Do You Know What To Ask When Purchasing A Cooperative?

Feb 10, 2005 4:15 PM

Most conventional loans will limit your pro-rata to 40%. The percentage of the pro-rata equates the financial bind that you have toward the Co-op’s underlying mortgage. Therefore, the lower the pro-rata, the less your financial obligation to the underlying mortgage.

Most underlying mortgages have balloon payments. Most balloon payments require you to pay interest only and the original principal amount is paid as one payment at the end of the mortgage term. Balloon mortgages are usually preferred because of its low interest rate and low monthly payments. Most Co-ops will refinance their underlying mortgage or principal amount for another balloon mortgage. Many lenders require that the underlying mortgages have a minimum of two(2) years remaining before it will make a loan to a Co-op purchaser.
*F

• Does Co-op have a tax abatement and when will it expire?

When a Co-op has tax abatement, they are entitled to pay taxes which are below the assessed market amounts and tax abatements have expiration dates. When the tax abatement expires, the Co-op will have to pay taxes at the assessed market amount. If tax abatement is expiring soon, find out what the taxes will be when abatement expires. *P, F

• Does Co-op have a land/ground lease?

When a Co-op complex has a ground lease, it means that only the ground which the Co-op building is built is on the lease. The Co-op corporation does not own the land or ground. During the effective period of the ground lease, the Co-op pays to rent the ground the Co-op building sits on and at the end of the term of the lease, the land/ground reverts back to the landlord. Most ground leases are effective for a long period, most of which generally range from fifty(50) to ninety(90) years. Even if the ground lease can be renewed, the new lease will require a substantial increase in lease payments and hence will mean a substantial increase in maintenance payments. Most conventional loans require ground leases to be in effect for the life/term of your mortgage. *P, F

• What was the last maintenance increase? What was the percentage in increase? What was the reason for the increase?

This could inform you the frequency of maintenance increases and the percentage you could expect for every increase. If the last maintenance increase occurred several years ago, the maintenance will most likely increase due to inflation and general upkeep of the common areas.

• Are there upcoming major repairs such as replacing the roof, re-pointing the bricks, replacing elevators? What will be the source of payments (reserves, increase in maintenance, take out another loan)?

• Was building built before 1977?

If yes, there may be a presence of lead or asbestos and it will lead to high costs in curing the problems. Any additional costs usually result in an increase in maintenance. *P

• How long has current management company been managing the Co-op?

If the current management company has been managing the Co-op for a long period and the Co-op has been financially sound under the management of the current company, the occurrence of financial instability and frequent changes will be minimal. If the current management company is fairly new, changes (whether positive or negative) may occur more frequent. The entrance by a new company may cause the revamping of the operations system within the Co-op.

• Is there a co-op board/committee?

Generally, most members of the Co-op board are shareholders of the subject Co-op. It is best to have a Co-op board or committee because this grants shareholders of the Co-op the opportunity to make decisions on their investments/shares and the overall Corporation.

• What are the policies on subletting?

It is best to know the subletting policies for possible future decisions of subletting the unit. Any future plans for moving such as a need to relocate, change in marital status or extension in family size, you may not want to sell the unit because it is a good investment where you may be able to earn high rental income. *P

• What is the deductibility of the maintenance payment?

A portion of your maintenance is deductible from your income taxes. It is based on how much of your maintenance goes for real estate tax and interest paid by the Co-op on its underlying mortgage.


* indicates sources which can provide answers to the above inquiries:
*P Proprietary Lease
*F Financial Statements
Refer to page 4 for definitions.

For questions which do not indicate an *, answers can be obtained from the realtor or the Co-op’s management company.

Above listed questions are not in order of chronology or priority.

Conventional loan guidelines stated are not indicative of universal guidelines. Each individual lender’s guidelines may vary through their different contracts signed for salability.