Buy a co-op at a discount: All about HDFCs and how to snag one

By Virginia K. Smith | May 13, 2019 - 10:30AM 

HDFC co-ops were created several decades ago when the city allowed tenants in derelict buildings to form co-operatives, take over their buildings, and buy their apartments for very little.


New York's affordable housing—or rather, its extreme lack thereof—is a near-constant topic of conversation, but one key question often gets glossed over: What about options for buyers? Other than outliers like Mitchell Lama co-ops—which are hard to find and even harder to get into—the bulk of the city's affordable housing options are geared towards renters.

Yet, there's another "budget" route to home ownership: Housing Development Fund Corporation co-ops, which have strict income caps for buyers, sell for well below the market rate, and have been sought-after in recent years as an appealing option for low- and middle-income buyers. "There's this mystique about them," says Jason Haber, a broker at Warburg Realty, so you need to do your homework to understand how a HDFC co-op works and whether you qualify for one.

HDFC buildings were created several decades ago when the city allowed tenants in buildings with derelict landlords to form co-operatives, take over their buildings, and buy their apartments for $250 apiece, the New York Times explains (yes, that's the correct number of zeroes.) 

[Editor's Note: A previous version of this story ran in May 2015. It has been updated with new information for May 2019.]

Below, our guide to what you need to know about HDFCs and, if you qualify, how to get one for yourself:

HDFC buildings have regulatory agreements specifying the income required to purchase a co-op, and are designed to provide affordable housing to middle-income and working-class New Yorkers. One example of a HDFC is the Grinnell, which The Cooperator explains is an 80-unit, uptown property that has thrived since its co-op conversion—to the point that its apartments are no longer exactly “affordable.”

Naturally, prices have risen substantially since the HDFC program was launched—you most often see HDFCs on the market for a few hundred thousand dollars—but in most cases, they're still far cheaper than the going rate in their surrounding neighborhoods and often have more affordable monthly maintenance fees, too (hence the mystique).

How HDFCs work

While they're similar to Mitchell-Lama co-ops, says Dean Roberts, a real estate attorney with Norris, McLaughlin & Marcus, the two types of housing vary slightly in that they're created under different articles of state regulations known as the Private Housing Finance Laws. And while Mitchell-Lamas are beholden to a certain body of laws and regulations, the provisions in regulatory agreements for HDFCs can vary depending on the building.

Because of this, HDFCs often function like typical co-ops; rules and regulations differ significantly from building to building depending on the bylaws and the board. The state of the building, too, can vary quite a bit.  

“On the one hand, it was a good program under the Koch administration to open up these buildings, but once they were transferred to tenants, the city pretty much left them alone,” says Kevin McConnell, a partner with Himmelstein, McConnell, Gribben, Donoghue & Joseph, (FYI, a Brick sponsor). “The people in charge of running these buildings were not people who had professional expertise, so some are not as well-managed as other co-ops.” 

But what sets HDFCs apart, primarily, is the financial structure. It works like this: Most HDFC buildings receive partial tax exemptions and subsidies to help keep operating costs—and maintenance charges for shareholders—at a minimum. Buyers in HDFCs must meet strict income caps either tied to the area median income (aka AMI) or a formula based on the apartment's utilities and maintenance fees.

Some HDFCs require buyers earn no more than 165 percent AMI, others are limited to buyers whose income does not exceed 120 AMI, and still others are open only to buyers who don’t earn more than 6 or 7 times the monthly maintenance, utilities, and original purchase price per month. 

"Most HDFCs have the Division of Alternative Management tax cap, so they're charged taxes based on a lower assessed value than if they were a regular building taxed based on market value," explains Hilary Glaus, a senior project associate with the Urban Homesteading Assistance Board, a housing organization that works extensively with HDFCs. "They pay about a third of the taxes they would otherwise."

To keep would-be speculators at bay, HDFC owners are hit with a significant flip tax when it comes time to sell.

"It varies from building to building, but in a lot of buildings, it's 70/30—so a shareholder would be forgoing 30 percent of the profit on the sale of the unit," explains Glaus. While there's generally not a cap on resale price, income restrictions and flip taxes function to keep prices relatively low. And flip taxes can be especially high for shareholders who have lived in the unit for five years or less, according to City Realty.

And as a whole, HDFCs are designed to act as affordable, long-term housing for families, rather than investment properties.

"It can be hard for people to think of property outside of the context of 'how can I make as much money as possible off of this,'" says Glaus, who also notes that shareholders in HDFCs aren't paid dividends, as any extra building funds go directly back towards operating costs. "Instead you’re seeing the savings over a lifetime with lower maintenance fees."

 This one bedroom in an HDFC co-op at 175 Rivington St. is asking $419,000, with an income cap of $87,720 for one buyer or $100,200 for two buyers.

This one bedroom in an HDFC co-op at 175 Rivington St. is asking $419,000, with an income cap of $87,720 for one buyer or $100,200 for two buyers.

What type of buyer qualifies for an HDFC co-op?

Besides the obvious restrictions like income caps and flip taxes, like everything else in New York's housing market, prices of HDFC co-ops have been creeping up (especially in newly gentrified neighborhoods like Harlem and the Lower East Side), presenting prospective buyers with a frustrating conundrum: how to come up with a down payment worth tens of thousands of dollars, while still earning less than a building's income cap. (Some units actually are advertised as all-cash transactions even.)

These conditions end up favoring buyers with low(ish) incomes but significant assets, like retirees, young buyers whose parents are helping them out, or those with trust funds or an inheritance to lean on—not exactly the demographic one thinks of when talking about affordable housing. 

"In determining income eligibility, the city does not require HDFCs to look at assets," says Gregory Barrett, the director of NYC HDFC, an organization that represents HDFC tenants and shareholders across the city. "So if you’re a schoolteacher earning $50,000 a year, but have a $2 million trust fund," you can potentially qualify.

HDFCs often attract all-cash buyers because the building needs the cash to cover repairs or debt. And even if the building does accept a buyer with financing, locking down mortgage approval for an HDFC building can be difficult, as banks are wary of financing limited equity co-ops. (In the event of foreclosure, the bank would be bound to the same resale and income restrictions as the shareholder, notes Glaus, not exactly an appealing financial prospect.)

“For the most part, someone interested in an HDFC co-op will not be able to secure financing,” says Serge Joseph, a partner with Himmelstein, McConnell, Gribben, Donoghue & Joseph, (FYI, a Brick sponsor). “The price of an apartment may not be market price, but because you can’t secure financing, you have to come up with cash, and most people who would quality for an HDFC under the income requirements do not have $250,000 lying around.”

Case in point: Rebecca Brooksher, an agent with Warburg, represents a buyer who's spent the past three years on the hunt for an HDFC three-bedroom. "A lot of times he's ruled out because they can't do financing," she says. "But even if they do accept financing, people come in with an all-cash offer, usually parents who are gifting their kids the money."

However, Joseph adds, there are some banks out there that do approve financing for HDFCs, or offer special programs for first-time buyers, but identifying these opportunities takes a bit more effort.   

Another challenge facing some HDFC buildings is foreclosure: Recently, the city has been foreclosing on HDFCs on the grounds that they are “distressed,” because of taxes or utility bills that are past due. When this happens, ownership is transferred to new management, and the building’s shareholders become tenants. The city has foreclosed on 74 buildings since 1997, the New York Times reports

“There has been an uptick in foreclosures,” Joseph says. And more specifically, Brooklyn judge recently ruled "that the city was targeting communities of color and taking away property and the opportunity to generate inter-generational wealth.”

 This two bedroom, one bath is in an HDFC co-op on East 131st St. It is asking $345,000 with an income cap of $87,720 for one buyer or $100,200 for two buyers.

This two bedroom, one bath is in an HDFC co-op on East 131st St. It is asking $345,000 with an income cap of $87,720 for one buyer or $100,200 for two buyers.

What it's like to live in a HDFC co-op

Even with higher prices and eager speculators circulating, most HDFC co-ops are still primarily family- and community-oriented affairs with residents in it for the long haul. "The vast majority of people in HDFCs are not interested in flipping them for market prices," says Bagget. "They want to preserve them as low-income properties for members of their own families."

Such has been the experience of Alice (who asked to be quoted using a pseudonym), a 20-something florist who, with the help of an inheritance, recently bought into a fixer-upper Williamsburg HDFC. "I really like my neighbors," she says. "As a born-and-bred New Yorker it's really refreshing to be in a building where almost everyone is older and been here for a long time (especially in a neighborhood like Williamsburg). My downstairs neighbor grew up in her apartment, and a girl on the first floor is living in the apartment her mom bought in the 80s. There are a lot of interesting characters and everyone is laid back." 

Indeed, many HDFC shareholders can opt to pass their apartment down to relatives, provided they follow specific guidelines for succession, so it’s possible that generations of a family can live in one unit. 

As with many HDFCs, Alice's apartment was in less-than-mint condition when she moved in, lacking basics like a stove and kitchen sink (to complicate matters further, the unit was an estate-sale that had sat empty for years). "Oh god, it was a dump," she tells us. "It had been vacant for 10 years before I had moved in, so it was completely infested with roaches." (With that in mind, she's set aside around $9,000 for a renovation she's doing largely by hand and over a long period of time.) 

Even more so than in most co-ops, being an active participant is often a key part of life in an HDFC. "It's really important for people to know the history of the program, and to be willing to participate in the governance of the building—to do their sweat equity," says Glaus. "Respect where the people who formed the tenant association" and brought the building back from disrepair.

 A one bedroom, one bath in an HDFC co-op on Grand Street in Williamsburg is asking $400,000 with an income cap of $87,720 for one buyer and $100,200 for two. 

A one bedroom, one bath in an HDFC co-op on Grand Street in Williamsburg is asking $400,000 with an income cap of $87,720 for one buyer and $100,200 for two. 

So how do you get an HDFC co-op?

If you want to find an HDFC, you'll need to do some digging. (To get a sense of just how much, check out the story of this HDFC shareholder, who conducted a very lengthy search for his apartment.) However, some are on typical listing sites; currently searching Streeteasy for sales with "HDFC" in the description pulls up 74 apartments, and Alice found hers incidentally while searching for market rate apartments via Kline Realty.

Additionally, UHAB has its own listings (you can find them on the "Homeownership" section of their website), some of which are sponsored by the organization, and require you to participate in their Homeownership Workshop in order to be eligible. The organization also puts a cap on its resale listings, and will only feature apartments asking $30,000 per room or under.

If you need to lock down a mortgage in order to buy, Glaus notes that some credit unions like the Lower East Side People's Federal Credit Union have specific packages geared towards HDFC buyers, and that UHAB also educates buyers about options available via the New York Mortgage Coalition, a group of community financial organizations that provide free financial counseling and help finding first-time homebuyer grants.

“You need to do your due diligence,” Joseph says. “Find out whether the building has been approved for financing, and know the maximum income guidelines. In some HDFCs, you have to comply with private housing finance laws, and they may also have regulatory agreements that are more restrictive.”

As for the rest of the sale process, it's more or less like a slowed down version of what happens when you buy any other co-op, but with a bit of extra paperwork involved. "In most cases, there is more paperwork needed," says Brooksher, "and the window between handing in the board package and getting approved can be up to a month longer than normal because usually the package is sent to the government agency who handles these properties first."

After the government agency signs off, your package goes to the board for approval, and then your interview is scheduled.  "All that can take two months, and you haven't even scheduled closing yet," Brooksher adds. "But, it's worth it if you can make it happen."


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