How Can I Protect Myself Buying a Cooperative ?

by Dian Hymer

Buying a cooperative is similar to buying a condo. In both cases you share ownership with a community of homeowners. But, there is a very important difference between the two types of ownership.

With a condo, you own the interior of your unit; but you share ownership of the common areas with the other co-owners. With a cooperative, you buy shares of stock in a corporation and the corporation leases your individual dwelling unit to you. As a cooperative owner, you are simultaneously an owner, a landlord and a tenant.

First Time Tip: It's important to find out as much as possible about how a cooperative is run before you buy. An offer should include a contingency for your satisfactory review of the cooperative documents. These include the articles of incorporation, the by-laws, the house rules and the proprietary lease. If you have difficulty understanding any of these documents, have them reviewed by an attorney who specializes in cooperatives. Some co-ops prohibit renting, others don't allow pets. Make sure that you can live with the restrictions.

Carefully review the operating budget and financial statements for the past five years. Does the co-op hire a professional management company? If so, find out how good the company is.

The financial statement should give you information about the underlying mortgage. A cooperative with a high remaining mortgage balance relative to the property value could be a risky investment. The financial statement should also tell you if any share-holders are delinquent on their maintenance fees, and if the cooperative maintains an adequate reserve fund to take care of major maintenance and renovations. Ask if there are any pending assessments, or litigation against the project.

A cooperative share-holder pays a monthly maintenance fee. Part of the maintenance fee usually pays a portion of the cooperative property taxes and underlying mortgage. Cooperative owners can usually take a tax deduction for the portion of their maintenance fees that pays property taxes and mortgage interest.

Another way in which cooperative ownership differs from condo ownership is that the Board of Directors of the cooperative has the power to approve, or disapprove, any buyer. The board can't turn down a prospective buyer for a reason that is based on illegal discrimination. But, the board can disapprove a buyer for any other reason, or for no reason.

Your fellow share-owners can wield a lot of power over you, so you should find out as much as you can about them before buying. Meet the board of directors. Talk to co-op owners to find out how they like living there, and to find out if you like them. The doorman, and the maintenance manager, can be a wealth of information.

As with buying any kind of property, you should find out as much as you can about the physical condition of a cooperative. Have the property professionally inspected and ask to see the cooperative prospectus. If the cooperative was converted from an apartment building, which is often the case, there should be an engineer's report on the physical condition of the property.

Part of your maintenance fee will cover the cost of insurance for the cooperative. Check to make sure the project is adequately insured. You'll need additional insurance coverage for your belongings and probably for improvements you make to your unit.

The Closing: Buying into a cooperative takes a careful investigation to make sure you're making the right choice. The benefit of buying a cooperative is that you can own in an area where single family residences may be prohibitively expensive.

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