What are the advantages or disadvantages of renting in a rental building, in which case the entire building is owned or operated by a large landlord or management company, versus renting a condo or co-op apartment directly from the apartment owner? There are many, and we will discuss each here.
Timing and Approval
First of all, be aware that the process for renting a condo or co-op can take significantly longer than in a rental building. In a condo or co-op, you must first have your offer and application approved by the owner of the apartment. This can take anywhere from one to three days after which your application will be submitted to the managing agent for the building and ultimately to the Board of Directors. In the case of a co-op, the board will have the right to approve or deny your application. The qualifications required for co-ops can vary greatly so speak to your broker in detail before considering whether to submit an application. Some co-ops will require an in-person interview in addition to the package. In the case of a condo, the board only has a Right of First Refusal. This means the board can either match your offer and rent the apartment from the owner on the same terms or approve your offer and permit the owner to rent directly to you. You cannot be rejected by a condo board (but the owner of the unit will make the final decision about your application). The entire application process in a co-op or condo can take as long as one month, so you must be prepared further in advance of your move-in date.
In a rental building, you are renting the apartment from a landlord that owns the entire building (not individual apartments). There is not a board of directors to approve your application. This means that the application process can usually be completed in two to seven days and interviews are rarely required.
Cost and Required Materials
In a rental building, you can expect to pay an application fee which covers credit checks and processing. These fees typically range from $50 per applicant on the low-end to as much as $200 per applicant on the high-end. If a broker found you the apartment, the landlord may or may not agree to pay your broker’s fee for you. They are currently offering to do so in about 20% of all rental transactions in Manhattan (typically in less desirable neighborhoods or in new development buildings with high vacancy rates). Brokers’ fees are generally 15% of the annual rent, are paid by the tenant, and are split by the landlord’s agent and the tenant’s agent. If the tenant is unrepresented (which happens in less than 10% condo and co-op rentals), the listing agent keeps the entire 15% fee. The application materials required for a rental building will usually be less than a condo or co-op application.
In a condo or co-op, the board typically requires substantial application materials which, in addition to a typical application in a rental building, can include letters of business and personal reference, a CPA letter, and substantial verification of assets. There are also more substantial fees in a condo or co-op including application fees due to the managing agent, move-in and/or move –out fees paid in advance, and move-in/move-out deposits. These fees can range from $500 – $2,500. Of course, you can negotiate with the landlord over who should be responsible for these fees – your leverage is simply a function of supply and demand. Of course there are exceptions and differing circumstances. Brokers will be especially helpful in assisting you in the preparation and presentation of a condo or co-op board package which often run 50 -100 pages and need to be presented in the manner managing agents and directors have become accustomed to.
In a condo or co-op, you will likely have more ability to negotiate the contract terms. There are also terms the landlord (apartment owner) or board may ask for that you should be aware of. You have zero ability to negotiate on the requirements that the board implements as the owner cannot rent the apartment without complying with them. However, the owner may ask for specific terms you should be aware of or you can address them if the owner does not. The following issues are things that you should discuss with your broker prior to agreeing to the terms of a lease.
1. Insist that a provision in the lease (or rider) makes any increase in the common charges or maintenance fee the responsibility of the landlord. The tenant should not cover these costs.
2. We always request a right of renewal for our clients in the second and third year. Make sure the renewal provision lays out the rental escalation, if any, or else you will be left with a worthless right when you have to renegotiate the rent in order to renew. One good way to do this is to tie increases in rent to the consumer price index (CPI) or you can just use a percentage increase (typically 3-5%) per year.
3. Co-op boards often limit the number of years that an apartment can be rented (e.g. two out of five years, no more than two years in a row, etc.). Make sure you know the building’s policy before agreeing to the lease.
4. Know what the lease’s sublet provision states. As a rule, most market rate residential leases state that you cannot sublease the apartment. However, you may be able to negotiate for a provision that permits you to sublet with the landlord’s approval. If that matters to you, ask your broker to negotiate for it, but realize that many landlords will say no.
5. You or the owner may ask for a right of early termination. This provision would state that one or both of you have the right to terminate the lease before the end of its term. Of course, the party terminating should have to provide the other party with some sort of valuable consideration (i.e. notice + free rent if you’re the landlord or some amount of rent if you’re the tenant). Given the current economic times, it may also be prudent to insist on a right to terminate the lease if and as soon as you have notice that the landlord has defaulted on their mortgage, maintenance, common charge, or tax obligations. Many tenants have been evicted when a landlord loses a property in foreclosure, though this has not been as common in Manhattan as elsewhere.
6. The landlord will probably include a provision allowing showings of the apartment. You should insist that twenty-four hours notice be provided and may be able to get the landlord to agree that they only occur during the last thirty days of the lease.
In a rental building, the lease agreement may not be as negotiable. Many management companies view their contracts as a “take it or leave it” proposition, because they want to ensure that the lease terms for all of the apartments in their portfolio remain consistent. That being said, you should always review the contract in full and make sure you understand it. You may even be able to find some room to negotiate.
Advantages vs. Disadvantages
So how does this all weigh out? To be brief, the application process for rental buildings is generally quicker and less expensive. However, there are often advantages to renting directly from an owner of a condo or co-op. These buildings are owner occupied and are generally kept in better repair and the buildings staff go out of their way to assist residents who own their units and indirectly (through the board) have a say in their continued employment! Additionally, the apartments may have higher-end finishes than a rental unit and the building may have better amenities. Finally, many tenants find it much easier to deal with issues during the course of their lease when they can contact the owner directly rather than a large management company that may be responsible for hundreds or even thousands of units. There are, of course, some management companies that run their buildings pursuant to very high standards. There are also some that operate no better than slumlords. You must do your research and rely upon your broker to share their experiences with you. Also, a new trend has developed in the past two years in which very high-end rentals are being built to provide an alternative to home ownership.
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- Manhattan dwellers face higher rents, less concessions (nydailynews.com)