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CO-OPS

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bullet TYPICAL TRANSACTION COSTS
bullet TYPICAL TIMELINE
bullet FAQS - HOW THE PROCESS WORKS

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TYPICAL TRANSACTION COSTS

Seller Costs:

Brokerage Fees:  If Seller is utilizing a broker, typical brokerage fees are 4-6% of the gross sales price.  If Seller is also buying a new home through the same broker then Seller may be able to negotiate a fee on the low end of the scale.  If Buyer has its own broker then the Seller will split the above fee with the Buyer’s broker.  The brokerage fee is paid at the Closing by the Seller.

Coop Fees:  The coop will often charge the Seller a few miscellaneous fees like a move-out fee (typically $500), a transfer fee to the managing agent (typically $200-$400).  Sometimes there is also an additional refundable move-out fee that the Seller retrieves once the move-out is complete (typically $500).  Some coop buildings have a “flip tax” which can vary widely and be quite expensive.  These flip taxes are sometimes tied to a percentage of the selling price (typically 1%) or a dollar amount multiplied by the number of shares the Seller owns in the coop.  Sellers should check with their managing agent for the existence and amount of any flip taxes charged.

Transfer Taxes:  If the Co-op is in the City of New York, NYC charges a transfer tax of 1% of the gross sales price for units selling for $500,000 and under and 1.425% for transfers where the gross sales prices is over $500,000.  NYS charges a transfer tax for all coop units sold in New York State.  The tax is $4 multiplied by each $1,000 of gross sales price.

Bank Charges:  If Seller has a loan to repay, then Seller should expect to pay the outstanding balance of the loan from sale proceeds at closing plus interest calculated per day from the first of the month through usually a day or two after the closing (to give time for the check to get to the lender).  The Bank will also charge for its attorneys to attend the closing.  This fee varies but is usually about $500.

Adjustments:  At closing the maintenance charges for the coop unit for the month in which the closing occurs and any special assessments due to the coop (if any) will be adjusted between Seller and Buyer based on the number of days in the month prior to closing (paid by Seller) and the number of days in the month from closing until the end of the month (paid by Buyer).  If the Seller has already paid these charges for the month then Buyer will reimburse Seller for the Buyer’s share of such costs for the month.

Legal Fees:  Seller’s counsel typically charge fees ranging from $1,600 to $2,500.

Utility Accounts:  Although not in the nature of closing costs, Seller should arrange to close its accounts with all utility companies as of the date of delivery of possession of the unit and provide the name and contact information for the Buyer.


Buyer Costs:

Coop Fees:  The coop will often charge the Buyer a few miscellaneous fees like a move-in fee (typically $500), an application fee (typically $250-$300), a processing fee to the managing agent (typically $250-$400), and a recognition agreement fee for a standard agreement between the coop and the bank if Buyer is obtaining a loan (typically, $250-$400).  Sometimes there is also an additional refundable move-in fee that the Buyer retrieves once the move-in is complete (typically $500). 

Bank Charges:  If Buyer is financing then the Bank will have several charges which can vary widely depending on the bank and structure of the loan.  Such fees may include an application fee ($250-$500), a credit check fee ($50-$100), an appraisal fee ($350-$500), a processing fee ($300-$400), lender’s counsel fee ($600-$1,000), so-called points or buy-downs of the interest rate (check with lender if these types of fees apply).  The Bank will also charge short-term interest (i.e. the interest due on the loan from the date of closing to the last day of the month).

Transfer Taxes: If the purchase price is $1,000,000.00 or higher the Buyer is required to pay to New York State a so-called mansion tax equal to 1% of the purchase price.  In the case of newly constructed cooperatives, the Seller tries to pass on to Buyer certain transfer taxes which are normally the responsibility of Seller.  Whether or not these other transfer taxes are paid by Buyer can be negotiated.  See Transfer Taxes under Seller Closing Costs above if the Buyer will be required to pay these taxes.

Adjustments:  At closing the maintenance charges for the coop unit for the month in which the closing occurs and any special assessments due to the coop (if any) will be adjusted between Seller and Buyer based on the number of days in the month prior to closing (paid by Seller) and the number of days in the month from closing until the end of the month (paid by Buyer).  If the Seller has already paid these charges for the month then Buyer will reimburse Seller for the Buyer’s share of such costs for the month.

Legal Fees:  Buyer’s counsel typically charge fees ranging from $1,600 to $2,500.

Lien Search:  Buyer’s counsel will order a lien search on the co-op, Seller and Buyer.  The cost is typically $250-$300.

Homeowners Insurance: In a cooperative Buyer does not need insurance to cover the building or his unit burning down because the cooperative corporation maintains such insurance and the cost is included in the monthly maintenance charges.  But such insurance does not cover personal belongings or appliances in the unit.  So a lender will require that Buyer maintain insurance in an amount necessary to replace personal belongings and appliances in the unit in the event of a fire or other catastrophe.  It’s a good idea to obtain this insurance even if a lender does not require it. 

Utility Accounts:  Although not in the nature of closing costs, Buyer should arrange to open new accounts with all utility companies as of the date of delivery of possession of the unit.

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TYPICAL TIMELINE

The following is meant to be a representative timeline for closing a coop purchase or sale.  Each transaction is different and a variety of factors may affect the overall closing timeline for each individual transaction.

Day

Major Activity

1

Purchase offer accepted by Seller

2-3

Seller’s broker prepares and distributes a “set up” sheet which has the names and contact information for Seller and Buyer as well as the attorneys and brokers for each side.  The set-up sheet also includes the purchase price, monthly maintenance on the coop, agreed to estimated closing date and amount to be financed by the Buyer.  If there is no broker, then the Seller and Buyer are responsible for making sure that attorneys are contacted and have all necessary information on the transaction.

3-5

Seller or Seller’s broker deliver the coops offering plan and financial statements to the Buyer’s attorney for review.

3-5

Seller’s attorney drafts contract and sends to Buyer’s attorney for review.

4-7

Buyer’s attorney reviews offering plan, financial statements and contract terms with the Buyer.  Buyer’s attorney may also visit the managing agent of the coop building to review building history and board of directors minutes of meetings to see if any information regarding the building management may be of concern to the Buyer.

5-7

Buyer’s attorney works with Seller’s attorney to resolve any disagreements in the proposed contract of sale. 

7-9

Contract is signed by Buyer and returned to Seller’s attorney with a contract deposit of 10% of the purchase price to be held in escrow.

7-10 Seller and Seller’s attorney (as escrow agent) sign contract and return at least one original to the Buyer’s attorney.
10-22

Buyer applies for a loan for the portion of the purchase to be financed.  (Typically, Buyer has already made contact with a lender long before the contract is signed or the unit for purchase is even identified.  This is highly recommended.)

10-22

Buyer completes and submits the completed coop application packet with all enclosures.  This is an intensive process that typically requires tax returns, bank and investment statements, verification of employment, personal letters of reference and other documentation and information.  The Buyer’s broker often assists and provides guidance during this process.  Typically, the Buyer’s attorney is not much involved in the application process unless specific questions of a legal nature arise.

10-15

Buyer’s attorney orders a lien search on the co-op building, the Seller and the Buyer to be sure that there are no problems with the anticipated transfer of title to the unit.  Buyer’s attorney arranges for the Seller and lender attorneys to obtain a copy of the lien search when it is completed.

10-30

If Seller has a loan on the coop, Seller should contact its lender to obtain a pay-off letter and ask that the loan file be sent to lender’s counsel to prepare for closing.  The lender will need to know the estimated closing date and Seller should feel free to use the estimated date set forth in the contract, although the actual closing date may vary.  If Seller does not have a loan on the coop, then Seller should locate the original stock and proprietary lease for the unit.  If these important original documents cannot be located or are not in the Seller’s name (by reason of an inheritance or other circumstances) the managing agent of the co-op should be contacted to arrange for duplicates originals in time for the closing.

20-45

Buyer obtains a loan commitment.  Buyer’s are advised to make sure that, if a loan commitment is delayed, their rights under any mortgage contingency clause are not inadvertently waived by the failure to extend the timing in the contract for obtaining a loan.  The Buyer should check with his attorney for more information.  Once received, the Buyer should review and then sign and return the loan commitment to the bank and satisfy any additional documentation or other requirements that are listed in the commitment to be satisfied prior to closing.  This is important since the bank will not schedule a closing until all such information has been received.  So the Buyer should pay close attention to these matters until Buyer has received a “clear to close” from its lender.

30-60

Coop board interview/approval.  Most coops require a short, personal interview with one or more board designated representatives before final approval takes place.  Typically, if a coop purchase is subject to the Buyer obtaining financing, the review of a co-op application will not begin until the Buyer submits the full application with all attachments including the mortgage commitment letter.  Since it can take 30 days to obtain a loan commitment letter, this pushes out the board review of the application to a month after contract signing.  Depending on the time of year (summers are the worst) and the diligence of the coop board, the review process (including the personal interview) can take a minimum of 30 days or more.

45-60

Coop board approval and a “clear to close” from the Buyer’s lender should be obtained within this time frame.  Buyer and Seller’s attorney should be notified so that the closing can be scheduled within this time period.

Before the Closing

Buyer does a walk-through of the unit once the Seller vacates the unit to be sure that the unit is in the condition required by the contract of sale.  The Buyer’s broker typically arranges for the walk-through and accompanies the Buyer on the walk-through.

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FAQS - HOW THE PROCESS WORKS

I have an accepted offer. What is the next step?
If there’s a broker involved, the broker prepares what is called a “set-up sheet” which lists all of the parties and their contact information- including Seller and Buyer attorneys, the brokers, and the managing agent of the coop. The set-up sheet will also list the purchase price, projected closing date and other important terms of the deal. All information on the set-up sheet must be accurate because the attorneys will rely on it in preparing and reviewing the contract. So both parties should make sure that their names are spelled correctly and as they want their names to appear in the contract. The set-up sheet is distributed to everyone on it. Next, the Seller’s attorney prepares the contract while the Buyer’s attorney reviews the building’s financial statements and the offering plan, bylaws, house rules and minutes of the coop board of director meetings- all to see whether there are any issues about the buildings physical or financial condition or policies that might be of concern to the Buyer. The Seller needs to provide the financial statements and offering plan in his file (from when he purchased) to the Buyer’s attorney for review. Seller can send this information to his broker (if he has one) who will pass it along. If Seller cannot find these items he may have to purchase an additional copy from the managing agent to provide to the Buyer’s attorney. If the building is being built brand new, then there will be no separate financial statements or minutes to review and Buyer’s attorney will review the offering plan which contains projected monthly financial expenses of the building and a summary of the building’s current physical condition.


As a Buyer, do I need to have the apartment inspected by an expert?
Physical inspections by experts are not typically done in the case of coops and condos. As noted above, Buyer’s attorney will look through recent Board of Director meeting minutes to see if the Board recently discussed any increases to monthly maintenance charges or large items of expense coming up for repair or replacement, such as the building’s boiler, brick work or the roof. But in the apartment are only appliances, plumbing fixtures, electrical outlets, windows, heating system and, perhaps, air conditioning. As Buyer walks around the apartment, he should check these things out. Turn the appliances on, open the refrigerator, open and close the windows, check the walls and ceilings for evidence of leaks, turn on the water in the sinks and tubs. If Buyer notices anything not working then he can specifically mention them to his broker and attorney to insist that the contract provide that such items be fixed before closing. The contract will also have other clauses to protect the Buyer (see below). It’s also a good idea to visit the unit a few times during different times of the day/night. The Buyer may notice things about the unit and the building that weren’t apparent at other times of the day.


How do I arrange for a mortgage?
If the Buyer is planning to finance any portion of his purchase, he should check out ads in the newspapers for residential mortgage loans. The Buyer can visit the residential loan websites of the major banks like JP Morgan Chase, Bank of America, and Wells Fargo. If the Buyer wants more variety or has a special circumstance, then the Buyer should ask his broker or attorney to recommend a reputable mortgage broker who will have access to a wider variety of loan options. Buyers should not go to a bank which is not well known or to a mortgage broker who has not come well recommended by someone the Buyer trusts. There are many horror stories out there of high fees being charged and obscure lenders and brokers not coming through with a promised loan.


The Seller wants to see a lender pre-approval letter. How do I obtain one?
A pre-approval letter is a letter from a lender that basically says how much of a loan the Buyer can afford and be approved for based on the annual income and financial standing of the Buyer. It does not approve a specific apartment, since that will depend on obtaining an appraisal of the apartment and approval of the building by the lender. But it gives Seller, Buyer and lender some comfort that the Buyer can actually afford and be able to obtain a loan of a certain dollar amount. It is advisable for Seller to request that the Buyer provide a pre-approval letter if Seller has any doubt whether a prospective Buyer can actually obtain a loan or pass the coop board’s screening process. It is also advisable for prospective Buyers to obtain such a pre-approval letter from a lender during the home search process in case Seller requests one or if there is any doubt in the Buyer’s mind about how high a mortgage the Buyer can afford. In some cases, if a Seller is still not confident that the Buyer can obtain a loan or be approved by the coop board, the Seller should not be shy about asking the Buyer to provide a recent tax return and/or a summary of assets and liabilities for Seller to review. After all, the coop board will be requesting these items anyway during the board approval process so the Buyer should not be shy about providing some of the same information to the Seller before the contract is drafted.


What if the Buyer can’t obtain a loan to close after entering into contract?

For the Buyer’s protection, we recommend that Buyers request that a “mortgage contingency clause” be included in the contract if the Buyer plans to obtain a loan to finance a portion of the purchase price. This is a clause placed into the contract that provides that the deal is subject to the Buyer obtaining a loan commitment from a lender in a specified dollar amount within a specified time after contract signing. With this clause, if Buyer is unable to obtain a loan commitment within the period of time (typically, 30-45 days) then the Buyer has the right to terminate the contract and the downpayment will be returned to the Buyer without penalty. In a Seller’s market (i.e. a market where prices are high and home inventory is low) or when there are multiple offers on the unit, Sellers typically do not want this clause in the contract. A Seller wants the Buyer to take the risk that the Buyer won’t be able to obtain a loan and will thus lose the downpayment to the Seller. In a Buyer’s market (i.e. a market where prices are dropping or weak and inventory is high) or at time when the mortgage market is uncertain, these clauses are routinely included in the contract if the Buyer intends to finance the purchase.


When does the Buyer have to put money down and how much?
We do not recommend that Buyers put any money down until contract sig
ning. Some brokers try to get the Buyer to put some money down when the offer is made. Such “binders’ are non-binding anyway and provide no real benefit to the Seller or the Buyer. In New York, the use of so-called “binders” or “good faith deposits” is not commonly done, as it is elsewhere in the country. Once the Buyer and Seller have agreed to a purchase price and the Buyer is signing the contract (which has been reviewed and approved by both Seller's and Buyer’s attorneys), then the Buyer will be required to give a personal check for 10% of the purchase price made payable to Seller’s attorney, as escrow agent, and which sum is credited to the purchase price at closing. In unusual circumstances the downpayment can be negotiated to be lower than 10% (such as if the Buyer is getting more than 90% financing). The contract is typically signed by the Buyer first and sent to Seller’s attorney with the downpayment check. The Seller and his attorney (as escrow agent) then sign the contract and the check is deposited into the Seller attorney’s escrow account. At least one original of the fully executed contract is then returned to Buyer’s attorney. Even with an accepted offer, the deal is not binding on either side until both Buyer and Seller have signed and returned the contract to the other party.


Can the Buyer get his downpayment back if the deal doesn’t close?
Basically, if the deal is cancelled for any reason other than the Buyer’s default, the Buyer is entitled to the return of the downpayment. So, as noted above, if the contract is contingent on the Buyer getting a loan and the loan commitment is not obtained, then the downpayment is returned to the Buyer. Similarly, if the coop board does not approve the Buyer to purchase the unit, then the deal is terminated and the contract provides for the downpayment to be returned. If the situation gets complicated and Seller makes allegations of bad faith by the Buyer (such as that Buyer failed to use good faith efforts to try to get a mortgage or obtain coop board approval), or the Buyer otherwise defaults under the contract, then the return of the downpayment may be in jeopardy. But if there is any dispute as to who is entitled to the downpayment, the Seller’s attorney is not permitted to release the funds to either Seller or Buyer until authorized by both parties or a court involved in any litigation over the matter. So, if a dispute arises, the Buyer’s downpayment should be safe in the escrow account until the dispute has been fully resolved.


What is the coop board approval process like and how long does it take?
Many people find the coop board approval process to be stressful and invasive and this is one of the downsides to buying a coop unit. Once the contract is signed by both parties, the Buyer’s broker or the managing agent for the building will provide Buyer with the application packet. The packet typically requires a wide range of financial and personal information including two or more letters of reference from employers and personal contacts, bank statements, tax returns and other requested financial and personal information. Much of this information the Buyer will need for his mortgage application anyway, so the Buyer should be assembling such information during the home search process. Once the coop managing agent receives a completed packet- and once the Buyer has obtained a loan commitment- the application will be reviewed and a short in-person interview with one or more members of the coop board will be scheduled. The entire process can take up to two months- sometimes longer during summer months when coop board members may be on vacation. A Buyer cannot control the length of the approval process except to get the entire completed application and loan commitment to the managing agent as early as possible for review.


Once coop board approval and a loan commitment are obtained, are we ready to close?
You are very close. The mortgage commitment will often be conditioned on the Buyer signing and returning the commitment with whatever items are listed in the commitment that are then still outstanding. Only then is the loan commitment binding. Once Buyer sends the commitment back to the lender and supplies those outstanding items, the Buyer should call the lender and ask if the Buyer is “cleared to close”. When Buyer obtains such clearance, the Buyer’s attorney can then arrange for the closing with the new lender, the coop managing agent and the Seller.


As a Buyer, do I need a title search of the unit?
Title searches are not used for coop units because coop units are not real estate. Technically, a Buyer doesn’t buy the unit. A Buyer buys shares of stock in a corporation which owns the entire building and signs a “proprietary lease” which gives the Buyer the right to occupy a specific unit in the building. Instead of a title search, Buyer’s attorney or the bank orders a “coop lien search”. This is a search of the public records against the coop unit, the building, the Seller and the Buyer to see if there are any liens or judgments against any of such interests. If any liens or judgments come up against the coop unit or the Seller, they may have to be cleared up before closing. The attorneys will handle this process.


As a Seller how do I payoff my existing loan on the unit?
Well before the closing the Seller should contact his lender at the number on the lender’s monthly billing statement to let the lender know that the unit is being sold and ask for a “pay-off letter” and for the lender to send Seller’s loan file to lender’s attorney to attend the closing. Seller should be prepared to give the lender an estimated closing date (it doesn’t have to be exact). The lender will generate and send Seller the payoff letter in a few days. Seller should ask the lender for the name and contact information of the attorney that will be representing the lender at closing and Seller should pass this contact information on to his attorney. Seller should also let his existing lender know that Seller’s loan file- including the original proprietary lease and share certificate that the existing lender is holding as collateral- should be sent to existing lender’s attorney to bring to the closing. It can take two weeks or longer for the lender to locate the loan file and send it to lender’s attorney, so this is an important item that needs some advance planning.


When should the Buyer conduct the final inspection of the unit prior to closing?
Before the closing the Seller must remove all of his possessions from the coop unit and once that is done, the Buyer needs to carefully inspect the unit to make sure it is in the condition required by the contract. Typically, this means that the unit should be broom clean, vacant and all appliances, plumbing fixtures and electrical outlets are in working order and the unit is free of leaks. However, the exact terms of the contract govern the required condition of the unit prior to closing. If Buyer notes anything amiss or anything significantly damaged, the Buyer should check with his attorney to see if he is entitled to a credit at closing for the damaged or non-working item. If Buyer and Seller agreed in the contract that any particular item of furniture or personal property was to be included and it isn’t in the unit at the time of final inspection, Buyer should mention that to his attorney before closing. Also, Buyer should check to see if the Seller left the manuals and warranties for the appliances and other equipment in the unit. Sometimes the Seller cannot find such items. If that’s the case, and the affected appliance is not new, the Buyer usually does not make a big issue of it.


Where is the closing held and what do I bring with me?
The closing is usually held at the office of the managing agent for the building. Buyer and Seller will need to be present and have picture identification. A driver’s license or passport usually serve as identification. If any Seller or Buyer will not be present at the closing then a valid power of attorney will need to be prepared by such party’s attorney and signed and notarized in advance of the closing. The balance of the purchase price with apportionments, fees and expenses will need to be paid by the Buyer at the closing (See Typical Transaction Costs for more information on Buyer’s apportionments, fees and expenses.). The balance of the purchase price is paid as requested by Seller to Buyer’s attorney a few days before the closing. For example, the Seller may wish that the Buyer direct part of the purchase price due from the Buyer to pay off the Seller’s existing loan or to pay the brokerage fees. However Seller directs the Buyer to pay the balance of the purchase price due doesn’t really matter to the Buyer as it doesn’t change the amount due from Buyer, and all sums so paid by Buyer or its lender from loan proceeds will be a credit against the purchase price due regardless of how directed. There are also a variety of fees for the Seller to pay (See Typical Transaction Costs for more information on apportionments, fees and expenses). Seller and Buyer’s attorneys typically work together to determine what payments will be necessary for the closing and to whom such payments should be made. Each of the attorneys will typically prepare for their client a preliminary closing statement a day or two before the closing and advise their client about the payees and amounts of any bank or certified checks which must be brought to the closing. Both Seller and Buyer should also bring their checkbook for other fees and charges which can be paid by personal check at the closing. Also, the Buyer should bring his loan commitment to the closing and any other items of correspondence or notes that Buyer feels may be important or relevant to any issue that may come up. Seller should bring to Closing all keys to the unit, building and mailbox.


What if the Seller wants to remain in possession of the unit for period of time after the closing?
This is not an unusual circumstance but it does introduce some complications. The attorneys can draft a possession provision into the contract or at the closing which outlines the specifics of how long the Seller can stay, how much the Seller will pay to the Buyer per day of possession and how much will be held in escrow by Seller’s attorney to insure that the Seller pays the sums due and vacates the unit in good condition when the Seller leaves the unit on the agreed date. Obviously, if the Seller is staying in possession after the closing it may not be necessary for the Buyer to conduct a final inspection of the unit prior to closing because the Seller is not yet out of occupancy. The final inspection would be postponed until the date that Seller actually vacates. But typically enough money is left in escrow with Seller’s attorney pending final delivery of possession to address any issues regarding the condition of the unit when final delivery of possession occurs.


As a Buyer do I need to obtain homeowners insurance?
In a cooperative the Buyer does not need to obtain insurance to cover the building or his physical unit against fire because the cooperative maintains such insurance for the entire building and the cost is included in the monthly maintenance charges. But such insurance does not cover the Buyer’s personal belongings or appliances in the unit. So a lender will usually require that the Buyer maintain insurance in an amount necessary to replace his personal belongings and appliances in the event of a fire or other catastrophe. It’s a good idea to obtain this insurance even if a lender does not require it.

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