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Home » So You Want To Buy A Co-op?

So You Want To Buy A Co-op?

By Melissa Colabella

co-op

Photo courtesy of Compass by 6sqft

Why do we have co-ops?

Co-ops existed prior to the Great Depression but we saw the bulk of them appear in NY as a result of legislation. Due to rent control provisions, landlords found that it was more profitable to sell their buildings to their own tenants and thus co-operative communities emerged.

As rents escalate and private home prices reach new heights, a co-op apartment may be a great route to homeownership. Cooperative living can be a wonderful experience – a comfortable apartment decorated to your own tastes, few home maintenance responsibilities, and some possible tax benefits.

What is a Co-op?

When you buy a house or a condominium, you are purchasing real property. When you buy a co-op you are not actually purchasing the physical apartment. You’re buying shares in the cooperative corporation which owns the building in which the apartment is located. You will own the number of shares allocated for that apartment based on its size and location. Instead of the deed you receive when you buy a house or a condo, with a co-op you get a stock certificate and a proprietary lease or occupancy agreement.

What are restrictions?

Every co-op will have its own set of house rules including whether or not you must carpet a certain percentage of your apartment, how to use designated common spaces, pet restrictions and even how late you can use the laundry room. Entry restrictions can include down payment minimum requirements (10%, 20%, 35%), possibly a minimum income restriction, subletting policy or a debt to income ratio restriction. The co-op’s board of directors may put conditions on the sale of its shares called a flip tax, or charge the buyers a one time fee meant to be invested in the capital reserve. A co-op may have all of these restrictions or only one of them – it depends on the building and the board.

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Are there tax benefits?

As it is with any home or condo, real estate taxes and mortgage interest on primary residences are usually deductible on your federal income tax return. As a co-op owner, your share of the real estate taxes and interest on any underlying mortgage allocated to your shares may be deductible. The co-op corporation notifies shareholders of the dollar amounts of these allocations annually. See your tax advisor regarding tax deductibility of interest and real estate taxes.

I’ve hear the maintenance fees can be high?

The common charges are the costs associated with the operation of the building, distinct from the costs of your apartment. These charges may include payments on the building’s underlying mortgage, real estate taxes, water and sewer fees, fuel costs, utilities for the common areas, salaries for building employees or the management company, insurance and the other operating expenses. These costs are apportioned to each shareholder as maintenance fees, usually payable to the corporation on a monthly basis. The corporation then pays the bills. In a condo, you have a much lower Homeowner’s Association Fee but you usually pay your taxes and utilities separately.

What are sponsor units? Can I sublet my co-op?

When a structure is built as a cooperative or a converted rental, the builder or converter is known as the sponsor. Initially, the sponsor owns all of the shares in the cooperative. The more unsold shares the sponsor holds, the more control the sponsor has over the physical and financial management of the building. It is also possible that the sponsor pledged the unsold shares as collateral for the underlying mortgage, so that if the sponsor runs into financial difficulties the shares become the property of the lender and not the remaining shareholders.

If the building was originally a rental with rent controlled or rent stabilized tenants, some of these tenants may still be in residence. Although their apartments may be owned by the sponsor or other shareholders, co-op conversion laws generally permit rent regulated tenants to occupy the apartment for as long as they choose under the same terms and conditions of their original leases. Their rent increases are determined by city and state agencies.

Consider how many of the units are occupied with rent regulated tenants, especially if you are purchasing into a building with a rent potential. A building may allow for 10% of their units to be rented out at any one time so if 10% are sponsor units, then there is really no chance that your request to sublet can be granted until some of those tenants leave and even then your request and your tenant are subject to board approval.

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Why am I approved for lending on some co-ops but not others?

Sometimes a lending institution will not lend to a co-op for a variety of reasons. If other shareholders default on the maintenance payments which help pay utilities, taxes, and the underlying mortgage on the building, you may have to increase your outlay before the legal status of the defaulting shareholder is resolved. The same scenario can apply to larger co-ops, particularly if the sponsor owns a majority or even a significant number of shares. If the percentage of shares held by the sponsor is high, a default could jeopardize every shareholder. That’s why lenders look at the level of owner occupancy and the ratio between occupant and sponsor-held shares. Generally, a lender may not consider granting a loan to purchase a co-op in a building which is less than 80% owner-occupied or in which the sponsor still holds the majority of shares after a significant amount of time has passed since the conversion plan was approved.

Other reasons can include weak financials or lawsuits. If a building does not have enough cash in reserves to cover maintenance or there is a pending lawsuit your lender will see it as a red flag. If the building is over financed, the pro rata share could exceed the appraised value of your apartment. If the coop’s financial condition deteriorates and there is a default on the underlying mortgage caused by non payment from other shareholders or the sponsor, you may be assessed additional charges to cover payments due on the underlying mortgage.

All of this information will be provided by the co-op’s management company and seller after an offer is accepted.

What is a Reserve Fund?

The reserve fund is a designated amount of money set aside and kept separate from the operating expenses of the building. A co-op’s annual operating budget should include adequate provisions for ongoing maintenance. However, major capital improvements or unexpected repairs or replacement of building systems may need to be funded from the building’s reserve fund. If the fund is large enough there may be no need for increased maintenance fees, assessments, or new loans, if, for example, the heating system needs emergency repairs. If not, shareholders might have to absorb increased maintenance costs or pay the interest and principal on a loan covering such repairs. Some co-op boards pass on the expense to shareholders through assessments rather than maintenance fee increases. This can take the form of a onetime set amount or can be an addition to the monthly maintenance fee for a period of time or in any manner decided by the board. Therefore, buildings that charge occasional assessments are not necessarily poorly managed as some buyers like to stereotype.

Can the rules change? Will my fees go up?

The board can change policy, rules, and regulations as long as the changes don’t conflict with the bylaws or proprietary leases. They can determine issues such as: prohibitions on the ownership of pets and the right of a proprietary lessee to sublet an apartment. They can tell a smoker that they’re no longer allowed to smoke within 25 feet of the building. They set the rules for the physical and financial operation of the building in which you are a shareholder and of the home in which you reside.

However, the board is typically comprised of your neighbors who have volunteered their time. As a shareholder, you may also campaign to be on the board to represent interests of the entire community.

Do I need to use a real estate agent?

There isn’t any good reason NOT to use an agent as a buyer. In the Westchester market, sales commissions are paid to the listing agent by the seller and in return for bringing a buyer to close the sale, the selling agent will split their commission. And, in a buyer’s agency relationship, a buyer’s agent has a fiduciary responsibility to represent you and your interests, not the seller’s. Legal fees, application fees, credit and background check fees are not refundable so it makes sense to go into the process with as much assistance as you can get. Of course, no Realtor can guarantee board approval but we do our best to mitigate you risk as much as possible.

An experienced Realtor will pre-qualify you based on the restrictions currently set forth by the board to save you time and money so you are not spending months searching for an apartment, going through negotiations, going through the mortgage pre-approval process and preparing for an interview that you didn’t have a chance at winning. Here’s a real life example from experience – did you know that three people can’t live in a legal one bedroom co-op? That includes a couple and their newborn child, even if the apartment has a separate office that can be used as a bedroom. The board would reject it because it’s against building code!

A realtor will know the market and be able to guide you through negotiations and provide you with a comparative market analysis. We have experience with boards and some familiarity with which are straight forward, which are risky, and which match the lifestyle you’re looking for whether it’s location based, amenities, parking, or something else.

Is it easy to get through a board interview?

Always go through your board application with your Realtor. As mentioned, the board is a group of volunteers so if your paperwork is not in order or incomplete, they can just reject you instead of trying to decipher it and they aren’t obligated to tell explain a denial.

Here are some standard reasons why buyers don’t get past a board interview:

  • Financials: This could be that your income stated doesn’t match with the income on your tax returns. This can be tricky for self employed individuals and those who share bank accounts with individuals who are not on the application for the lease. It could also be that your accounts lack ample funds after withdrawing your down payment and closing costs. Typically the board will ask to see statements three months in arrears.
  • Job History: Co-op boards can ask to view not only a prospective buyer’s earnings from employment, but all of one’s job history. They will want a buyer who has demonstrated job stability, rather than someone who hops from job to job. This is tough for freelancers. It is not uncommon for prospective buyers who had sufficient assets to be turned down by boards simply because they changed jobs every few years.
  • Bad Credit: If you’re working with a Realtor and you have bad credit, you’re likely not even going to be looking at co-ops as an option. I’ve had to let down clients with confidence befuddled because they’re buying in cash, thinking that the age old saying “cash is king” makes a difference to the board – it doesn’t. Your seller will be happy but the board cares about your credit. While the buyer may have a good income and plentiful assets, if that buyer has a poor credit history, including a negative track record of paying current maintenance fees or rent, then that prospective buyer will likely be a candidate for the board’s rejection.
  • Pied-a-Terre: Some boards are entirely amenable to having pied-a-terres. Others make decisions on a case-by-case basis. Still others do not allow them at all. If one is looking for a pied-a-terre, make sure that the broker has a clear understanding of the rules of prospective buildings.
  • Home Work: Most boards will not object to tenants working in their homes, as long as their occupations do not involve a revolving door of client traffic. A writer, for example, is acceptable, but a psychotherapist will most likely be rejected.
  • The Sale Price Is Too Low: Imagine your seller purchased 60 years ago. Even a significant discount to market value would be financially beneficial to them and an offer may be accepted between both parties. However, the sale price of the co-op will affect the comps for all of the units in the building, thus bringing your neighbors market values down.
  • Your spouse’s background is questionable: Fair Housing Laws protect you to an extent but co-ops boards want to know why a spouse is not listed on an application if they plan to reside in the unit. In a marriage, one spouse’s debt belongs to the other. A board may worry that one spouse has terrible credit, is in debt, or has a criminal record. Some boards will ask for credit and background checks on all occupants, others will not. The answer may be very simple – maybe the funds are coming directly from one partner and ownership will be consistent. A board cannot tell a married couple how to manage their money but if there are holes in the application and the situation poses a possible threat to the overall finances of the co-op they have the right to reject the application. Ask your Realtor about your unique situation if this applies to you.
  • Pets: As in so many of the previous cases, this one also requires that a buyer’s broker perform the necessary due diligence to learn which buildings are pet friendly. Even if a building permits dogs, a broker must learn if there are limitations on the number of dogs or breeds of dogs one might own. For example, numerous buildings do not permit more than one dogs per apartment and will not permit Pit Bulls, Mastiffs and Rotweillers. Most co-ops in Westchester do not allow dogs at all.
  • A Poor Interview: A savvy broker will prepare a prospective buyer for the inevitable board interview. Not only should the buyer be on time for the interview and dress appropriately, but the buyer should not ask questions that might arouse concerns or suspicions on the part of even one board member. Rather, one should simply answer all questions succinctly and politely with a pleasant demeanor. In fact, the less said the better. Once a purchaser has been accepted by the board, has closed on the apartment and moved in, a shareholder may make as many suggestions to or ask as many questions of the board as desired. Now having become an owner, that shareholder is an exclusive co-op “club member” with the power to have a voice and a vote.

What kind of people live in this co-op?

Nope. I’ve been asked this question by almost every person I’ve sold a co-op to. Co-ops do not maintain a record of demographics because it violates Fair Housing Laws. Logically, you can imagine that if the units are on the larger side, you could potentially have families living in your building. Typically, the smaller units are more popular for first time home buyers and down sizers. Just remember, the other people who live in your building had to go through the same rigorous approval process as you do, so you have that in common.

This is overwhelming.

Now that you’ve been briefed on the procedure, relax! The most stressful part of co-op living is getting into the co-op. After that, you benefit from having a management company care for your home, operational finances and in some cases, security and landscaping. It can be headache free home ownership! You will be responsible for the clog in your kitchen sink but the pipes behind the wall will not your direct responsibility. I lived happily in my first co-op for years until I got married and I’ve helped clients successfully purchase and sell dozens of co-ops over the years. hillside terrace

Westchester Co-ops