The Legend of the HDFC
Every so often, in the back room of a low-lit bar, or maybe on a late-night subway ride, you can hear whispers of the elusive HDFC apartment. “It’s a three bedroom with a great view, asking $400,000…” Did you hear that right? You turn around and strain your neck, to find the source, but people have stopped talking and are looking at you funny, wondering what your problem is. You return to your book or drink and wonder if it was all just a dream. Well they exist! And I’m here to separate fact from myth.
HDFC: The acronym stands for Housing Development Fund Corporation. These buildings were once city-owned and usually in disarray, but through a government program they are renovated and offered to lower-middle income New Yorkers. These co-ops benefit from reduced real estate taxes in exchange for following certain guidelines for their sales and maintenance. The largest defining factor of these buildings are their income restrictions. Usually, the restrictions are based on a percentage of the neighborhood AMI (Area Median Income). The percentage is different for every building, depending on its agreement with the city and how it first entered the program. Current restrictions are as follows.
There are some instances, again dependent on the specific building’s agreement with the city, where the income restriction is six times (if the household is one or two) or seven times (if the household is three or greater) the annual carrying costs. So these buildings use the following equation instead of the chart above:
((Maintenance + Utilities) x 12) x (6 or 7) So what does all that mean for the buyer?! A listing should tell you the income restrictions. But some say something like “Income restrictions for this property are based on 120% AMI.” In cases like this, you can use the chart above to see if you qualify. Other listings just tell you they have income restrictions and don’t name them. I’m not sure what the strategy is here, it doesn’t make sense to me. But in this case, you must ask what they are. There is no definitive list out there for which buildings fall under which restrictions. Ok, so you understand the restrictions, but how do you know what “counts” as income? All income counts. So if you have investment properties, the rent collected counts as income. If you have stocks and collect dividends, this counts. If you are drawing from a 401K, this counts. But! Assets do not count. There is no limit on the amount of assets you can have. So you can own other real estate, hold stocks, and have a 401K, you just cannot be making or collecting money from them, or it will count. You must show that you meet the income restriction for the past two years, and that you do for the current year. So if you fall under the restriction this year but not the previous year, you do not qualify. If you qualify for the last two years, but you might be getting a raise for this year, make your purchase before you change your income bracket, because they will need a current letter from your employer stating your income, plus your last two tax returns. If you qualify, seems like a no-brainer, right? Not so fast. Most HDFC properties have a steep flip tax. So a certain percentage of any profit of a sale is given back to the building. The average for HDFC apartments is 30%. These are not investor units. Usually they need to be the owner’s primary residence anyway. But the flip tax is different for every building, and some do not have them at all. It’s a question to ask. Currently there are no restrictions on sale price. That may change in the coming years, but for now, even with a flip tax you can see a return on your investment, especially in booming neighborhoods like Harlem. So income restrictions and the flip tax keep market values from sky rocketing, as it’s a select buyer who qualifies. Well if this select buyer has to meet these restrictions, why do so many listings say “All Cash Only”? Those buildings cannot get financing. And then how are there so many all cash buyers?! Loopholes in the system. Since these co-ops are formed out of disarray, many are working themselves out of bad financial situations. If they are still in bad shape, banks will not go near them. This is not to say they are bad purchases. If you have the cash, and a fantastic lawyer, it is worth looking into them. Your attorney will advise on the risk. But bad finances or not, many of these properties go to all cash buyers because you can have assets just not income. And an all-cash sale significantly simplifies the process here, even more so than in a regular purchase. Sellers love the cash offers. The less you can finance, the stronger your offer will be. Therefore, sometimes you find these apartments going to students who are given money from their well-off parents. Other prime candidates are people who have inherited money, or someone like an actor who had two bad years, but had a hit sitcom before that. There’s the loophole. Of course there are HDFC buildings which have great financials, and also sellers who respect the HDFC concept and actively look for buyers who truly are lower- or middle-income. Many people find themselves in a situation where this kind of purchase is a possibility. Do you fall into that category? If so, it can be an amazing opportunity. Affordable housing in New York. But even once you understand all this and find the perfect property to offer on, you are just beginning. The process can be long and hard to negotiate. Yes, you know what’s coming next-- Call us! My biggest advice here is have an agent you trust, as your guide. Since these properties are on the low end of the market, you will get seller’s agents trying to convince you that you don’t need your own agent. This is because the seller does not want to pay for it. But buyers absolutely need an agent familiar with HDFC properties, to get them to the finish line.
What more is there to do, after the accepted offer? Much. I’ll have to save it for another entry. But for now, I tell you, the legend is true. The affordable apartment is out there, for a chosen few. Reach out if you’d like to start your own HDFC quest.