- Cooperative Rules for Purchasing
- Prospectus, Amendments and Financial Statements
- The Loan
- Estimated Expenses
- Selecting an Attorney
- The Process
- Terms in a Contract of Sale
- The Closing
The purchase of a cooperative apartment is probably the most demanding of any residential purchases. It requires the review of rules of the cooperative, not only for purchasing, but also for residential living. These rules are often more demanding than the rules in a condominium, the closest property to a cooperative. It requires the review of the financial statements of the project, generally more complex than in a condominium. It requires the analysis of the lenders likely to lend in that project. It requires a thoughtful prediction, or guessing, of how the project may move in the future, both in terms of living rules and increases in maintenance and special assessments.
The purchase of a cooperative apartment is not the purchase of real estate. What you are purchasing is shares of stock in a corporation which owns the building (or buildings) and in turn rents the apartment that goes with those shares to you. The apartment and the shares go together. You will become a stockholder in the corporation and also its tenant.
Following are some considerations of how to approach the purchase of a cooperative apartment.
Cooperative Rules for Purchasing
All cooperatives have rules for purchasing and these vary. Some cooperatives are very strict and some are not. It is imperative that you find out at the outset what the rules of the cooperative are. Don’t count on the realtor to provide you with that information, unless the realtor is a seasoned and experienced professional. Insist on looking at the information.
What do you need to look at? First, the income and down payment requirements of the coop. Some may provide the information upfront. For example, 20% down payment and a debt-to-income ratio that may be too low for your income, and more stringent than what your prospective lender requires. After you read these rules you may realize that you cannot meet the requirements.
Second, the rules governing behavior in the cooperative, or house rules. For example, no pets and a no sublet policy. After reading these rules you may decide that you don’t want to live in that project.
Prospectus, Amendments and Financial Statements
Most cooperatives have a prospectus, also called an offering plan or “black book.” An offering plan is a book containing information about the conversion from private ownership to cooperative ownership, or about the creation of the cooperative while the building is in its construction stage. In either case, the “sponsor” (the company creating it) will prepare a prospectus containing information about the terms of the offer for the sale of the shares (apartments). This prospectus gets amended every year while the sponsor has at least 10% ownership of the project, and these amendments may contain valuable information and a history of events that may have changed terms after the initial offering.
More important than the prospectus and the amendments is the review of the financial statements. These will give an interested purchaser details about the financial condition of the cooperative corporation.
What is important to look for? The underlying mortgage, its terms, how high the balance is in relation to the value of the building, and when the mortgage becomes due. Underlying mortgages are usually amortized over a long period of years, thus reducing the monthly payments, but there is a lump sum payment (or balloon) due in a much shorter time, usually seven or ten years after the commencement date of the mortgage. Also important are the reserves. A low reserve means that the cooperative has no savings to pay for certain repairs that, if needed, will have to be paid by the shareholders through the imposition of a special charge, called a special assessment. Alternatively, if the coop has a line of credit, the coop may use it to pay for any unexpected expenses. But, money borrowed has to be paid back. You must also look at the income and expenses. Compare net income, or lack thereof, as well as the expenses over the years. Look at the last year and see if there was net income. If not, look at the expenses and try to see why. Then try to calculate how much the maintenance would have to be increased in order to cover the shortfalls. See how much that would increase the maintenance for the apartment you’re purchasing.
Finally, be very careful with financial statements. You may misread the numbers and make a mistake, either purchasing a bad deal or failing to purchase a good deal, based on that misreading.
You should also make an appointment to read the board minutes. These are notations that boards make of subjects discussed at their meetings. These minutes sometimes contain valuable information about potential maintenance increases or assessments, change in rules or projected repairs and/or improvements. If you see something “fishy” maybe you should pay your attorney an additional fee for reviewing them. These minutes are usually kept at the office of the cooperative’s managing agent. You must make an appointment to view them.
The Loan
Before you decide to purchase, you should consult a cooperative loan (mortgage) professional to find out what is the maximum loan amount you qualify for, what the loan payment will be and what will be your closing costs. In the case of a cooperative, the knowledge of the consultant is especially important. Most experienced lenders will have a data base of pre-approved cooperatives. These pre-approvals have expiration dates and the loan consultant can tell you if the cooperative is approved and if any information needs to be updated. Lenders that do not have a cooperative pre-approved may have to commence that process and lose precious time in making a determination as to whether to approve the coop you’re interested in. Be careful not to choose a lender that may be advertising a fantastic rate, but that is clueless about what a cooperative is.
Estimated Expenses
If you are obtaining financing, the lender must give you an estimate of expenses. But you may also have expenses relating to the board application and these will not be included in the loan estimate.
In general, this is a list of expenses that you will encounter on a cooperative purchase:
- Bank fees: appraisal, credit report, origination fee, charge for the interest rate selected, bank attorney (or settlement agent) fee, maybe flood certification and some miscellaneous charges which vary from lender to lender;
- UCC 1 filing fee. The UCC 1 (Uniform Commercial Code, form 1) is a form that the lender files with the local recording office and it gives notice that the lender has a security interest in the collateral (a loan against the apartment). That fee is generally $75.00 to $150.00. Note that every county may have different fees, and some counties have very high fees;
- Your attorney’s fees;
- Adjustments for maintenance from date of closing to the end of the month;
- Cooperative fees. These include different fees charged by cooperatives for processing the application and preparing the transfer documents at closing;
- Cost of a lien search, or search of liens pending against the cooperative corporation and the seller;
- Mansion tax, applicable to prices of $1,000,000.00 and more.
If your lender requires private mortgage insurance (PMI), you will generally not pay any upfront fees for this PMI, but you will pay a monthly premium to the bank. There is no FHA financing in cooperatives.
Selecting an Attorney
I have been a lawyer for more years than I would like to admit, and yet, if I was purchasing a cooperative apartment anywhere other than downstate New York, I would hire a local lawyer to represent me. Experience is important. The dedication of an attorney in a particular field of law is more than important. I think that when it comes to condominiums and cooperatives, experience in these fields of law is essential. The mechanics of the process may be similar, but the substance of each transaction will probably be different.
Ask a relative, a friend, a co-worker who has purchased a cooperative apartment before, for a recommendation, so long as the experience with the attorney was positive. If not, consult the local bar association. Each county in New York State (at least downstate) has a bar association. Just Google the county name followed by “bar association” and the contact information will pop up.
The Process
Once you know your qualifications for financing, have retained an attorney and have found an apartment that you would like to buy, it is time to make an offer. Once your offer is accepted, by the owner, you should obtain the prospectus, the amendments and the financial statements, the house rules and the application. You should review them, but you should also have your attorney review them and go over the most salient details with you.
The owner’s attorney will send a contract to your attorney for review, possible changes and signature. If all is well, you will sign a contract and issue a check for the contract deposit. This check is payable to the seller’s attorney and it gets deposited into an attorney trust account. No one can touch that money until closing, when the seller becomes entitled to it, or until it is released to either party pursuant to the terms of the contract.
The seller then signs the contract and both parties are bound by its terms.
Terms in a Contract of Sale
- Address of the cooperative apartment, the name of the cooperative corporation and the number of shares appurtenant to the apartment. The monthly cost of maintenance and special assessments, if any.
- Price.
- The contract deposit and who it is payable to. It should be paid in trust to the seller’s attorney. The deposit should not be released to the seller, except at closing.
- The person or persons, as well as the pets, if allowed by the cooperative, that will live in the apartment.
- The loan contingency: the contract should be subject to you obtaining a loan within a specified period of time, in the amount you are applying for and, if denied through no fault of yours, the contract deposit should be refunded to you. But, make sure that this provision is explained to you, as it may not be as easy to obtain the refund as you may think.
- The contract should be subject to your approval by the cooperative board.
- Title to the shares and lease should be transferred to you free and clear of any liens.
- The contract should contain a provision with the representations, if any, that the seller is making regarding the interior condition of the apartment.
- The contract should spell out who’s responsible for the payment of the transfer taxes, a burden generally imposed on the seller. However, the purchaser pays the “Mansion Tax” when the price is $1,000,000.00 or more. Keep in mind that parties can negotiate who pays these taxes.
- Federal law provides that a purchaser has the right to conduct an inspection of the apartment to determine the existence of lead paint. If the purchaser conducts this inspection and there is lead paint, the seller will have the option to remedy the situation or cancel the contract and refund the contract deposit.
- The contract should specify the damages that either party will face if that party defaults in performing the terms of the contract of sale.
- The contract should provide the names of the realtors involved in the transaction and who’s responsible for paying the commission, generally the seller.
- The closing date: a most important term. As a purchaser, you should make sure that you are given some flexibility in the closing date, as lenders and cooperative boards may take a long time to process your applications and give you final approval. You want to make sure that the contract gives you the opportunity to use additional time in case you need it. The most desirable is a closing date of “…on or about…” which gives both sides the freedom to prolong the closing for a period of time. As a purchaser, you should never accept a closing date that states a “time is of the essence” closing date. This may expose you to losing your contract deposit if you cannot close by that date.
- Possession of the apartment after closing is to be negotiated and included in the contract. Most sellers may need or want to stay in possession of the apartment after closing. Generally this timeframe is five to ten days. During that time the seller pays the interest on the purchaser’s loan and the maintenance, all on a pro-rated basis. Generally, some money will be held in escrow after closing by the seller’s attorney to insure that the seller moves out within the negotiated time. The agreement will also provide that if the seller does not move out within that time, the seller will pay a substantial sum of money for every additional day that the seller stays in possession beyond the initial period.
The above are customary terms in a contract. There may be special provisions that apply to a specific transaction and those should be included in the contract.
The Closing
Once you, the lender, the seller, the seller’s lender and the cooperative board are ready, the transaction can be scheduled for closing.
At the closing you sign the loan documents with the bank, the cooperative documents with the cooperative, you pay the seller the balance of the price and the transaction is concluded. The seller will give you the keys to the apartment if the seller has already moved out, or after the seller moves out if s/he remained in possession after closing pursuant to a separate agreement.
Congratulations!
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