The ins and outs of buying a co-op

Our daughter is ready to move out on her own. She saw a co-op in a great development that seems to check every one of her boxes: great price, a neighborhood she loves, nice size, parking spaces, green areas and close to work. We were ready to encourage her to offer a contract that day, but then realized that it has been on the market for 255 days. Additionally, other apartments for sale in the complex, some of which had been beautifully renovated, have been on the market for at least that long and longer.

The agent showing us the apartments said that it’s because it is a co-op, and people in this area are used to condos and prefer that. They do have a relatively high HOA, but not unreasonable. We realize that one downside to a co-op is that you don’t have a chance to build as much equity as you do when you own a condo or house, but it makes the place so much more affordable in the short-term. Nevertheless, we could not believe that people are not flocking to this development, which offers so much, and would like to know why this is before we offer a contract.

We ran into two young men who live there (before we started having all these questions), and both said they really like the place. My savvy sister lived in a co-op in New York for many years and served on the board, so we called her for advice. She said that co-ops (and condos as well) often have problems with the corporation that may not be obvious. She thought we should try to get a copy of the bylaws and minutes from the board meetings, see if board members have term limits, and find out if there are special assessments or if a mortgage is coming due.

The agent was helpful and found that there was a special assessment; my daughter would probably have to pay about $7,000 based on what is remaining. However, he was not able to get us anything else. He did give us the name of the management company and asked a few people he knows, but everyone said, “…no problems; things are fine.”

We know we could get a lot of this information if we did offer a contract, but we would probably not have a lot of time to review it. Do you have any insights into why these places have been sitting on the market so long? And any advice about how we can get more information?

A: The first place Sam and I bought when we were married was a co-op on Lake Shore Drive in Chicago. It was a vintage building (known as “pre-war” in New York), built in the late 1920s. It had generous room sizes, a wood-burning fireplace, thick walls and ceilings (so, very quiet), a nice view, tall ceilings, and only two units per tier, which made it private.

We really liked it and, like the co-op your daughter has her eye on, it was priced affordably for us.

The problem with buying a co-op outside of New York is that most buyers and real estate agents don’t understand how co-ops work and why the monthly assessment is so much higher than for a similarly sized condominium with the same amenities.

The difference has to do with how the property is owned. With a condo, the owner owns all of the space inside the walls, ceiling and floor of the unit, as well as a proportionate share of the common elements. Condos are owned individually by the owner and the condo receives its own real estate tax bill.

With a co-op building, the entire building is owned by a corporation. In many corporation-owned co-op buildings, the co-op owners own shares in the stock of the corporation. You could say that the ownership of that stock also gives them the right to lease a particular apartment in the co-op building. The co-op corporation is taxed on the entire building (and any property owned by the corporation), and the unit owner pays their share of the property taxes as part of the monthly lease on the apartment.

In a co-op building, the monthly lease payment on a unit covers the maintenance fees for the building along with the insurance, but it also covers the real estate taxes and any mortgage interest payments owed by the co-op corporation on the building.

There are other differences, including that co-op buildings typically have the right to refuse to allow someone to buy someone else’s shares in the corporation. They can turn down a prospective buyer for any reason, but they can’t violate the federal Fair Housing Act. Mostly, you hear about this in New York, where famously, a co-op building turned down Madonna, Antonio Banderas and his then-wife Melanie Griffith, among others. In a story a few years ago, The New York Times quoted agents who said the estimated co-op turn down rate was somewhere between 3% to 5%.

There may also be rules restricting other types of activities, such as subletting the co-op unit. In other words, if your daughter decides she wants to move on and rent out her unit, she may not be able to, or she might need board approval of her future tenant.

It isn’t that complicated, but perhaps because co-ops aren’t as common as condominiums, some agents seem to have trouble explaining how a co-op works and why the monthly assessments are higher.

We think you’re smart to try to get more information ahead of time. A lot of this information is distributed to the owners during the year, and you might just have to ask the seller to go through their files to find this information or have them request this information for you to view before you agree to make an offer on the place.

Your story reminded us of a recent news story about a New York co-op building whose units would ordinarily sell in the millions but now are selling for around $100,000. The land on which that co-op building sits is owned by a third party that raised the rent on the land astronomically, and now the co-op owners are at a crossroads to decide whether to buy out the landowner for millions or sell out and move on. Co-ops can, and frequently do, have pitfalls that you might not see in condo developments. This is probably what your sister was referring to when she mentioned legal issues.

Still, if it is a great place and affordable for her in today’s market, she gets her financing, and has enough information to make an informed decision, she can decide whether to make an offer she’s comfortable with, even if it’s a low offer.

Just remember, down the line, that’s the sort of offer she might field when it comes time for her to sell. Good luck.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)