders will "blend" the debt to income ratios of both borrowers and use this blended ratio to qualify the loan.

"The bottom line is to make sure the real estate agent and a mortgage professional advise the buyer of all the buying and borrowing possibilities before signing a contract or loan application," says Kunen. "I have seen too many cases where issues arise after contract signing that should have been vetted if everyone discussed the situation in advance." 

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