What are the risks to buying a co-op?
We'll discuss this topic in the following video, my name is Chris at Hauseit.
Hauseit is the largest For Sale By Owner and Buyer Commission Rebate company in New York
City, established 2014.
The first major risk to buying a co-op in New York City is the risk of having a corrupt
or inept co-op board.
For example, you're in serious trouble if you buy into a building where the co-op board
is utterly corrupt and one or more officers or board members are taking kickbacks or illegal
referrals from contractors for a large jobs in the building.
For example, the typical referral fee can be 25% or more for a job often given in cash.
Now, if a co-op board member is receiving a kickback, he or she may not bother to solicit
competitive quotes or even multiple quotes and as a result, the contractor who gets the
job as a result of the kickback maybe marking up the job significantly.
For example, in New York City and especially in Manhattan, it's not uncommon to see jobs
with the 6-figure price tag such as a $100,000 to repair part of a roof.
If that is the quote given and the board members do not bother to solicit additional quotes
because perhaps of a secret arrangement, well the board member may pocket $25,000 to him
or herself and the rest of the shareholders pay up.
Another risk is that the board members are simply incompetent or totally inept for the
job.
For example, some board members may retain power but they don't speak business English.
They may have a simple grasp of English but they simply do not understand anything related
to real estate and thus are effectively unable to cover or even respond properly to emails.
Lastly, a less insidious but just as deadly risk is buying into a building where the co-op
board is simply lazy.
We get it, everyone is busy in New York but this is a typical tragedy of the commons in
economic terms that we often see in New York City where board members all slack off in
the hopes that one other board member or someone else in the board will take over or spend
more free time governing the building.
Another major risk to buy a co-op is having poor building management.
Essentially, a managing agent that is corrupt, inept or simply lazy.
In this example, just like co-op boards, a managing agent can't be utterly corrupt and
accept kickbacks or referrals illegally perhaps in cash from contractors.
This means perhaps due to the fact that the managing agent is accepting in illegal kickback
or perhaps simply because the managing agent is lazy, the managing agent may not bother
to solicit multiple quotes or competitive quotes.
The managing agent may simply choose to reach out to the 1, 2 or 3 contractors that he or
she already knows quite well just to get an uncompetitive quote from a couple of places
and to present it to the board.
In another vain, a managing agent can simply not respond to you even if you are on the
board.
In this infuriating instance, the managing agent may only respond to one particular officer
such as the "President of the board" which for some bizarre reason, the managing agent
may feel has authority and even though you are on the board you effectively don't have
any power because the managing agent refuses to respond to any calls or emails from you.
Another less insidious but equally dangerous risk to having a poorly managed building is
a managing agent that is simply not on top of it and that is lazy or inept and doesn't
respond to letters or fines or a notifications from various city agencies in a timely manner.
In this case, letters may go unnoticed and fines can wrack up quickly with lots of penalties
for lateness and delays.
Another real risk to buying a co-op in New York City is the prospect of having a neighbors
who are utterly crazy.
Now this can range from neighbors who "power trip" and believe they have the power in the
world because they are on the co-op board.
In the sense, they do have a tremendous amount of power over shareholders and their day to
day life.
But you can also face crazy neighbors who have power by virtue of being in the co-op
board who simply are petty.
Perhaps, you didn't say hi to them properly or with enough enthusiasm in the elevator.
Or perhaps you held a party 4 years ago and there it have it be larger than the expected
or you did something else convenient to a board member.
Well, this person may actually hold a grudge against you for years and they finally excuse
to penalize for the slightest infraction of the co-op house rules.
Another major risk to consider in buying a co-op in New York City is the prospect of
the building being poorly managed from a fiscal perspective.
For example, if the co-op board and or managing agent doesn't bother shopping from multiple
and competitive quotes especially for a large expensive projects and if the co-op board
doesn't bother to push back on annual rate increases from various vendors or price check
quotes themselves.
Well, you might see constant increase in monthly maintenance fees much higher than the rate
of inflation and furthermore, you may even see some large unexpected often 6 figure special
assessment bills.
This brings us to a next topic.
Unexpected special assessments.
This is a significant risk to buying a co-op in New York City or anywhere.
For example, did your building recently fail a Local Law 11 inspection?
And is your building landmarked?
And will you immediately require facade repairs?
If so, the cost of major facade repairs can run into the hundreds of thousands or even
millions in New York City.
Divided amongst however many shareholders are in your building, this can represent a
significant and unexpected one-time bill to you.
Another significant risk to buy a co-op is the inability to sublet your apartment when
you need to move to another apartment.
Perhaps because you need to have a bigger apartment, because your family size is changing
for example.
Keep in mind that the sublet policy that was in place when you purchase the apartment may
change due to what the board decides the following year.
So, you may have purchasing apartment where you thought that you can sublet the apartment
through out of every 5 years but it turns out the following year the board decides to
restrict subletting altogether.
Keep in mind that co-op apartments are primarily designed for primary residency.
As a result, there are usually some form of restrictions of subletting i.e. renting out
your apartment.
Whether it be only 2 out of 5 years, only 2 years total.
Some combination of such or no subletting whatsoever or even in a very rare case, unlimited
subletting from day 1.
Last major risk we'll discuss to buying a co-op in New York City is the inability to
sell your apartment due to board rejection when you desperately need to sell.
Perhaps, you have already moved to another state, you've already purchased another home
and now you're having an empty apartment which you desperately need to sell and perhaps which
you can't sublet anymore.
In this case, it can be extremely infuriating and exasperating to be unable to sell because
the co-op board rejects your prospective buyers over and over again.
Remember that co-op boards have the right of approval and are able to reject a perspective
purchaser for any reason whatsoever.
Technically, as long as the reason is not discriminatory in nature.
Keep in mind, in practicality there is never any way to prove that a rejection was discriminatory
in nature because co-op board are not required to reveal the reason for rejection and for
liability reasons, they never do reveal the reason for rejection.
As you can imagine, if you have a petty member on the board who hates you for some reason
for something you did years ago and now you need to desperately sell, well, you may be
completely out of luck if that board member is able to influence a vote that the clients
or purchaser over and over again simply to teach you a lesson.
These are just some of the risks to buying a co-op that you should consider.
Please consult your lawyer and feel free to check out our general resources, our website
http://www.hauseit.com.
If you want to learn more about how to save money when you buy yourself property in New
York and how to save money on closing cost and broker commissions.
Check us out http:// www.hauseit.com or send us an email under team@hauseit.com, the spelling
is below.
My name is Chris at Hauseit and I hope to see you on the next one.