Do You Know What To Ask When Purchasing A Cooperative?

Feb 10, 2005 4:15 PM

If you are considering purchasing a cooperative, there are several questions which you need answered because these are the same questions and answers which will determine the eligibility and availability for a mortgage. Purchasing a cooperative means owning shares of a corporation of real property whereby stockholders of the corporation are entitled to use a certain dwelling unit or other units of space. To determine if stocks of any corporation will be a good investment, it is in your best interest to find out as much as you can about the corporation and cooperatives are no exception. Since a lender will provide you with a mortgage to finance the shares you are purchasing from the cooperative corporation, it will also consider if the corporation and shares you will own will be acceptable and adequate collateral or investment.

Below are questions you should find answers to before obligating yourself for a cooperative purchase:

• Does the Co-op or seller limit financing? If yes, what is the maximum financing allowed by the Co-op or seller?
  (Example: Maximum financing allowed by Co-op is 80%. This means that you must have a down payment of at least 20%. It does not matter that a lender will lend you more than 80%, the Co-op will decline your offer to purchase if you do not have at least a 20% down payment.) *P

• How long has the Co-op been in existence?
  Most conventional loans will require that the Co-op to be in existence for at least 3 years so there is established financial history. *P

• What is the total number of units within the Co-op complex/project? Most conventional loans will require the Co-op complex to have a total of at least 5 units. *P, F

• What is the estimated square footage of the subject unit? Most conventional loans will require a unit to be a minimum of 325 square feet.

• What is the presale percentage?
  The presale calculates the percentage of units which are sold. Co-ops consist of units where some are privately owned and some are held by sponsors who invest in unsold units/shares for the Co-op. Most conventional loans will require a minimum presale of 51%.

• What is the owner occupancy or what percentage of shareholders occupy their units?
  Most conventional loans will require the total units to be at least 51% owner occupied.

• Is there a flip tax/transfer tax and how is the flip tax calculated?
  Some Co-ops will require that you pay a tax to sell your shares. Currently, this may not seem applicable to you when you are the buyer but when you become the seller of those same shares, you may have to pay the transfer tax. *P, F

There are generally 3 ways the flip or transfer tax is calculated:

• Net Profit: a percentage of net profit from sales. Example: Original purchase price was $100,000 and now you are selling the unit for $150,000. Co-op requires you to pay 25% of net profit which means that you will be paying $12,500 or 25% of $50,000 as the flip/transfer tax.
• Dollar per Share: Based on the dollar amount per share required by Co-op, the flip tax is calculated by multiplying the required dollar amount by the total number of shares you own or will be selling. Example: Co-op requires $1.75 per share and you own 450 shares. The total flip tax you will be paying is $787.50 (1.75 X 450).
• Fixed Amount: Co-op will require you to pay a fixed amount as the transfer tax.

• What is the monthly maintenance amount?
  The maintenance generally comprises of real estate, underlying mortgage and the general operation and repairs (salaries, management fees, insurance, utilities of the common areas, legal fees, etc.) of the entire building.

• What does maintenance include?
  Which utilities are included in your maintenance and what other services are included?

• Are there any amenities (parking garage, on-site laundry room, concierge, door man, live-in super, porter, swimming pool, gym, private garden, etc.)? If yes, what are they and are they covered in the monthly maintenance?

• How many shares are allocated to the subject unit?
  Total number of shares allocated to a subject unit is usually based on the unit’s square footage, unit’s total number of rooms, floor where unit is located, view from unit, outdoor space(private garden, balcony, terrace) and any other extras which will deem the subject unit superior when compared with other units. The more extras the subject unit has, the more shares are allocated to the unit. *P

• Before entering Co-op building, observe the facade of the building exterior for graffiti and any detectable aspects which need repair such as re-pointing of the bricks.
  The Department of Buildings sends inspectors to inspect buildings for the overall building conditions. If the designated inspector deems the conditions to be unsatisfactory, the Co-op must make repairs to cure the unsatisfactory conditions and some of these repairs may be very costly.

• Are there any underlying mortgage(s)? If yes, what are the outstanding balances and when will they mature?
  Underlying mortgages are used to finance the entire Co-op complex. Lenders usually would like to know the effect the underlying mortgage will have on the subject unit and this is called the pro-rata. The pro-rata is calculated by dividing the underlying mortgage outstanding balance by total number of shares in Co-op, multiply by the shares allocated to the subject unit and comparing that to the appraised value:

(Underlying mortgage/total shares)(shares to unit)
_______________________________________________
Appraised Value