If you decided that a co-op apartment is worth the effort, review (with your accountant and attorney) the following documents, and remember:
Look Before Leaping Off the Cliff
1. Capital plan for the building
2. Capital improvements (past history and future plans including cost estimates and time frame)
3. Mortgage for the building (what are the terms/conditions/renewal options)
4. Management agreement (company currently holding management contract; costs/services)
5. Asbestos survey on public and apartment spaces
6. Rotting window frames on basement and other public spaces that may be entry point for rodents/bugs and water damage
7. Water/electric meters. The costs for each year should be reviewed. Are the costs similar year to year?
Application Package. Heads UP (Way UP)
There are three terms every potential co-op buyer must memorize: down payment, debt-to-income ratio and post-closing liquidity.
• Hurdle One: The down payment is the initial cash portion the buyer pays the seller with the remaining amount to be financed by a bank or other lender. Co-ops want owners to have equity in their homes. A down payment can run from 20-50 percent (not universal). A few high-status buildings may insist on all-cash purchases with no financing allowed.
• Hurdle Two: Debt-to-income ratio. The amount of a buyer’s monthly debt divided by his/her monthly income. For many co-ops the permissible debt to income ratio tops out at 25-30 percent. Many boards also look at the overall financial picture. If someone is on Social Security and brings in only $2100 per month, but has a $10 million in the bank or investments, the debt-to-income ratio might not be an issue.
• Hurdle Three. Post-closing liquidity. The amount of money readily available to the prospective buyer after making a down payment. This can include cash in the bank, money-market and/or stock funds, stock portfolio, Treasury bills, certificates of deposit (considered liquid). IRAs and other retirement accounts are not considered liquid, nor are life insurance policies, uninvested shares of stock or personal property (i.e., real estate, works of art).
The rule of thumb – buyer should have enough cash on hand to pay the mortgage and maintenance for two years in case his/her income ends for some reason, such as job layoff or illness.
Boards will sometimes settle for one year liquidity and one year of cash placed in escrow which allows a prospective buyer to raise escrow cash by selling liquid assets ahead of time and gives boards peace of mind.
