Here’s why buying a co-op is so uncertain
Our daughter is ready to move on her own. She saw a co-op in a large development that seems to tick all of its boxes: good price, a neighborhood she likes, nice size, parking spaces, green spaces and close to work. We were ready to encourage him to offer a contract that day, but then realized he had been on the market for 255 days. Additionally, other apartments for sale in the complex, some of which had been beautifully renovated, have been on the market for at least as long.
The agent who showed us the apartments said it was because it was a co-op, and people in that area are used to condos and prefer that. They have a relatively high, but not unreasonable, HOA. We realize that one of the downsides of a co-op is that you don’t have the opportunity to accumulate as much equity as when you own a condo or a house, but that makes the place a lot more affordable in the short term. Still, we couldn’t believe people aren’t flocking to this development, which offers so much, and would like to know why before offering a deal.
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We met two young men who live there (before we started having all these questions), and both said they really liked the place. My savvy sister lived in a co-op in New York for many years and served on the board, so we called her for advice. She said co-ops (and condos too) often have issues with society that may not be obvious. She thought we should try to get a copy of the bylaws and board meeting minutes, see if board members have term limits and find out if there are any special appraisals or if a mortgage is coming up due.
The agent was helpful and found that there was a special assessment; my daughter should probably pay around $7,000 depending on what’s left. However, he couldn’t get us anything else. He gave us the name of the management company and asked a few people he knows, but everyone said, “No problem; things are going well.
We know we could get a lot of this information if we offered a deal, but we probably wouldn’t have a lot of time to review it. Do you have any idea why these places have been on the market for so long? And any advice on how we can get more information?
A: The first place Sam and I bought when we got married was a co-op on Lake Shore Drive in Chicago. It was a vintage building (called “pre-war” in New York), built in the late 1920s. It had generously sized rooms, a wood-burning fireplace, thick walls and ceilings (so very quiet ), a beautiful view, high ceilings and only two units per floor, which made it private.
We really liked it, and like the co-op your daughter has in mind, the price was affordable for us.
The problem with buying a co-op outside of New York is that most buyers and real estate agents don’t understand how co-ops work and why the monthly valuation is so much higher than for a similar sized condo with the same amenities.
The difference has to do with how the property is owned. In a condo, the owner owns all of the space inside the walls, ceiling, and floor of the unit, as well as a proportionate share of the common elements. Condos are individually owned by the owner and the condo receives its own property tax bill.
In the case of a cooperative building, the entire building is owned by a company. In many corporation-owned cooperative buildings, the owners of the cooperative hold shares in the shares of the corporation. One could say that the ownership of this stock also gives them the right to rent a particular apartment in the building of the cooperative. The co-op society is taxed on the entire building (and any property owned by the society), and the unit owner pays their share of property taxes as part of the monthly apartment lease.
In a co-op building, the monthly rental payment for a unit covers building maintenance costs and insurance, but it also covers property taxes and mortgage interest payments owed by the co-op on the building.
There are other differences, including the fact that cooperative buildings generally have the right to refuse someone to buy someone else’s shares in the company. They can refuse a potential buyer for any reason, but they cannot violate federal fair housing law. You mostly hear about it in New York City, where a co-op building turned down Madonna, Antonio Banderas, and his then-wife Melanie Griffith, among others. In an article a few years ago, the New York Times quoted agents as saying that the estimated rejection rate for co-ops was between 3 and 5 percent.
There may also be rules restricting other types of activities, such as subletting the cooperative unit. In other words, if your daughter decides she wants to move out and rent out her place, she may not be able to do so or she may need the approval of her future tenant’s board of directors.
It’s not that complicated, but maybe because co-ops aren’t as common as condominiums, some agents seem to have a hard time explaining how a co-op works and why monthly assessments are higher.
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We think you are smart to try to get more information up front. Much of this information is distributed to owners over the course of the year, and you may simply need to ask the seller to go through their records to find this information or ask them to request it for you to review before agreeing. to make an offer on the venue.
Your story reminded us of a recent news story about a New York City co-op building whose units would normally sell for millions of dollars, but are now selling for around $100,000. The land this co-op building sits on is owned by a third party who raised the rent for the land astronomically, and now the co-op owners are at a crossroads deciding whether to buy out the landowner for millions of dollars or to sell get out and move on. Co-ops can and often do have pitfalls that you may not see in condo developments. That’s probably what your sister was referring to when she mentioned legal issues.
Still, if it’s a great and affordable place for her in today’s market, she gets her financing, and she has enough information to make an informed decision, she may decide to make an offer with which she is comfortable, even if it is a low offer.
Remember that ultimately this is the kind of offer she might present when it comes time to sell. Good luck.
Ilyce Glink is the author of “100 questions every first-time home buyer should ask(Fourth Edition). She is also the Managing Director of Best Money Moves, an app employers provide to employees to measure and reduce financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them via the website, BestMoneyMoves.com.