When you buy a condo, you own a percentage of the building and improvements—you own real estate. But when you buy a co-op, you are buying shares in a corporation that owns the building. In effect, you are leasing a unit from the corporation, and your monthly payment (assessment) depends on the number of shares you own. As a shareholder you have a vote in co-op matters. Usually, it takes a 2/3 or ¾ majority—depending on the bylaws—to enact or change rules. Typically, co-ops are converted apartment buildings, hotels, or even warehouses. However, in some urban areas such as New York, San Francisco, or Chicago developers will build new units and sell them as co-ops.
Since co-ops are corporations, a board of directors or co-op board runs the show. It sets the rules and can determine who is allowed to buy shares or what improvements you can make to the unit. For some people that’s a plus. Who gets to live in the building can be tightly controlled in contrast to a condo, where whoever has the money to buy a unit is in. But this is a two-edged sword. The exclusivity of a co-op can make getting your money out when you want to move harder and more time consuming than a condo. You pay a monthly maintenance fee and can also get a buildingwide assessment bill if revenues fall short of outgo. Although the board can’t discriminate based on race, sex, or religion, it can reject your application if it feels you won’t fit in. Also be aware that if you want to buy a co-op, the board will most likely want as much information on its application as a mortgage lender. Also in some areas, a seller doesn’t have to give you a seller’s disclosure form detailing the condition of the co-op. The seller is selling stock, not real estate, so a disclosure form is not required. This presents a special challenge to you to make sure the co-op is in good condition. A professional inspection can be a good investment before you buy. If the co-op board is keeping costs down by deferring maintenance, you may want to look elsewhere.
You also need to find out if the co-op board imposes a flip tax if you sell. This is a fee levied when a shareholder decides to move and sell their stock. The fee can be a percentage of the sale price (commonly 1 to 3 percent) or a set cost per share. It can also be based on the profit from a sale or how long you’ve lived there. Which formula is used boils down to what the board and co-op members can agree on. The big question on a flip tax is whether it will hurt you when you want to sell. Some brokers say it does, others say it depends on the co-op and the nature of the flip tax. If the co-op you’re looking at does have a flip tax, do a little extra homework and find out if it has caused sales problems in the past.
Buying a co-op can also have special financial challenges. Co-op boards often require 30 to 50 percent down payments, and some boards allow mortgage financing for the balance while others won’t. Every co-op board is different, and practices differ depending on area. For instance, when Anita sold her New York co-op and moved to the West Coast, she discovered that a condo or co-op was all she could afford. After a month of house shopping, she finally found a co-op in her price range and filled out the application. A couple of days later she got word that the board had accepted her offer. ‘‘It was amazing,’’ Anita said. ‘‘When I bought my New York coop, the board ran a credit check, employment check, and called my references. Here in San Francisco the co-op board seems almost indifferent.’’ And the financing was up to her with no minimum down payment.
Like condos and town houses, co-ops can be a good investment if you do your homework and buy wisely. Also, be aware that not all real estate agents are savvy on condos, less so on co-ops. Co-ops are a niche market, and you want to find an agent who works that niche. In New York City, for example, there are real estate brokers who specialize in co-ops and even in certain buildings. They know the market, the board members and their preferences, and can help you pass the board’s requirements. Ask board members what agents do the most business in their co-op and talk to two or three to find the one you’re most comfortable working with.
Be aware, though, that in most areas, New York included, condos tend to hold their value slightly better than co-ops. This is due to fewer selling restrictions on condos, and when you own the unit, you have more control.
A great Web site for co-op buyers and owners is www.cooperator .com. It also publishes a magazine for co-op and condo owners, especially in the New York City area.
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