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Did You Know A Coop's Flip Tax Can Affect the Loan?

A coop’s flip tax can affect the maximum loan amount a bank extends to a buyer

By Mark Maimon, VP Sterling National Bank

Banks have become increasingly concerned with what happens when they take over ownership of a property in foreclosure.  In the event that a bank forecloses on a coop, they would typically have to pay the coop’s flip tax when they resell the property.  Therefore, the perceived value of that coop apartment to a bank is actually the property value minus the flip tax. 

So if a buyer is financing the maximum amount allowed by a lender (80% in most cases) and there is a flip tax in the building, then the bank might decide to reduce the maximum loan amount they will extend to the buyer.

Here is an example:

Purchase price:  $1 million
Maximum financing allowed/applied for:  $800,000 (80% financing)
Flip Tax:  2% of the sale price paid by the seller ($20,000)

Property Value determined by the lender:  $1 million - $20,000 = $980,000
Maximum financing allowed by the lender:  $784,000 (80% of $980,000)
Additional down payment required from the buyer:  $16,000

This rule typically only applies if the flip tax is calculated as a percentage of the sales price.  If the flip tax is a percentage of profit on the unit or a specific dollar amount per transaction or per share, then this reduction is not typically required.  

Additionally, if the coop is willing to certify in writing that a lender is not responsible for paying the flip tax in the event of foreclosure then the reduction can be sometimes be avoided.  However, many coops are not willing to make that statement since they would want to collect the flip tax even if it’s a bank selling the property. 

If a buyer is putting 25% or more down, then it’s the flip tax generally has no impact on the maximum loan amount unless it’s an excessive amount (as it can be in some lower-income housing projects such as HDFC buildings).  

Content was written and provided by Mark Maimon at Sterling National Bank.  Please contact Mark for all of your mortgage needs per the contact information below.  All material is protected by applicable copyright laws. 

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More on flip taxes:

1 comment:

  1. It seems like a trivial matter if you were to ask me. However, after reading through the rough calculations made on an example figure, the end results seem rather hefty actually. It is best to perform some research especially when it concerns finances that might incur more interests if not calculated properly from the very beginning.


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