Do Buyers Need Co-op Title Insurance in NYC?
We’ll demystify the following topic in this video.
My name is Chris at Hauseit.
Hauseit is the largest Assisted FSBO and buyer agent commission rebate company in NYC, established
2014.
New York co-op apartment buyers typically do not pay for co-op title insurance, primarily
because it’s not a required closing cost and also because a co-op lien search already
affords them $50,000 in coverage against any missed liens.
However, buyers’ attorneys typically do recommend getting co-op title insurance in
the case of an estate sale or if an apartment has previously been through foreclosure.
What is co-op title insurance?
Title insurance protects buyers from any undiscovered liens incurred by previous owners as well
as any potential claims against their ownership interest, meaning someone who claims that
they had rightful ownership in the past and never sold it (i.e. deed fraud) or agreed
to sell it (i.e. estate sale where one of the heirs wasn’t consulted on a sale that
happened).
Essentially, title insurance protects buyers from events that happened in the past, before
they purchased the apartment, whereas a home insurance policy protects the buyer from events
that happen in the future.
Technically, co-op title insurance is called co-op leasehold insurance because buyers won’t
have title to real property like they would with a condo or house.
Instead of a deed for real property for a condo, co-op apartment buyers receive a proprietary
lease and a stock certificate.
The stock certificate states the number of co-op shares they own in the cooperative corporation
that typically owns the entire building, and the proprietary lease lets them occupy their
specific apartment.
As a result, co-op apartment owners are technically tenants, but also shareholders, of the co-op
corporation that is the landlord of the entire apartment building.
What does co-op title insurance cover?
Co-op title insurance protects buyers from any liens on the property that were missed
by the co-op lien search, and also provides protection against loss and legal expenses
from any claims on the buyer’s ownership interest (i.e. it guarantees that the title
is transferred “free and clear”).
Furthermore, co-op leasehold insurance insures that the cooperative corporation was duly
formed and actually holds title to the building and/or land.
Co-op title insurance also protects against any missed liens imposed by the co-op corporation
itself, such as delinquent monthly maintenance fees or co-op special assessment charges.
Perhaps most importantly, co-op title insurance covers the cost of legal defense, for which
there is no limit to the amount spent.
This means that while a standard title insurance policy will only cover the purchase price
of a property in the event of a claim against rightful ownership, there is no corresponding
limit on how much a title insurance company may spend to defend the policy holder.
As a result, title insurance companies on average spend about as much money on legal
defense costs as they do on actual payments on claims.
How much is coop title insurance?
A co-op leasehold insurance policy typically costs around 0.30% of the purchase price,
which consists of a sliding as well as a fixed fee component.
This compares favorably to title insurance for a condo or house which we estimate to
be between 0.40% to 0.50% of the purchase price per our buyer closing cost calculator
for NYC.
There are lower cost options for buyers who are more concerned about undiscovered liens
than claims against their ownership interest.
For example, co-op buyers can instead opt for a UCC insurance policy which includes
the co-op lien search fee and provides coverage up to the purchase price for under 0.10% of
the purchase price.
The co-op lien search provides some protection
A buyer’s attorney typically orders a co-op lien search to look for any open liens against
the seller, the seller’s stock and lease and the cooperative corporation itself, regardless
of whether the buyer intends to purchase co-op title insurance or not.
The title company that does the coop lien search will usually do a good job of discovering
all open liens, however, if there is an open lien that is missed, the co-op lien search
fee includes coverage up to $50,000.
However, anything above that amount wouldn’t be covered, which is one reason why co-op
title insurance can come in handy.
The market value rider
The market value rider is an additional endorsement that co-op apartment buyers can purchase which
protects their ownership against claims or liens incurred by previous owners up to the
full market value of the home.
This can be useful if the buyer expects the value of the home to increase in the future,
as co-op title insurance normally only protects the buyer against the original purchase price
of the home.
The market value rider is typically 10% of the cost of the title insurance premium, and
is also paid only once upfront.
An appraisal is done to certify the market value of the home in the case of a claim.
When co-op title insurance is necessary
Co-op title insurance is rarely used in NYC
Even though title insurance is required lenders when buying a condo or a house with financing
and is extremely common even for all cash buyers, it is rarely seen in co-op apartment
sales.
Banks don’t require borrowers utilizing a share loan, the co-op equivalent of a mortgage,
to get a co-op leasehold insurance policy, but real estate attorneys generally don’t
push buyers to get them either.
However, there are a few unique situations we’ve seen where buyers do tend to get co-op
title insurance.
When it’s an estate sale
An estate sale can be messy and having clear title may not be as straightforward as a regular
re-sale transaction.
For example, the executor of the estate may not have clearly identified all heirs and
beneficiaries.
In another common scenario, one of two siblings has taken over the sale process, but did not
get written consent from the other sibling.
As a result, the sale may go through without the consent of the other sibling which is
a serious issue.
If the seller lost their stock and lease
In a co-op sale, the seller is typically required to hand over the original stock certificate
and proprietary lease to the managing agent, who then cancels them at closing and re-issues
a new stock and lease to the buyer dated as of the closing day.
However, this can be a serious issue which can cause significant delays if a seller who
owns their apartment free and clear of a loan lost their stock and lease.
The managing agent may require the seller to pay for co-op title insurance to protect
the building management company in case of any potential future disputes around ownership
(i.e. the seller tries to sell the original stock and lease to someone else).
Contrary to what typically happens, the seller usually pays for the policy covering the managing
agent’s liability.
Of course, if the buyer wants co-op title insurance to cover themselves, they will have
to pay for it.
If an institutional lender is involved however, typically the banks will accept a Lost Stock
and Lease Affidavit and coop title insurance won’t be required.
When it’s a foreclosure
Risks to clear title increase for purchases of homes that previously been subject to foreclosure.
This is because previous owners could claim that the co-op foreclosure process was improperly
handled or otherwise illegitimate in some way.
This risk is magnified since the co-op foreclosure process is non-judicial, meaning that co-op
corporations do not need to go through a court process to foreclose upon a shareholder’s
stock and lease.
In New York, foreclosures are especially risky for lenders because the courts tend to be
very liberal in favor of borrowers, and it’s not unheard of for foreclosure proceedings
to drag on for 5 or more years.
When the buyer’s attorney is from out of town
The last situation we’ve seen where co-op title insurance is sometimes used is if the
buyer has an attorney from out of town who has no idea what a co-op is.
This is not entirely surprising considering that co-ops are indeed a very NYC focused
phenomenon.
In these situations, the out of town attorney may very well insist on the buyer getting
a title insurance policy.
Anyway, we hope you found this video helpful.
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Again, my name is Chris at Hauseit.
If you ever need help with buying or selling property in New York in order to save broker commission
up to 6% on the sell side and up to 2% back on the buy side. Please check us out,
www.hauseit.com
and we'll see you on the next one.