MrsT
Enjoying wedded bliss.....
Member since 4/06 1323 total posts
Name:
Katrina
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Re: New Here! And I have a Condo vs. Coop Question
I vote condo if you can find one that is affordable.
I have a co-op and just found out yesterday that it's worth over 10 x's what I paid for it  However, financing and rules are less stringent for a condo so taking out some of my new found cash will not be a simple process. I will have to pay the co-op a fee even if the bank does a no cost cash out refi. And it bothers me a bit that I have to involved the co-op board in my financials YEARS after I bought the unit since they have to approve my cash out refi.
Legal Distinction:
When you buy a condominium, you are purchasing real property. When you buy a co-op you are not actually purchasing the physical apartment; you're buying shares in the cooperative corporation that owns the building. Once the deal is closed, you will own the number of shares allocated for that apartment based on its size and location. Instead of the deed you receive when you buy a house or a condo, with a co-op you get a stock certificate and a proprietary lease, or occupancy agreement, on a specific apartment. As a shareholder, you become part owner of the building. In addition to the monthly loan payments on your individual unit, if any, you are responsible for monthly building maintenance and real estate tax payments to the co-op and you have a share of the assets and liabilities of the building.
Tax Implications :
When you own a condominium, you are a property owner, and you pay real estate taxes directly to the city. In a co-op, your building is assessed as a whole and the building pays the real estate taxes. You, as a shareholder, are charged a percentage of these taxes, which are typically included in your monthly maintenance bill. Therefore, in looking at average monthly carrying costs for a condo versus a co-op, you must determine the annual real estate tax estimate on the condo, divide it by twelve, and add it to the monthly maintenance charges. Whether you are a co-op or a condo owner, real estate taxes and mortgage interest on primary residences are usually deductible on your Federal income tax return. As a co-op owner, the interest on the underlying mortgage allocated to your shares may also be deductible. The co-op annually notifies shareholders of the dollar amounts of these allocations. The value of the deduction is dependent on, among other things, your income-tax bracket and whether you itemize deductions.
Maintenance Costs and Common Charges:
Common charges are the costs associated with the upkeep of the building, which are in addition to the costs of your apartment. The common charges may include payments on water and sewer fees, fuel costs, utilities for the common areas, salaries for building employees, insurance, and any other expense related to the operation of the building. These costs are apportioned to each co-op shareholder or condo unit owner as maintenance fees, usually payable via the corporation or condo association on a monthly basis. In the case of a co-op, the monthly maintenance payments usually cover local real estate taxes on the building and may also include payments on the building's underlying mortgage.
Mortgages and Co-op Loans:
When you get a mortgage to buy a condominium, the property is collateral for the mortgage. Since you're not buying real property when you buy a co-op, you are not getting a mortgage in the traditional sense of the term. In effect, you are getting a loan to buy the shares and a proprietary lease to live in the designated co-op unit. Your shares in the co-op serve as your collateral. Shares are not as valuable to the bank, because they can't be sold as easily as the real property of a condo. The co-op's board of directors may put conditions on the sale of its shares. It may also be difficult to sell the shares if the building is in poor financial or physical condition. Because of this, the loan rate may be higher than a condo mortgage.
What are the corporation bylaws and what is the role of the board?
The bylaws are the rules and guidelines under which the board of directors is elected and runs the corporation. In a true co-op, where the sponsor is no longer the majority shareholder, the board of directors is made up of your neighbors--shareholders who function on a volunteer basis and usually have no training in building management or real estate financing. In most co-ops the board has broad authority to approve stock sales, authorize expenditures, hire staff, and adjust maintenance charges. The board can also change policy, rules, and regulations as long as they don't conflict with the bylaws or proprietary leases. They can determine such important issues to shareholders as prohibitions on the ownership of pets and the right of a proprietary lessee to sublet an apartment.
How do I decide between a co-op and a condo?:
Your long-term goals will help determine whether a co-op or a condo is appropriate for you. It's important to understand that the basic purpose of a co-op is to be owner-occupied, with the assumption that owners have a direct stake in the quality of their surroundings and create more stability of residency. Therefore, many co-ops have restrictions on renting. The co-op's board of directors must approve whoever rents your apartment as well as whoever ultimately buys it. Aside from aiming for a compatible community of residents, the co-op has a stake in the financial reliability of each unit holder, since unpaid taxes and carrying charges ultimately fall upon the remaining shareholders if any unit holder defaults. If you plan to live in the apartment for five years or more, a co-op is a good choice, since the purchase prices tend to be 20 to 40 percent lower than comparable condominium units. There are some co-ops that still have a high percentage of sponsor-held units, or unsold shares. These co-ops tend to have fewer restrictions on subletting, although many banks will require a higher down payment on such a unit, and many will not offer loans on a building less than 60 percent owner-occupied. Also, if the sponsor pledged the unsold shares as collateral for the underlying mortgage and then runs into financial difficulties, the shares become the property of the lender and not the remaining shareholders. Majority ownership by the sponsor does not produce a true cooperative and may not be in the best interest of a purchaser. If your plans are relatively short-term or if you do not plan to live in the unit full-time, you may choose the freedom and flexibility of a condominium, where there are typically no restrictions on renting or on selling to whomever you choose. However, bear in mind that the initial purchase price of a condominium can be substantially higher.
Evaluating Co-op Financials:
There are five important factors in evaluating the financial condition of a co-op:
The Underlying Building Mortgage This reflects the indebtedness of the building, which is applied on a per-share basis to each individual unit. For example, if there is a $100,000 mortgage on a 10-unit building and all the apartments hold an equal number of shares, then the debt per each apartment is $10,000. The size of the mortgage is what matters; the smaller the mortgage, the better the building is for the shareholders.
Another factor to consider is when the building mortgage is scheduled for refinancing. Before buying you should ask for the terms of the underlying mortgage. What is the amount of the mortgage? What is the term? Is it a balloon mortgage with the entire principal coming due at one time? What is that date?
If the terms of the mortgage call for full payment in four or five years, the co-op's board of directors will have to secure new financing without assurance that they can get favorable rates. If the building's payments are fixed for an extended period, there is greater certainty that your maintenance payments will not increase and therefore you will probably be able to make your agreed cooperative loan payments.
The Reserve Fund A co-op's annual operating budget should include adequate provision for ongoing maintenance. However, major capital improvements, unexpected repairs, or replacement of building systems may need to be funded from the building's reserve fund. If the fund is large enough there may be no need for increased maintenance fees, assessments, or new loans. If there is a shortfall, shareholders might have to absorb maintenance increases to cover the cost of the installation or to pay the interest and principal on a loan. Some co-op boards pass on the expense to shareholders through assessments rather than maintenance fee increases. This can take the form of a one-time set amount or can be an addition to the monthly maintenance fee for a period of time or in any manner decided by the board.
In general, the lender looks for a reserve fund that is adequate to cover any major capital improvements. Typically a lender would like to see a reserve fund of at least $1,000 per unit with a minimum of $25,000 per building.
Building Repairs Check the physical condition of the building. Are there any major repairs that need to be done to the building? This could easily cause the maintenance for the apartments to go up.
Real Estate Taxes Does the building have any tax abatements that are keeping the real estate taxes artificially low? If so, when does the abatement expire? Has the building been careful about the assessed valuation?
Monthly Maintenance fees In a co-op, monthly fees cover building services, property maintenance, and real estate taxes. In general, they should fall within the following ranges:
Studios: $400 to $600
1 Bedrooms: $500 to $750
2 Bedrooms: $850 to $1200
3 Bedrooms: $900 to $1500
Lower maintenance fees are more desirable, but higher fees should not automatically rule out an apartment. Maintenance fees are simply one factor in the value of the apartment.
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