So you are considering buying a cooperative apartment. Even through your daily life will be about the same as living in a condo, the process for buying a co-op has substantial differences. This ten step guide will walk you through the process of purchasing a co-op. As with any major transaction, having expert help is mandatory. Your real estate agent, mortgage broker, and closing agent should be able to answer any questions you have.
Step 1- Placing an offer
Make sure your agent is familiar with cooperatives. If you are buying without an agent, ensure that your offer conforms to standards set by the National Association of Housing Cooperatives and the National Association of Realtors. It is important to use terminology that corresponds with co-op housing. You are purchasing “shares,” not a deed. Additionally, you are assuming a “proprietary lease” from the seller.
Step 2- Arrange Share Loan Financing
Co-ops maintain a list of pre-approved lenders. You can obtain this list from the co-op’s management office. Frequently it is included in the resale package or co-op bylaws that you will have the opportunity to review. This is a list of financial institutions that have signed an agreement with the co-op to turn over your shares if you default on the loan.
“Share Loans,” as co-op mortgages are officially known, are available in most varieties available for traditional mortgages. Purchasers can select from adjustable rate, fixed rate, or hybrid loans. Because of the added risk of writing a co-op share loan, rates are generally .25% higher than prevailing rates for condominiums. Most major banks have gotten into the co-op mortgage business, so buyers should be able to find financing with a well-known, reputable institution. A 20% down payment is required for a co-op mortgage. Expect to fill out copious forms and present financial records to the mortgage agent. The process for getting a mortgage can take 2-3 weeks, so start early.
Step 3- Review and Accept the Rules and Regulations.
The co-op board has much broader power than a condominium board. This board is elected by shareholders of the corporation, and is empowered to make almost any rule that does not violate the law. Although boards vary, there will likely be more rules and regulations than you might find in condominium. If you have any nontraditional activities in your life, pay special attention. Boards have been known to restrict pets, boat/motorcycle storage, the playing of musical instruments, and enforce quiet hours-even on weekends. The rules of the co-op will be provided to you for review prior to closing. Be sure to review them carefully. If you cannot live with one or more of the rules, you can cancel your contract and get your earnest money back. The period of time to review the rules and the process for cancelling your contract varies from state to state. Check with your agent or your state Department of Housing for exact timeframes.
Step 4- Review the Co-op’s Finances and Board Minutes
The housing corporation is required to provide buyers with financial statements for at least the previous year, more in some states. You should carefully review the statements for evidence of impropriety or looming financial commitment. If the corporation has been operating at a loss or putting away only a small reserve, your monthly fee could rise significantly in the near future. If a major repair or upgrade is on the horizon, it could mean a special assessment–or lump payment–could be required of all owners.
Co-ops corporations are able to take out mortgages. This mortgage is repaid through an additional monthly fee charged to all shareholders. The board can take out a mortgage over a minority of the shareholder’s objection, yet everyone is required to pay their portion. As with the rules and regulations (see step 3), you can object to the financial statements and decide to back out of the sale.
The corporation is able to perform more business than just providing housing. Some operate parking facilities, own and rent outside housing, operate retail stores, or hold paper investments. As a shareholder of the corporation, you will be a part owner of all of these assets! Be sure to check the balance sheets for financial health and a sound investment strategy.
Step 5- Understand How Property Taxes Work
Property taxes will work differently for a co-op than a condo. The city will charge you the same rate, but the person you pay and the method of calculating what you owe is different. Real estate taxes are almost always lower than condominiums because the building is assessed a whole instead of as individual units. Imagine there are two identical buildings, one of which is a co-op, the other a condominium. The condominium is comprised of 10 individual units whose value is $100,000. Taxes due on each unit come to $500 a year (or 5 mills). The co-op is assessed as one big piece of property worth $500,000. Using the same millage rate, the building owes taxes of $5,000. Divided among the shareholders, this is only $250 a year.
Some co-ops collect property taxes as a component of your monthly fee. Other states allow shareholders to be billed directly. Your lender may add taxes to your monthly mortgage payment and hold them in escrow. Be sure to ask the selling agent, the co-op manager, and your mortgage agent about the process for property taxes. No matter how taxes are collected and assessed, you are still eligible to deduct them from your personal income taxes.
Step 6 – Apply to Co-op Board
The all-powerful co-op board will demand that you apply to become a shareholder. You will be required to fill out an extensive application with background information, financial statements, references, and permission forms for criminal background and credit checks. The board has the power to block the sale of shares for any reason except overt discrimination. Be sure to fill out this application thoroughly and accurately. A fee (usually less than $200) will be required with your application. The review process can take up to two weeks.
On the positive side, this rigorous screening process will keep less than desirable people from becoming your neighbors. On the negative side, this process can seriously hamper-or eliminate-your ability to sublease your unit.
Step 7- Sign the Proprietary Lease
After you have been approved by the board, you will be given a document called a proprietary lease. Remember that when you buy co-op shares, you are only purchasing shares in the corporation that owns the building. In order to occupy the unit, you must lease the unit from the building. Don’t worry, you won’t be charged rent and the lease lasts forever. The lease will need to be signed, notarized, and copies delivered to the closing agent. You will retain the original copy.
Step 8- Exercise Your Hand
At the closing, you will be signing a multitude of papers and documents. Thankfully, a real estate closing agent and your real estate agent will be on hand. You don’t need to think too much, just be prepared to sign your name and initial several dozen times. The bank will keep the stock certificates to the corporation until you pay off your loan.
Step 9- Get Insurance
There are some special considerations for insurance too. The building itself is insured by the corporation, so you will only need personal property and liability insurance. There is special insurance product, known as a HO-6 policy, which meets the needs of co-op owners. In practice, this insurance policy is very similar to renter insurance.
Step 10- Enjoy Your Cooperative Apartment
Congratulations! You are a homeowner! Enjoy your cooperative apartment and the financial savings that come with owning your residence. Remember that pesky co-op board that made you jump through hoops before closing? Get involved. The more involved you are, the more responsive the board will be to your issues. Attend monthly meetings and the annual shareholders’ meeting. You can volunteer to be on committees that decorate, oversee applications, and manage the communal facilities. You can also run to become a member of the board.