IrishCentral Community News is pleased to continue with our bi-weekly financial column, courtesy of Sean O’Sullivan of Arlington Financial.
What are the pro and cons to purchasing a co-op?
When you purchase a co-op, you own a percentage of the building called shares. Potential owners have to be voted into the building before they can purchase by a Co-op Board. Some Co-op Boards have a more rigorous board entry screening process than others.
The pro is that you can pick your neighbors. The con is that when you go to sell the board has to approve the new buyer, which can delay the sale of your co-op or in some cases cost you the sale. There have been many instances wherein the purchaser has had a mortgage approval only to get declined by the Board. I find it amazing that they can do this and not have to give a reason. It’s almost discrimination, if not bordering on it.
In addition many boards have the following rules and regulations
· 25% to as much as 50% down payment
· No pets
· Not permitted to rent if not living in the unit
· Permitted to rent for a maximum of two years – some boards
· Monthly maintenance fee
· Utilities included - such as electric, gas and heat
· Utilities excluded – some boards
· Minimum credit score for all occupants
· No alterations without Board approval
How Co-op’s Develop
A building is either newly constructed by a developer containing a number of apartments or an existing rental building being converted into a cooperative. For example, let’s say 30 apartments ranging from Studios to one, two and three bedrooms. The developer borrowers a sum of money to purchase the property and develop it into apartments. This is then referred to as the “Underlying Mortgage”. At this stage the Developer owns all 30 apartments, referred to as “Sponsor Units”. The Developer then tries to sell the apartments during construction or upon completion. With sponsor owned apartments there’s no Board approval required, which makes it easier to some extent? During this process the Developer is focused in getting at least 16 apartments sold in order to meet the “51% presale requirement” by conventional lenders. This is the best window to get the best deal on a new apartment from the Developer. With the initial 16 apartments the Developer had to finance the apartments to meet the 51% presale requirement. This is usually done by using proceeds from the underlying mortgage that’s in place.
After the Developer has sold 16 apartments it now becomes easier to finance the remaining units. The buyers of the remaining apartments can now get conventional financing from some high street banks that do co-op loans.
What You Are Actually Purchasing?
When you acquire an apartment in a housing co-op, you don't actually buy real estate; you buy shares in a corporation, whose only asset is the property. This corporation owns the home you live in. You gain the right to occupy it through what's called a proprietary lease or occupancy agreement. In addition you get what is referred to as a stock certificate which shows you how many shares you own of the overall shares that were issued to the 30 apartments originally.
In theory the larger the apartment the more shares you own and the greater your monthly maintenance or common charge is to the co-op association. Your monthly maintenance is used for the exterior upkeep and staffing of the building in general. The interior upkeep of each apartment is the responsibility of the owner.
What Lenders Pay Attention To
Co-ops are traditionally more difficult to obtain financing for. Some lenders today will not lend on Co-op’s for a number of reasons. Here are a but few of them
· Overly strict co-op board
· Too many non-owner occupied apartments, i.e. rentals
· New development with no history of financial stability
· Too many sponsor units owned by the developer
· Underlying mortgage in arrears
· Weak financial reserves for emergencies
· Presale requirement less than 51%
· Owner occupied units less than 75%
What to be careful of
Remember that there are two mortgages in place in a cooperative. You have the underlying mortgage by the Developer/Sponsor and the mortgage on each individual apartment by the occupant. If the underlying mortgage collapses and goes into default with the Bank that holds it, foreclosure proceedings are initiated against the Developer or Sponsor. If that were to happen the mortgages on each individual apartment become void. Each apartment would revert back to the holder of the underlying mortgage less the mortgage that the borrower has on it. The apartment owner now has a mortgage on an apartment that has ended up in foreclosure and has to be vacated, even though he is current with his apartment mortgage.
That’s one of the main reasons that the strength and history of the underlying mortgage is very important. This is done by requesting the following three items for review;
· Most recent two years financials. This shows in particular the underlying mortgage balance, mortgage history and reserves collected through monthly maintenance; in addition to many other financial information.
· Copy of the master hazard insurance policy ensuring that the Building and staff are adequately covered.
· A co-op questionnaire that normally has about 25 to 30 questions covering what was previously discussed in this article.
You don’t need to buy your dream apartment to discover you could lose it with no recourse and still owe a mortgage on it to your Bank. The only way you would be able to stay in it is by paying rent to the underlying Bank that’s foreclosing. That along with a mortgage payment doesn’t make sense to me. So as difficult as your mortgage application may be with your Bank on that co-op you’re buying, in the long run they are protecting both themselves and you the borrower.
For any additional information, or questions regarding other subject matter, contact Sean O’Sullivan at Arlington Financial. Phone: 914-793-1122, email: [email protected]