Tips for Selling a Cooperative Apartment

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Although cooperative apartments involve real estate, they are not real property. What you bought was shares of stock in a corporation and that corporation generally owns the land, the building(s) and everything in it (them). You became a shareholder and a tenant of the corporation. The shares that you purchased are attached to the apartment in which you became a tenant. If you didn’t understand it then, by now you know that almost everything you do has to be approved by the cooperative board, which is elected by the shareholders to manage the corporation. And, just as when you bought (unless you purchased directly from the sponsor of the project) you must obtain board approval for the sale of your shares and leasehold (apartment).


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COOPERATIVE RULES FOR SELLING

When you are prepared to sell “your apartment,” you should first consult the board or the managing agent about the rules imposed by the board on shareholders as a condition of selling the apartment. Most likely you will need to obtain board approval of the sale. This entails presenting a transaction to the board and asking the board to authorize the sale to your buyer.

There is usually an application that must be completed by the buyer once the contract of sale is signed. That application contains financial information about the buyer and requests copies of certain documents, such as income tax returns, w-2’s, paystubs, bank statements and other pertinent financial disclosures.

At this beginning stage, the most important step is to find out what you must comply with and the fees that you have to pay at closing or before. Some cooperative corporations impose a “flip tax” or “waiver fee.” This is a charge for the right to sell your shares. This fee is impossible to calculate in general, as each cooperative has its own formula for calculating it. It may be imposed as a set number of dollars for each share you own. It may be imposed as a percentage of the sales price or as a percentage of the profit on the sale (which profit is calculated differently from the way you would calculate your profit or the way profit is calculated for capital gains tax purposes). Thus, it is important to determine if there is such a fee and, if so, what the fee would be in your particular instance. There may also be some other fees owed to the cooperative and its transfer agent, the company that will transfer the shares and lease to your buyer. All these fees can add up to substantial sums and it is important to know them so that you don’t have any unpleasant surprises before you accept an offer.

It is also important to determine the qualification rules for a prospective purchaser. For example, there may be a minimum down payment requirement, as well as a minimum income required of a purchaser. If this is the case, you want to make sure that you screen your potential purchasers so that you don’t waste time accepting an offer that will go nowhere.


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PROSPECTUS, AMENDMENTS AND FINANCIALS

If you did not keep a copy of the prospectus or offering plan, a full set of all the amendments to the plan and the financial statements that the cooperative has emitted throughout the years, now may be the time to get them. You may get them from a neighbor and make a copy if you have easy access to a copy machine. If not, you can ask the managing agent for a copy (for a fee of course). You will most likely need them because most prospective purchasers will ask you for them, and most competent realtors, when they take your listing, should ask you for them. If a realtor does not, you should ask yourself if the word competent applies to that realtor.

Together with the prospectus, amendments and financial statements, you should also obtain a copy of the board application and the current house rules so that you can provide them to the purchaser.


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CAPITAL GAINS

Do you have a profit on the sale of the apartment? If so, how much is the gain? Did you use the apartment as your primary residence for at least two of the past five years? These are all important questions to answer, because you may have to pay a tax on a profit depending on the answers to these questions. It may be a good idea to consult an accountant or an attorney about any potential capital gain.


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LAWYER SELECTION

Although it may sound self-serving, I think that the selection of a lawyer is probably the second most important step in the process of selling a cooperative apartment, the first being the selection of a realtor (see below).

There are important issues to consider when selling your apartment. You must obtain information from your cooperative board about the rules for selling, consider what expenses you may have and get direction on how to proceed. An experienced lawyer can guide you through this process in a way that most realtors don’t. And, once you have selected a realtor, you should not sign a listing agreement without first consulting your lawyer. Know what you’re signing, whether you can cancel the listing, whether you can sell the apartment on your own and, if so, under what terms, whether you can sell to friends and relatives without paying a commission, and how you can take the apartment off the market if you change your mind about selling. It is important to know, before signing a listing agreement, how long is the listing for, how long must you wait after the listing has expired to sell the apartment to someone who visited the apartment while the listing was in effect, without having to pay a commission.


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REALTOR SELECTION

The following are some considerations:

  1. Experience in selling cooperative apartments, not just real estate or even condominium apartments. Remember that cooperative apartments are very different from houses or condominiums. The principal difference in selling is that the seller needs board approval, which really means that the purchaser must submit an application and be approved by the board. By the time the realtor knocks on your door to solicit your listing, the realtor should be fully familiar with your cooperative  board’s rules for selling, should have a copy of the board application, a copy of the house rules and have a track record in selling cooperative apartments. This realtor has to be able to screen your potential purchaser and if s/he is not, you may spend months either not selling the apartment, or going into multiple transactions with purchasers who, from the beginning, did not have a chance to be approved by your board.
  2. Honesty in pricing your apartment. It is important to price your apartment correctly. If you overprice it, potential buyers will not even come to visit, and, worse yet, other realtors working with potential buyers will not waste their time showing an apartment that they know their buyers will not be able to buy, even if they want to, because they will not qualify. You cannot underprice it because remember that your cooperative board has the right to reject the sale and, what do you think your board is going to do if it thinks that you’re selling the apartment too much under market value?
  3. Familiarity with rules of lenders, especially in your cooperative. One of the most important distinctions between cooperative corporations is not the neighborhood, the building or the layout of the apartment, but the financial condition of the corporation. This is important to banks. Independently of the personal financial qualifications of a potential buyer, the bank will also take into account certain factors about the cooperative, one of which is the financial condition of the corporation. A realtor who’s not familiar with the requirements of lenders may not be able to screen a prospective buyer and your cooperative corporation properly and loose precious time in selling your apartment.


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ESTIMATED COSTS

The following is a checklist of expenses:

  1.  Broker’s commission: to be negotiated before accepting an offer;
  2. Transfer taxes: 0.4% of the sales price to New York State for prices up to $3 million, and .65% for prices above. In New York City, 1% of the sales price if same is $500,000.00 or less and 1.425% if the price is more than $500,000.00. There is a “Mansion Tax” when the price is $1 million or more, but it is imposed on the purchaser, unless otherwise negotiated. Make sure that your contract specifies who’s responsible for paying the transfer taxes;
  3. Flip tax, also called waiver of option fee: some cooperatives impose a fee on the sale of an apartment, commonly called a flip tax. It is a fee for the right to sell the apartment. This flip tax may be based on dollars per share (for example $5.00 per share), or on a percentage of the profit (but as calculated by the board, which may not be the way you would calculate it, or an accountant would calculate it, for capital gains purposes), or a percentage of the sales price, or on a dollar per room basis (for example $1,000.00 per room);
  4. Cooperative fees: in addition to the flip tax, cooperatives may have other fees, such as administrative fee, processing fees, and the like, and these can add up;
  5. Transfer agent fee: at closing, the cooperative will be represented by someone and that someone will prepare transfer documents, such as a new stock certificate, proprietary lease (or occupancy agreement), and a number of other documents. This transfer agent may be a lawyer or a managing agent. Whoever it is, the parties will pay a fee for the services;
  6. Lender’s representative: if you have a loan against the apartment, your lender kept your stock certificate and lease. Now is time to bring those back. A lender will send a representative to the closing to exchange payment of your loan balance for the stock certificate and lease. That representative will also collect a fee, generally less than $700.00;
  7. UCC 3 filing: if you have a loan against the apartment, the lender probably filed a UCC 1, or evidence of a lien, with the city register or county clerk. If so, that evidence of a lien will have to be terminated. It is terminated with a UCC 3 and there will be a fee for filing this UCC 3, generally between $75.00 and $150.00, but the fee could be much higher, depending on the county where the property is located. UCC stands for Uniform Commercial Code, the law that governs liens on personal property;
  8. Legal fees: you should have already consulted the attorney you plan to retain and should know the attorney’s legal fees. Again, this may sound self-serving, but keep in mind that you are retaining a professional service and that the value of that service should be measured by different factors, such as experience, the bar committees the attorney belongs to, his/her knowledge of the subject matter, etc. You are not buying a can of soda which, at whatever price and in whatever store, is the same can of soda.


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THE PROCESS

Once you have accepted an offer, you are ready to go to contract. Your attorney will prepare the contract and send it to the purchaser’s attorney for review, comments, changes and signature. After the purchaser signs the contract, same is returned to your attorney with a check for the contract deposit. This deposit is customarily paid to the seller’s attorney and it gets deposited in an escrow account with that attorney until closing. The amount of the deposit is to be negotiated, but strive for a deposit of 10% of the price. The higher the amount, the least a purchaser will feel tempted to have “buyer’s remorse.”

Once you sign the contract, both sides are bound by its terms.


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TERMS IN A CONTRACT OF SALE

  1.  Address of the property with the name of the cooperative corporation and the number of shares appurtenant to the apartment.
  2. The maintenance and any special assessments or additional charges the owner pays.
  3. The person responsible to pay the “flip tax” or waiver fee (usually the seller).
  4. The price.
  5. The amount of the contract deposit and who is it payable to. It should be paid in trust to the seller’s attorney.
  6. The loan contingency: the contract should be subject to the purchaser obtaining a loan in the amount agreed by the seller in the binder.
  7. Cooperative board approval: the contract should be subject to the buyer being approved by the cooperative board. Keep in mind that cooperative boards may have financial qualification requirements that may be more stringent than lenders, and that they can use subjective tests for qualifying a prospective purchaser, so long as those tests are not prohibited by law.
  8. The contract should be subject to the apartment being free of liens at closing.
  9. The contract should spell out who’s responsible for paying the transfer taxes, a burden generally imposed on the seller. Keep in mind that parties can negotiate who pays the transfer taxes.
  10. Federal law provides that a purchaser has the right to conduct an inspection of the unit to determine the existence of lead paint. You must also provide information to the purchaser as to your knowledge or reports of the existence of lead paint.
  11. The contract should spell out the damages that either party will face if that party defaults in performing the terms of the contract.
  12. The contract should provide the names of the realtors involved in the transaction (if any), and who’s responsible to pay the commission (generally the seller).
  13. The closing date is an important term. The desired language should read “…on or about…’ This gives flexibility to both sides in scheduling a closing.
  14. Possession of the apartment after closing is to be negotiated and included in the contract. If you reside in the apartment and need the money from the sale to move, or don’t want to vacate the apartment until you have concluded the sale, you should negotiate to stay in possession after the closing for a short period of time, customarily five to ten days. Keep in mind that in the case of a cooperative apartment, you must make sure that the board will allow this stay, no matter how short. During this time, you will pay the purchaser the interest on the purchaser’s loan and the maintenance, all on a pro-rated basis. Generally some money will be held in escrow by the seller’s attorney to insure that the seller will move 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.


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THE CLOSING

Once all parties are ready to consummate the transaction, a closing will be scheduled at a date, time and place convenient to the parties, but generally it will be at a place designated by the person that represents the cooperative corporation at the closing, called the transfer agent. This could be a law firm or the managing agent. At the closing, from the sales price, all your costs and your loan (if any) will be paid off, and the balance will be paid to you. If you have a loan, your lender will send a representative to the closing with your stock certificate and your proprietary lease (or occupancy agreement). That representative will receive the payment of your loan and deliver the certificate and lease to the cooperative transfer agent so that new ones can be issued to your purchaser. If you don’t have a loan, you will deliver the stock certificate and the proprietary lease to the transfer agent. You will receive payment, deliver the keys of the apartment to the purchaser (unless you have agreed to a post-closing possession) and the closing will be concluded.

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