Buying real estate in New York City is a challenge, but even more, care must be taken when you are purchasing a co-op. Owning a co-op provides some benefits, such as not worrying about fixing the electrical/plumbing, or competing against foreign cash buyers to secure a home. But, we would like to use our experience to offer some potential pitfalls that you should know in advance.
1. Not using a buyer’s agent
The traditional real estate model is so ingrained; many do not realize there is another way. You should engage a buyer’s agent to help find your co-op. Under a traditional arrangement, the seller hires an agent, who lists the apartment and tries to find a buyer. This agent’s fiduciary duty is to the seller and does not represent your interests. His/her main goal is to sell the unit quickly and for the highest price. The agent’s commission is greater as the selling price goes up. But, there is another way. A buyer’s agent has a fiduciary duty to you. His or her only goal is to make sure you get into a co-op that is right for you for the right price. Also, a buyer’s agent knows his/her way through the nuances of a board package that is crucial to get right to make board approval more likely. Your buyer’s agent also helps you prepare for a board interview.
2. Not properly checking the building’s financials
Many people are turned off or intimidated by financial statements. You should not be one of those since you do not need to be a CPA to understand what is going on. But, what do you need to hone in on? You want to see that an accounting firm correctly audited the statements, mainly if it is a large building. When looking at the financials, start with the balance sheet. A key figure to look at is the cash balance. Ideally, there is an adequate reserve covering three to six months worth of expenses. If not, you may be charged a special assessment for an emergency such as a new roof or elevator repairs. You can also check how much debt the building carries.
Turning to the income statement, see the sources of income. Ideally, you want a significant portion to come from commercial rents, which help keep your maintenance fees down. You can also see the expenses to learn what the co-op is spending its money on.
The statement of cash flows is beneficial since it tells you how the co-op is spending its money. You want to see that it is generating positive cash flow. Otherwise, you can expect a hike in your maintenance fees down the road.
3. Not doing the rest of your homework
You have checked the building’s financials, and everything checks out. Are you in the clear? Sadly, the answer is no. You need to do the rest of your due diligence. Is the board involved in a series of lawsuits? You can check here. As part of your detective work, you should also read the board minutes as well as review the building board application to make sure you can provide everything needed for approval. A REBNY financial statement form or something similar is requested in all board packages. It is essential to start with this even before going to see a co-op. It allows sellers to compare the financial strength of competing buyers. The form lists your assets, sources of income, and debt/income ratio, among other things.
Your homework should also include doing a check of the building’s structure (you can ask to see reports or hire your engineer), while you can walk around the neighborhood and the building to see what it would be like living there.
4. Not presenting the right offer
You only get one chance to make the right impression. It is tempting to present a low ball offer, but in this market, it might be quickly rejected, and you may not get a second chance. Similarly, you may bid too high, and end up overpaying. Remember, if you engage a buyer’s agent, he or she is on your side. An exclusive buyer’s agent runs a comparable market analysis and is in the best position to advise you on the right offer. For instance, the agent will let you know if there are exceptional circumstances that he/she is aware of that can help your bargaining position. A couple of common ones are a pending divorce or if the owners are buying another property and may not want to have the burden of carrying both properties at the same time, thus looking to sell sooner rather than later.
Also with co-ops, it is not just about the price you offer but the package as a whole. You will be you in a competitive position if you work at a large company with a transparent history with supporting letters and documents. If you are a freelancer with less transparent past, this will likely cause the seller to have a concern on whether you will be approved by the board. A good offer with a well-compiled board package and supporting documents helps you get a board interview.
5. Celebrating too soon
Do not celebrate right after your offer has been accepted. It is tempting to pop the champagne corks, but you must resist. You must still pass the board’s interview. You should bring a copy of your board package to the interview and know your financial statements in case questions are asked.