If you're shopping for a co-op, your financial information will be carefully scrutinized by the board. While this may feel nerve-wracking, in this case, financial scrutiny is a two-way street. In fact, if you're thinking of becoming a shareholder, it is essential to carefully consider the financial health of the building in question.
In this article:
Why a Co-op’s Financials Matter
If you're seeking financing to purchase a co-op, expect your lender to be nearly as concerned with your finances as they are with the co-op's finances. After all, if you are borrowing money to become a shareholder, the lender will want to determine how much the building is worth and if there is any risk of immediate or future insolvency. If the building poses a financial risk, they likely won't agree to finance the purchase, even if you possess a strong credit history. But this isn't the only reason a co-op's financials matter.Co-ops with little or no debt and demonstrated histories of savvy financial management are generally able to cover routine maintenance, unexpected upgrades, and even desirable but unnecessary capital improvements without imposing high assessments or hefty permanent fee increases on shareholders. While any co-op can raise fees, and most do so annually to keep up with the pace of inflation, as a rule, buildings with solid financials are better able to avoid the type of increases that price out current shareholders.
Common Red Flags
Given that a co-op’s financials not only impact one’s eligibility for financing but can also lead to sharp, unexpected fee hikes in the event of required repairs (e.g., a major façade repair), it is important to know how to spot common red flags.- The ratio of assets to liabilities. As a rule, if the building's assets (its current market value) are less than its liabilities (what it owns to lenders, tax authorities, etc.), you should think twice about proceeding with a purchase. In fact, in most cases, buyers should only proceed if and when the co-op has evidence of at least a 1:1 ratio of assets to liabilities.
- Annual operating costs. Another key consideration is operating costs. Are they generally stable, or do they fluctuate wildly from year to year? If there are fluctuations, it is important to understand why — e.g., was it due to a necessary repair, or due to newly elected board members opting to take on unnecessary projects?
- Itemized repairs. On a related note, potential buyers should pay attention to what the co-op is itemizing in their list of repairs. The more details a co-op can provide, the more likely it is that there will be no unpleasant surprises down the line.
- Rainy-day fund. There is no better way to assess the financial health of a co-op than to assess the building's reserves. Do they have any reserves, and if so, how deep are their reserves? If they have to replace a boiler or HVAC system or fund a major façade repair to comply with city bylaws, can they do so without passing on most or all of the costs to shareholders?
Putting Your Real Estate Attorney to Work for You
In the real estate world, New York State is known as an “attorney state.” In other words, you can’t close on a property without hiring an attorney. While an attorney’s presence certainly adds to one’s closing cost and can extend the time it takes to close on a property, it is important to remember that in New York City, attorneys aren’t just employed to redline purchase contracts and ensure all the right documents are signed before a property changes title. Another key part of any real estate attorney’s work is the unenviable task of reviewing the co-op board’s financials and minutes to ensure there is nothing questionable happening behind closed doors.In addition to looking for common red flags in a co-op’s financial statement, real estate attorneys typically dig deeper, scanning the co-op board’s minutes for other problems. Did a visitor slip on the sidewalk outside the co-op during an ice storm, and is it possible they will sue the co-op? If so, does the co-op have enough liability insurance to cover the cost? Finally, how might this impact the co-op's insurance premiums in the future? Likewise, any good attorney will scan the building's notes for other signs of instability, unrest, and wrongdoing. Are residents always fighting to take over positions on the board due to ongoing disputes? Do shareholders have vastly opposing views on when and how the building's resources should be invested or spent? While not always directly related to a building's financials, a co-op board's minutes can reveal a great deal about a building's unaccounted liabilities, resident infighting, and short- and long-term likelihood of engaging in potentially extravagant capital expenditures.
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Contributing Writer
Cait Etherington
Cait Etherington has over twenty years of experience working as a journalist and communications consultant. Her articles and reviews have been published in newspapers and magazines across the United States and internationally. An experienced financial writer, Cait is committed to exposing the human side of stories about contemporary business, banking and workplace relations. She also enjoys writing about trends, lifestyles and real estate in New York City where she lives with her family in a cozy apartment on the twentieth floor of a Manhattan high rise.
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