Let’s discuss the ins and outs of co-ops

Q: We are wondering if you could provide us with some enlightenment about the ins and outs of buying a co-op. We would also like to know about how we can get more information about the co-op, specifically the bylaws, financial health and board minutes without actually putting a contract on it.

Our daughter is ready to move out on her own and saw a co-op in a great development that seems to check every one of her boxes. The price is great. She loves the neighborhood and it’s the right size and even has parking. We were ready to encourage her to offer a contract that day but then realized that it has been on the market for 255 days.

Other apartments for sale in the complex, some of which had been beautifully renovated, have been on the market for at least that long and longer. The agent showing us the apartments said that it’s because it is a co-op and people in this area are used to condos and prefer that. They do have relatively high assessments but not too unreasonable.

We realize that one downside to a co-op is that you don’t have a chance to build as much equity as you do when you own a condo or house. But buying a co-op seems to make the place so much more affordable in the short-term. Nevertheless, we could not believe that people are not flocking to this development, which offers so much, and would like to know why this is before we offer a contract. We ran into two young men who live there (before we started having all these questions) and both said they really like the place.

My savvy sister lived in a co-op in New York, so we called her for advice. She said that co-ops (and condos as well) often have problems with the board that may not be obvious. She thought we should try to get a copy of the bylaws and minutes from the board meetings, see if board members have term limits, and find out if there are special assessments or if a mortgage is coming due. The agent was helpful and found that there was a special assessment. My daughter would probably have to pay about $7,000 based on what is remaining. However, he was not able to get us anything else. He did give us the name of the management company and asked a few people he knows, but everyone indicated that all is fine. What advice can you give us?

A: Most people living in urban areas are familiar with condominiums. Outside of New York, Chicago, and a few other cities, co-ops are less well known. But there are some specific differences between the two that often make co-ops less understood and less popular.

Condominiums are a well-understood form of real estate property ownership. In a condominium, the homeowner generally owns the interior space of the individual unit. You could say that a condo owner owns a box-like area made up of the floor, ceiling and the exterior walls and windows of the unit. Everything else is a common element.

In a cooperative building, also known as a co-op, the entire property is owned by the cooperative corporation, trust or other entity. The “homeowner” owns shares or other ownership interests in the corporation equal to their specific unit. The other owners own the remaining shares. The cooperative gives the homeowner a lease, which includes the right to live in a specific unit.

In a condo building, the unit owner pays their own share of real estate taxes. The condo building is assessed as a whole. Then, the tax bill is divided up according to each condo unit owner’s percentage ownership. Individual tax bills are sent by the local taxing authority to each owner.

In co-op, the building pays the real estate taxes for the whole building. Owners pay their share of the taxes as part of their monthly assessment. For this reason, assessments in a co-op are generally higher than a similar condominium unit. The assessments for both would include building utilities, maintenance expenses, common area expenses, building insurance and other expenses of the association. With a co-op unit, you’d then tack on that owner’s share of the real estate taxes for the building. It makes for a very unequal comparison, if you’re just looking at assessment numbers.

A third difference between condo and co-op buildings is how easy it is to finance your purchase. Condo loans are now quite easy. Just about every lender out there offers condo loans. But when it comes to a co-op, fewer lenders are willing to approve loans. Lenders can offload condo loans on the secondary market, while co-op loans may need to be kept on the lender’s books.

Finally, you can buy a condo just as you would a single-family home. But co-ops (and a few condos) often require that you provide your copies of your financials and go through an approval process. A lot of people don’t like to go through that bother. And some co-ops have a history of rejecting seemingly qualified applicants, which they can do without providing any reason. It can feel elitist and exclusionary, which many buyers and agents don’t like.

It may also be harder to find out the particulars of the co-op building’s finances and other issues. Condo and co-op buildings typically don’t hand out financial statements to anybody requesting them. You usually have to be an owner in the building, a lender in a transaction involving the building or a buyer under a contract to purchase.

Sam doesn’t feel there’s much difference between a condo or co-op when it comes to getting board minutes and financials from the buildings. We like co-ops and lived in one when we were first married. Ilyce grew up in a 1920s co-op on Chicago’s north side. Her family was in a well-run building with great neighbors, and she loved living there.

But sometimes you won’t know whether you have a good building or good neighbors until you move in. So, talk to people that live in the building. Read the minutes of board meetings. Understand it’s difficult to tell what people are really like until they’re your neighbors.

Also, in a condo or co-op, size counts. In a smaller building of 10 or fewer units, you’ll have to pick up some of the responsibilities of being an owner of the building. You may need to serve on the board, find vendors and contractors for repairs and handle the building’s affairs. Will you like working with your neighbors?

In a seller’s market, it’s unusual for any sort of home to sit for a long period of time. Typically, homes that sit are overpriced or there is a known problem with the building. In this case, you uncovered a special assessment. But to your sister’s point, that may not be the only issue. It could be that people compare the assessments of similar co-ops and condos on their face value and don’t understand what they’re looking at. The co-ops seem way more expensive, so buyers make an offer on the condo. Your daughter could get a great deal because of this.

Go online and do a search for similar properties in the neighborhood. If co-ops are sitting and condos are selling, we think that says quite a lot. As Ilyce likes to say in her books, “Imagine how tough it will be to sell this home before you buy it.”

If your daughter still wants to take a chance on the building, make sure her real estate contract provides an out. That way, if she doesn’t like what she sees when she gets the association documents and financials, she can move on.

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(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, a financial wellness technology company. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)