What is a co-op?
Unlike a condo, a Co-op apartment building is owned by a corporation. This means, when you buy an apartment that is in a Co–op building, you are not actually buying real property (like you would in a condo). You are in fact, buying shares of the corporation.
How do I qualify to purchase a co-op?
In order to qualify to purchase a co-op, a purchaser needs to go through a 2-step process (unless the buyer pays cash for the purchase):
- Step 1: Most co-op’s have a 20% cash requirement (or higher), so a purchaser needs to obtain a pre-approval letter from a lender for the 80% loan amount.
- Step 2: To be able to purchase a co-op an applicant needs to go through a board approval process. Unless the board specifies, there is an average 33% DTI ratio required. DTI? This is “Debt to Income Ratio.” For example: if buyers income is $100 their total fixed monthly expenses cannot exceed $33.
What is the difference between a co-op and a condo?
Co-ops (short for “cooperatives”) are apartment buildings owned by a corporation. Technically they are not classed as real estate. Individual tenants do not own their apartment; instead, they own shares of stock in the corporation. The shares are apportioned based on the size and floor level of the particular apartment. Ownership of the shares is established by a stock certificate and occupancy is governed by a “proprietary lease.” The corporation pays all building expenses including, real estate taxes, maintenance expenses, and the mortgage. The monthly amount a shareholder pays towards these expenses is in direct proportion to the number of shares owned in the corporation. Generally, heat & hot water are included and at times cooking gas & occasionally electricity. There are usually sublet policies in a co-op & a new owner must live there for 2 years prior to being able to sublet their unit.
Condominiums, on the other hand, are considered real property and are bought and sold just like a single-family residence. Condominium ownership also involves a monthly CAM fee aka Common Area Maintenance Charges (for building upkeep and maintenance of common areas, etc.) that is based upon the square footage of a particular owner’s apartment. Real estate taxes are excluded from the common area charges and are paid by the condo owner to the City separately. Ownership and occupancy of a condo are governed by a set of rules and regulations called Covenants, Codes & Restrictions or CC&Rs that cover everything from the allowable noise levels permissible to pet types and breeds permitted on the grounds.
Condos are governed by a tenant elected Board of Directors that is usually made up exclusively of condo owners. They oversee enforcement of the CC&Rs and manage the building’s budget to ensure they do not overspend and have enough reserves for future capital maintenance expenses like a new roof, etc.
In co-ops, the tenant-owners also elect a Board of Directors. They are responsible to meet with and approve or disapprove prospective new owners. Since it can sometimes be difficult to get approved by a co-op board, residents tend to stay for longer periods of time. Due to the subletting policy, it creates a high owner-occupancy rate.
In a co-op, a large portion of the monthly maintenance fee is tax deductible, i.e., the pro-rated share of the corporation’s real estate taxes, and the interest on the building’s mortgage payment.
Lastly, owners looking to sell their apartments must have the new buyer approved by the board through the application process before a sale can be made.
What are the steps in purchasing a co-op?
- Step 1: Understand Co-Op Living. There a certain “House Rules” to abide by, please get a copy and read the content.
- Step 2: Partner With an Experienced Co-Op Agent. Make sure the agent you choose understands how to underwrite a Co-op and is clear on what is needed by the board members to qualify a new shareholder.
- Step 3: Read the Building Bylaws and Financials. This helps you to understand the rules and the financial strength of the Co-op (is generally reviewed by the purchasers’ attorney).
- Step 4: Compile Your Financials. In the board package you will see a step by step requirement of what is needed to prepare the board package (working with an experienced real estate agent is crucial, they can help you with this process as it is tedious and they are ways to put a package together to get the highest probability of getting is approved by the board.
- Step 5: Meet the Co-Op Boards. An experienced agent can also help you prepare for this meeting. Some Co-op Boards meet once a month on a certain date, others “meet on demand” or as needed.
How do I know that I am investing in the right co-op?
This is a crucial step in underwriting the Corporation as you will be purchasing shares in the Co-op.
- Make sure that they have a healthy reserve
- Look at the underlying mortgage amount, when is it due and interest rate (an overleveraged co-op is unhealthy as that loan has to be paid one day)
- Check to see when the roof was replaced
- How old is the furnace
- When was the elevator(s) replaced
- How good is the pointing work for the brick
- Check the last 3 years of maintenance increase history
- There must be at least 50% shares sold to finance a co-op, ideally 70% +
- Look for Sponsor presence (in a healthy co-op it is minimal), however, there is an:
(i) eviction plan
(ii) non-eviction plan. When the co-op was converted, usually from a rental building. In a non-eviction plan, there could be several tenants who were under a “Rent control guidelines” and did not purchase when shares were offered. An experienced Real Estate Agent and your attorney will be able to guide you. By doing this due diligence you are making sure you are investing in a healthy co-op and there is not much in deferred maintenance as this calls for assessments (levied on each unit to raise funds for the necessary work when the co-op does not have enough in their reserve fund).