What is a Co-op?
Co-ops are different from condominiums (“Condos”) and single-family homes. When you buy a co-op apartment, you are not buying real property. Instead, you are buying shares of the corporation, and upon purchasing them, you become a shareholder. In return, the corporation gives you what is called a proprietary lease, and you essentially become a tenant in the co-op building. The bigger the apartment, the more shares you will own in the cooperative.
Shareholders pay a monthly maintenance fee to the cooperative, which covers building expenses such as the heat, hot water, building insurance, salaries, real estate taxes and the mortgage for the building. Pursuant to the building’s bylaws, special assessments (‘temporary fees”) can also be implemented and incurred for each shareholder, which cover the cost of building repairs and renovations. Typically, special assessment fees range from $50 to as high as $800 per month, depending on the size of the building and the cost of the repairs/renovations that are needed.
Overall, the approval process for co-op buildings is significantly more intensive than if you were purchasing an apartment in a condo building. The main difference and headache of buying a co-op in New York City is the board approval requirement. That is unless you’re lucky enough to find and purchase a sponsor unit.
A sponsor unit is an apartment owned by the original owner an/or corporation who originally converted the building from a rental into a co-op (typically back in the ’80s). As older tenants move out of these apartments, occasionally, these apartments become available on the market by the owner/original sponsors. The big advantage to purchasing a sponsor unit is that you can skip the dreaded board approval process. Depending on the individual sponsor, the financial requirements are usually very lenient compared with that of a non-sponsor apartment.
10 Steps to Buying a Co-op. (Typically it takes around three months)
- Gather your team of professionals. You should already have a broker, lawyer, and mortgage broker or banker that you intend to work with to purchase your apartment. The New York City, real estate market, moves fast, so when you find a suitable apartment, you need to be able to move quickly.
- Obtain a pre-approval. A preapproval letter is a document that details how much financing you have been approved for; that is assuming you are not purchasing the co-op with all cash. The letter typically includes the loan program, the loan amount, the purchase price, and the interest rate that you qualify for. This powerful piece of paper is significant because it shows Brokers and Sellers alike, that you are serious about purchasing a property. Realistically, you will not be taken seriously without a pre-approval letter.
- Go Shopping. Find an experienced broker who is familiar with the NYC co-op market. A good broker can save you a lot of time by showing you properties that meet your criteria.
- Confirm that you qualify. Co-op down payment requirements can range from 10% to all cash. However, the typical co-op down payment in NYC is usually somewhere between 20-30%. Co-op boards also want to see that you have some cash in reserve (e.g., a year of maintenance payments in the bank). Lastly, you should familiarize yourself with rules in the building. Many co-op boards prohibit subletting, and/or parents buying a coop for their children. The dreaded co-op board sets their own, subjective standards in terms of the approval process as well as how the building is managed. Co-op boards also require an interview (sometimes multiple interviews) to meet you and ask any questions regarding the application, your life, and/or your financial history. Because a co-op is technically a corporation, it can approve or deny any applicant for any reason as it chooses, pursuant to the Business Judgement Rule, as long as the co-op board is acting in good faith.
- Submit your offer. Submit your offer ASAP! If your offer is accepted, you should start preparing your financial documents and referral letters that will be needed for your board package. Your broker and/or lawyer should be able to streamline this process.
- Sign the Contract. Along with signing the contract, buyers typically submit a 10% deposit to the seller’s attorney to put into escrow until closing. Typically, co-op contracts contain contingency clauses regarding board approval, in the event that the Board rejects your application, you will get your deposit back.
- Begin the mortgage application process. This is the point where the mortgage company will decide if they will fund your loan. You will have to provide tons of financial information to your chosen lender (i.e., pay stubs, tax returns, bank statement, etc.). The bottom line is that the lender wants to ensure that you have the ability to repay your loan. A word of caution, make sure that you are dealing with a mortgage broker or lender that is familiar with New York City co-ops.
- Prepare and submit your board package & wait for the Board Interview. This is the point where you’re trying to convince the managing shareholders in the building that they should allow you to live in their community. You will need financial documents similar to the documents that you provided to your mortgage lender, as well as personal letters of recommendation. Essentially, you need to ensure that your board package is “airtight” to avoid rejection. At the interview, be honest, be yourself, but also conduct yourself as if you’re on a job interview.
- Conduct a final walk-through of the apartment. This final walk through confirms the condition of the apartment. And, if your contract required certain repairs, this is the time to ensure that the conditions of the apartment are satisfactory according to the contract terms.
- Close on the apartment. A “Closing” is a transaction where the title of a property is transferred from a seller to a buyer. This transaction typically takes about three hours to complete. The seller, buyer, attorneys for all the parties, the managing agent for the coop, the mortgage lender and the real estate agents are all typically present at the closing.