In many areas, co-op apartments are viewed as affordable housing that offer a gateway to home ownership. First-time homebuyers and seniors are often drawn to co-ops as they require less upkeep than houses and the repairs and management of the common areas are cared for by a management company. Co-ops also offer owners seeking to cap their monthly housing costs a set maintenance fee that will usually encompass the costs of heat, hot water, upkeep of the common areas and real estate taxes in addition to any mortgage payments. While co-ops have much to offer, it is important to understand that buying a co-op is very different than purchasing other real estate. Here are a few tips to consider:
What is a Co-Op?
A cooperative corporation, often called a “co-op,” is a business entity which owns real property containing units that may be occupied by commercial or residential tenants. Following the purchase of Shares of the co-op, the “Shareholder” enters into a Proprietary Lease with the co-op which allows the Shareholder to occupy a unit as a tenant. Unlike a condo or house, a Shareholder does not own the co-op unit; the Shareholder instead owns shares of the co-op and must comply with the co-op’s rules to remain in the unit. Prior to purchasing a co-op, a potential buyer must be approved by the co-op’s Board of Directors, which may take several weeks. In Westchester County, Boards of Directors are not legally required to provide a basis for a rejection.
What Co-Op Rules Must Be Followed?
When residing in a co-op, a Shareholder must follow the By-Laws, House Rules and Proprietary Lease of the co-op. These rules are established and enforced by a Board of Directors who are elected by the Shareholders annually. Co-op rules often include limitations on units’ occupancy, pets, noise, common area use, and subleasing. As the Courts view co-op Boards as quasi-governmental and usually will not overturn their decisions, it is very important to review these documents and the rules prior to purchasing a co-op.
What Other Review Should Be Performed When Buying a Co-Op?
A buyer should have their attorney do the following: (1) Review the Offering Plan, which is the document converting the building into a co-op that contains information about the buildings and corporation; (2) Review at least 2 years of Financial Reports, which will describe the financial solvency of the co-op; (3) Review the Board of Director’s Minutes, which provides insight into how the co-op is run; and, (4) Conduct a UCC Lien Search, which will determine if liens exist against the unit being purchased and/or the co-op.
Should A Buyer Examine Any Other Financial Issues?
When purchasing a co-op some of the major financial concerns are: (1) Monthly Maintenance – Has this amount remained steady or is it projected to increase?; (2) Assessments – Does the co-op have or is it projected to have additional charges beyond the monthly maintenance for fuel oil, capital improvements, litigation fees?; (3) Flip Tax – Does the co-op have a charge payable by the seller when a unit is sold, which is often a percentage of the sales price or a set amount due to the co-op per share sold?
In many Westchester County communities, co-ops often offer an affordable option to buyers who have limited funds for housing costs. However, before purchasing a co-op, it is important to understand what is being purchased, if the co-op is financially solvent, and if the rules of the co-op are acceptable to the buyer.