After months of looking at listings, going to open houses, and getting into bidding wars, you finally get an offer accepted to buy your "dream" NYC co-op. You've crunched the numbers and think the purchase price and resulting monthly payment (maintenance + mortgage) is reasonable. But not so fast. Here are 10 questions you should ask and get answers to before signing the contract and putting down the 10%.
1. How much has the maintenance increased over the past 5 years?
While you may have worked out your monthly payment based on maintenance today, you should make sure you have a good grasp of how maintenance has increased over the last several years. Some buildings that are mismanaged may see increases as high as 10% in a year. Annual increases of 3-4% are more typical and should be taken into account when figuring out your economics.
2. Are there any current assessments? If so, for what purpose and for how long?
When a building takes on big capital projects, the natural place to look for money is in the building's reserves. If there isn't enough money in the reserves, boards may be forced to charge an assessment to pay for the project. Assessments may come in the form of a one-time fee or a series of ongoing payments. Take a look back at the building's financial statements and board minutes to get a sense of if the board typically charged an assessment or utilized monies in the reserve when large capital projects were done in the past.
3. When was the last time the elevators, boiler, roof, and facade were repaired or replaced? If not for a long time, what are the future plans to improve these big ticket items and is money already set aside in the reserve?
Ahh, the big four! It's good to get an understanding of when these big ticket items were replaced in the past because having to fix or replace any of these items costs a lot of money and could deplete your prospective building's reserve fund or in the absence of a healthy reserve fund, subject you to assessment fees or increases in maintenance. I'd start with the financial statements to see what has been repaired in the past and look to the board minutes or building capital plan (if available) to see what is in the works.
4. What's the process to buy and sell an apartment in the building? Is the board strict?
This question really comes down to evaluating how liquid your investment is. Assuming you buy this dream apartment and sometime down the road, decide to sell - can you sell to anyone that meets the financial requirements of the building or does the board seem to reject prospective buyers for no apparent reason at all? You'll definitely want to get a sense of this because at the end of the day, if the board can reject a buyer for any reason, they're essentially shrinking your buyer base and making your investment less liquid - both not so ideal when you want to maximize your property value.
5. What's the subletting policy?
The subletting policy is another key rule to understand. Many co-ops allow very limited subletting. The one policy I've seen most is where you're required to live in your apartment for two years and then you can rent it out for two years. Some co-ops only let you sublet your apartment two years out of every 10 years. In the event you have to move out of NYC for a job in an economic downturn, you may have to decide whether it's better to carry the apartment and the maintenance (without a tenant) or sell in a depressed market. If subletting is available, you'll also want to inquire about any subletting fees.
6. What percentage of units are owner occupied?
While having a flexible subletting policy is generally good for property values because it expands the buyer base to investors (thus increasing demand), it's also nice to be part of a building whose main occupants are owners. Your fellow owners will likely care more about the building than someone just renting in the building and with more owner occupied units, the building will have a more community feel. In addition, banks don't like to see a low percentage of owner occupied apartments. If the number is too low, banks may be unwilling to make loans to purchasers in the building or to the building itself.
7. Is there a flip tax? If so, how is it calculated and is the buyer or seller responsible for paying it?
Aside from monthly maintenance and occasional assessment fees, another way for co-ops to raise money is through a flip tax. A flip tax is paid when an apartment in the building is sold. Flip taxes vary in how they're structured. Some are suppose to be paid by buyers, and others are paid by sellers. Most flip taxes are calculated based on a percentage of the sale price of the apartment, though some are based on the amount of profit generated from the sale. Percentages also vary by building, but are typically between 1-3% of the sale price.
8. Is the building a land lease building or does it own the land it sits on?
If you ever see a StreetEasy listing selling for a much lower price than comparable apartments, but has a much higher monthly maintenance, it's probably a land lease building. Most buildings in Manhattan own the building themselves and the land that the building sits on. However, there are a few buildings out there that DON'T own the land underneath the building. As a result, these buildings have agreements in place with the landowner to be able to rent the land for some long period of time, like 99 years. Buildings with 99 years left on their land lease may not be so troubling, but there are buildings out there with 15 years or less left on their land lease who have had trouble re-upping their land lease for another 99 years.
These are the buildings where you'll see prices at $400-500/sq ft, but the maintenance is twice as high as it should be. My advice - stay away from these apartments!
9. If there isn't a washer/dryer in the unit, could one be added?
A lot of co-ops are old buildings that weren't designed to handle a large amount of water flow through the actual apartments. As a result, these buildings have a central laundry room, typically in the basement and don't allow individual unit washer/dryers. If your dream is to have a washer/dryer in your apartment, make sure to get a clear answer on if it is even possible before proceeding.
10. Can food deliveries be made to your door?
You'd think this would be a question you wouldn't have to ask, but there are some buildings that don't allow delivery people to go to your apartment. Instead, for every food delivery, you have to pick it up in the lobby. I don't know about you, but this was definitely a non-starter for me.
-Pet Policy - Are dogs or cats allowed?
-Storage - Are there storage units available in the basement? If so, what's the cost?
-Electric - Is electric billed separately by apartment or is it already included in the maintenance fees?
-Cable - What companies are wired for the building?
-NYC Co-op/Condo Tax Abatement - Is this a benefit a resident can keep or does the board assess the value of this abatement away each year?
-Sponsor - Who is the Sponsor, how many units do they still hold (i.e. how many units have rent stabilized tenants), and how many board seats does the Sponsor have?
Potential Documents to Request
1. Offering Plan and Amendments
2. Financial Statements
3. Board Minutes
4. House Rules
5. Proprietary Lease
6. Capital Improvement Plan
7. Subletting Policy and Application
8. Renovation Package and Documentation
And there you have it - 10 key questions and then some that you or your lawyer should be asking the seller, seller's lawyer, or co-op management company before signing your purchase contract and putting down your money.