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How big is too big for an underlying mortgage?

A large underlying mortgage isn't necessarily bad news, but it could have some consequences for shareholders. 

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Question:

My wife and I are looking at buying in a 200-unit co-op building on the Upper East Side. We noticed there is a large underlying mortgage, and on top of that, the co-op refinanced a few years ago. Should a large mortgage deter us from buying?

Answer:

A large mortgage is not necessarily a reason not to buy, but it certainly could affect your monthly expenses, our experts say.

"Although this building’s underlying mortgage is considerable, it’s not necessarily a red flag," says Gordon Roberts of Sotheby's International Realty. "However, the carrying cost of a large underlying mortgage, even after it’s divvied up and allocated among the 200 shareholders, will increase fixed monthly maintenance costs for all." 

Compare the monthly maintenance fees of the unit you are considering to those of comparable buildings in the area to get a sense of whether they are unusually high. And if they are, you should then take a close look at other capital improvement expenses that may be on the horizon for the building, as these could further increase monthly fees, Roberts points out. 

You should also do some number-crunching to get a sense of the ratio of the building's mortgage to individual co-op shares. 

"The consideration of the underlying loan is based on the pro-rata share of the loan for the unit," explains Brittney Baldwin, vice president at National Cooperative Bank (a Brick sponsor.) "If the percent is 35 percent or lower, it is acceptable to lenders. In New York, lenders may use a higher ratio, not to exceed 40 percent, when there are fully documented compensating factors that justify using the higher ratio. The greater the value of the unit, the lower the percentage will be."

Consult with real estate professionals for guidance as to whether it still makes sense to buy. A good broker can provide you with important information on the history of the building and its condition, and an attorney can access financial documents that will shed more light on this. 

"Your attorney should review two years of the building’s financial statements, and, once you go to contract, the attorney will have access to review the board meeting minutes, where upcoming major repairs and expenditures are likely to be documented, or contain clues that might trigger another re-financing of the underlying mortgage with more debt added," Roberts says. 

Do your due diligence and you should feel armed with enough information to make the right decision. And remember, it's not just about monthly maintenance fees while you're living in the apartment—it's also about the unit's sales potential, once you're ready to move on.


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