Co-op vs. Condo Risks: Worst Case Scenario

My advice: Look for a pre-war condo. That's what we are doing.

nyc real estate novice here - but I thought that there are very few pre-war condos in manhattan.

Thanks for introducing this topic, Katie. I will definitely be listening in to what people have to say. There is risk in every single real estate transaction.

Condo risk is similar to coop in that if people start defaulting then must start worrying about common charges going up. Nice thing about coops is that because owners have so much skin in the game, dont have to worry about slips gone bad where people never should have been buying in the first place. In a sense coop boards made sure ownership is solid.

That said, if you want to sell a coop can be brutal and drive prices down. Also, if you need cash can cannot sell they don't allow renting, so you are in a bind.

I think generally people say that condos trade at a 10% premium to coops.

Coops generally have waiting periods before allowing shareholders to rent out. The usual holding period is two years and there could be restrictions on how long you're allowed to rent the unit. It depends on the coop, of course. Coops can also relax these rental restrictions if owners are caught in a tough market and cannot sell. So, it is not ironclad, in most cases.

I wish I could find condos at just a 10% premium over my coop space but I have not seen that in the marketplace. Usually, the condo units strike me as being smaller than the units I could get in a coop.

another problem with coops has to do with the strictness of the boards in terms of renting. Some boards are very inflexible and it can really harm you if your status changes and you need to be abroad or would like to leave town and come back. a forced sale in an off market would be devastating.

There are a few prewar condos. Depends on where you are looking. I know a couple on the UES.

Katie-- I am kind of an old-fashioned broker (and I usually don't work north of 59th, which is probably where your Classic Six is) but I think that some buildings are better than others . . it's not just a question of the type of ownership that you're comfortable with . ..I'll let others address that . . but it's also a question of the finances and governance of the building. Is a condo with poor board control, such that the board doesn't have power to pass needed assessments and properly maintain the building, a lesser risk than a well-run co-op? I don't think so.

A good realtor or real estate laywer should be able to give you some specifics on buildings that you like. Once you are fairly serious about target buildings -- usually after making an offer but prior to going to contract -- you can sit down and read their financials. That's pretty much just like researching a company whose stock you might want to buy.

In general, for a "good" building, whether co-op or condo, you want to look at questions like -- How does the board respond to varying financial circumstances? (for example, did they refi the underlying mortgage when rates were low? Did they take advantage of the relaxation of 80/20 to provide more commercial income?)

You can also get good answers to some of your questions by meeting people in your target buildings, and picking their brains about issues of financing and governance.

ali r.
{downtown broker}

Let's put a little bit of perspective on the talk of "risk" for coops. The history of NYC coops shows as entities they fair extremely well. I believe NYC history is just not littered with failed coop stories. Condos may be another story, but condos aren't my area. If I had to bet on a 40 year old coop or a new condo development in terms of economic security, I'd go with the tried and true track record of the coop. New condos with zero vetting of buyers, tax abatements that expire and rising monthlies that may not have been figured into the budget of new owners, amenities that have to be cut as the sponsor stops paying for them and owners have to face the reality of what a triple-tiered roof lounge with concierge actually cost...all are not plusses in my book. Condos do offer more flexibility, but let's not get carried away here with made-up financial risks of NYC coops which historically are remarkably stable.

From what I see, co-ops are more secure investments in a DOWN market. In an UP market, condos are the better investment. Right now many condos are getting slaughtered. Look at 20 Pine. THey have a 50% discount if you buy 80 units. Will a co-op ever offer the same discount? HECK NO!

ali,

What makes you think the class 6 mentioned by the OP is north of 96th? Just curious...

never mind. I read the 59 backwards.

Don't agree with you alpine. First of all, not all condos are new development. Secondly, coops should be more price sensitive because owners can't rent them if they get in financial trouble.

When I wrote condos have better appreciation in up markets, I was thinking of new condos.

"Don't agree with you alpine. First of all, not all condos are new development. Secondly, coops should be more price sensitive because owners can't rent them if they get in financial trouble."

I'm sorry, this depends on the specific coop. You can't make a blanket statement that coops will not let you rent if you get into financial trouble. I think the boards will consider it on a case by case basis or look at the overall market when relaxing standards. There is not necessarily some hard and fast rule in coops with regards to renting. It depends.

I think kylewest makes a lot of good points with regards to the stability of coops. Rising costs are what nail people because most people have incomes that do not increase dramatically. A stable coop with slow rising costs is a pretty stable form of ownnership. People can always get in trouble, of course.

I would like to see some comparisons between old condos and old coops as pertains to building maintenance and financial stability. How many old condos are there? What would be considered old?

SPECIFIC QUESTION: I liked the OP's angle on worst-case scenarios.

Can people talk more about what happens in the event of bankruptcy of individual coop owners vs individual condo owners? (I'm talking about existing condos, not under-construction new buildings.) My questions are things like: How long does the Board (coop vs condo) have to wait before it can force a sale of the unit? What recourse does each type of board have if someone is not yet bankrupt, but stops paying their mortgage? Or stops paying their common charges? If non-Board unit holders don't like how the Board is responding to a financial difficulty, how much influence or recourse do they have? What if a condo or coop unit owner ups and leaves, and just lets the bank deal with their unit? Does the bank's position as a creditor give it any influence over what either type of board does with the unit?

Thanks in advance for info. It seems to me NYC could easily see, say, over the next 2 years, some buildings where maybe 2 or 3% of owners of units in a building get into financial trouble (not all at once, but over a couple of years), and can't find suitable buyers to sell to. That would mean a steady stream of units in some degree of trouble. And since this economic downturn is so unusually broad-based, it seems that buildings that rarely had these issues before in past downturns may start dealing with them for the first time.

Thank you for the lively discussion! Can anyone address the systemic risk of ownership in a co-op – the reason boards attempt to exercise so much financial control? What happens when many people cannot keep up the cost of their apartments? Is that the worst case scenario?

Kyle, good point about the rarity of failure. Searches turned up few examples.

This article sets out the type of risk inherent in a co-op which, as I understand it, just does not exist for a condo because you own your apartment.

http://query.nytimes.com/gst/fullpage.html?res=990CE7DA143AF931A35757C0A963958260
IT is every co-op owner's worst nightmare: The building falls into default on its underlying mortgage. Then the bank moves to foreclose. Then the co-op files for bankruptcy. Then the judge sells the building, effectively liquidating the shareholders' equity and turning every apartment owner into a renter.

Ali also makes a good point that a purchaser only has to assess risk on one purchase, not co-ops in general. To that end, what are good indicators of solid financials? Are there co-ops with no underlying mortgage? How many months of operating expenses should the reserve fund be able to cover? Is there a place that rates buildings? (maybe S&P and Moody's can collect a fee for rating them all AAA ;) ).

And yes, a pre-war condo might be ideal, but they are so few and definitely more expensive.

Katie - I think there is risk in any transaction and I am not trying to give the impression that buying a coop is without risk, but I do believe there is much less risk buying an apartment in a well-run coop than most condo buildings. Many people who own in coops have put 2 years of maintenance into escrow when they purchased, which gives a 2 year safety-net that you will not find in any condo.

The link you provided is more a rare exception than the rule when it comes to coops. I would imagine that you can find many more examples of condos that have had financial trouble in the last 15-20 years than this building in Bay Ridge in 1996.

FWIW, Katie, you seem more concerned about the fact that you would own shares in the corporation instead of the apartment itself.

Kylewest - Thanks for the great points.

Yes, great discussion, it is conversations like this that make the site worthwhile. Whether condo or coop, you are tying your fortunes to the fortunes of other people and possibly putting yourself at risk. Just because you have title to real property in a condo, does not mean you could not face hardships if buyers default, common charges shoot up, and the building services and amenities can no longer be maintained.

I think there are a number of condos like this in Florida, the current owners are faced with huge costs, nobody can sell, nobody will buy, and the services cannot be supported.

I know of people who will not buy into either coops or condos, and will only buy single-family homes in the suburbs. Of course, neighborhoods anywhere can fall into disrepair and owners can lose their homes to foreclosure. I think this is especially true in neighborhoods of new developments where people have not built up a cushion to get themselves through the tough times.

How defaults work depends on whether you borrowed money to buy your co-op in the first place. If you borrowed money, then it's in the terms of your mortgage that a default in your maintenance payments 1) is a default of your mortgage and 2) that the bank can step in and cure it on the way to its foreclosure.

If you did borrow money, and you don't pay your maintenance, then the co-op board notifies your bank, and the bank steps in and pays your maintenance (which makes the building whole), and then forecloses on you, so that the bank becomes the shareholder.

ali r.
{downtown broker}

Buildings like the Orion, and certain other recent condo buildings are highly risky--not because they are condo, but because people own at a basis of 2006 and 2007 prices. Often times buyers leveraged 90%, and many are amateur real estate investors who were playing the boom. I couldn't think of a less stable investment--but one day picking up one of these units in foreclosure may be an excellent investment.

There is a reason that all new buildings (besides land leases ones) are structured as condos. They are easier to sell and it is not because of the coop board process. Sponsors of coops don't vet people they sell to. It is only re-sales that are reviewed by Coop boards. The reason condos are preferred is that they are real property with greater rights of ownership. Give me a fully sold, fully seasoned (not all sold yesterday) condo any day.

Maybe there is a realestate attorney who can tell us if a condo defaults,I thought the bank which has the mortgage has to pay the taxes and common charges?But a coop since it is shares has to pay the common chearges?

waverly, you're right. Owning the shares is what makes me uncomfortable. Is the 2 years of maintenance drawn down each month, or does it stay there for when you need it? That would make me feel better. I agree the link I posted is a very rare example. It was only meant to illustrate how the worst case scenario plays out.

I have a logical problem with using historical stability as an argument. What factors do people believe account for the stability? Have these factors been diminished by the current extreme economic circumstances? For example, I understand some buildings have large reserve funds. That would help us sleep better at night.

Thanks Balzac. We posted at about the same time and you asked good questions. As I understand it, co-ops don't go through the same foreclosure process because it's not real property but I'd like to learn more if anyone has the info.

Also, I like that you state your assumptions. I think 2-3% is fairly conservative. It sounds like people expect condos to have much higher rates. So everybody, how does it play out?

"How many old condos are there? What would be considered old?"

This is a good question 407PAS. To limit risk in this market, my preference would be to buy into an established condo without tax abatement, high % of owner occupied units, good financials (cash on hand), track record of improvements, and stable unit turnover. I also think it is a good sign when there are a number of family units in a building that have been combined from smaller units. The age of the condo is irrelevant if you keep these things in mind. What you want is commitment to the building with the ability to rent your unit if things get dicey for you personally.

Instead of just asking for proof that two years' of maintenance be "liquid" -- i.e. in a non-retirement non-equities type account, sometimes a board will ask that maintenance be escrowed up front.

Few boards are asking for two years; six months' to a year is more common.

If that's the case, the maintenance sits in an attorney's escrow account. Purchaser pays their maintenance each month out of current funds, and the escrow is disturbed only if purchaser defaults on maintenance.

On the negative side for the buyer, they may get the board to release those escrowed funds after they demonstrate a payment history/better financials -- or they may not get those funds back until they sell.

ali r.
{downtown broker}

I was going to make a remark similar to what front_porch said. I think the escrow comes into play depending on the candidate. If you're strong financially, with impeccable credit, they won't necessarily ask for any escrow. It depends on the board. Boards pick up some income from late fees, just like the way libraries pick up late fees on all those materials they lend out.

Thanks for your comments JuiceMan. I will keep your guidelines in mind when I go out to look at properties.

JuiceMan makes some excellent points. A lot of people think of condos are automatically higher-end than co-ops, with ridiculous (and costly) amenities, but that's not necessarily the case. Some condos are run quite well and may appeal to a more typical no-frills co-op buyer. You should definitely do your due diligence, but there are solid condos out there that don't need to jack up their monthly fees every year.

Katie, thanks for starting this post, great comments.

The issue with coops is one of governance. They can govern according to their own rules, opening the door to funny, political games such as a broker who's on the board and may hold up approval of a sale becuase the seller went with another broker. Or one day your coop may allow sublets but two years later, when you find out you have to move to Singapore for a year, they change the rules. For this reason coops sell at a discount to condos.

These are extreme cases, as most coops, from what I understand, are run fairly and professionally. As for financial stability, you can find this out when you and/or your lawyer perform due dilligence of the building's finanicals before you sign the contract. Also, make sure ownership isn't too concentrated among one shareholder. A good building will limit the number of unts one tenant can own.

On the other hand, coops tend to be more stable investments. Because condos can sell more quickly, they experience more price volatility. And because coops have rarely allowed risky mortgages, most haven't been hit with forclosures the way the rest of the country has.

As more buildings in NYC are going up as condos, going forward I think you'll see less price differential between the two, and coops relaxing their rules.

For a more detailed analysis you might want to check the following Miller Samuel Inc. paper on "The Condo vs. Co-op Puzzle":

http://www.millersamuel.com/pdf-tank/1051930559WFulr.pdf

Their general findings are that in the long term Condos are the more valuable type of property.

Ali - there are more and more buildings requiring 2 years maintenance in escrow in order to approve sales. Our building has done that with every sale for the past 5-6 years. Is it a pita? Yes. Does it make our building more secure financially? Absolutely.

Certainly some of the coops on 5th Avenue and CPW are not going to require this, but for many coops this is pretty standard now.

uptowngal -- "As more buildings in NYC are going up as condos, going forward I think you'll see less price differential between the two, and coops relaxing their rules."

I haven't heard of any coops relaxing, but I keep hearing (and it might be anecdotal more than a trend) about condos putting up lots of hoops to jump through before renting or reselling. Sadly.

waverly -- does your building keep the escrow funds in perpetuity?

ogden, thank you. Excellent article. For example, pp. 9-10 (footnotes omitted) do a good job of explaining the risks I've been thinking about:

Each shareowner of a cooperative corporation bears a proportion of the risk that one of her fellow shareowners will default on a financial obligation to the cooperative corporation. For example, if a shareowner were to default on her maintenance payments, the other shareowners of the building would, in practice, be required to make up the amount in question. This is because failure to pay in full the underlying mortgage would lead to default and the threat of foreclosure with respect to the entire building. Similar dynamics would affect property tax payments. In the case of condominiums, since all mortgage loan and property tax payments are the sole responsibility of individual owners, this shared risk of default does not exist.

Although the underlying mortgage of a cooperative corporation may create greater risks for owners of cooperative corporations relative to condominium owners, it does have some countervailing advantages. The ability of cooperative owners to use tax deductible debt to finance building-wide improvements is more advantageous than the typical method used by condominiums of assessing individual apartment owners. * * *

The cooperative corporation is also in a stronger position vis-à-vis defaulting shareowners than a condominium association. Typically, the cooperative corporation's lien for unpaid maintenance is superior to that of a shareowner's mortgage lender. For a condominium, however, the relative priority of the condominium association is reversed. In addition, because the occupant of a cooperative apartment is a tenant, the corporation can make use of summary process to evict a rule-breaking shareowner. A condominium association, however, would have to go through the more cumbersome legal process of ejectment.

Fun, lets try this. Say things get real nasty in NYC and the economy as a whole tanks. Condo owners left and right are defaulting, maintenance is so high, people won't buy at any price because the building is only 40% occupied. Units go to tax auctions. Now in comes Patient09 as New Jack City's new Mayor. Call me Mr. Mayor please. Now the homeless problem is getting out of hand. Global cooling is coming and it happens to be winter time and cold as a witches xxx. Mr. Mayor tells housing services to place these homeless in the vacant condos and if they promise to not urinate in the hallways for the first 2 weeks, they can have the condo, free!. SWEET! I'll take my Madoff coop and take my chances.

I agree with most of what Jon Miller said except this:

"Typically, the cooperative corporation's lien for unpaid maintenance is superior to that of a shareowner's mortgage lender" --

That's true as far as it goes, but being second priority is not something that the lending bank is going to put up with -- that's why in my understanding the lender makes the co-op sign the Recognition Agreements (Aztechs) before they'll lend to you -- in practice the bank is making sure that it can protect itself . . .any lawyers care to comment?

ali r.
{downtown broker}

I prefer a co-op's vetting of my co-owner/neighbors, rather than any random renter who wanders into the building. The real risk to my mind is quality of neighbors - transients or financially solid people buying a home to live in? Plus in a co-op, as a trade off for less liquidity, I put less money per foot into real estate and have more money for other investments.

Less money = less risk, for same apartment quality. I see no reason for a long-term, US-citizen owner to pay extra for a condo, since the extra money has other uses.

If a condo owner is a deadbeat, the condo is out the common charge (typically much lower than coop maintenance). The taxes are the deadbeat's responsibility and there is no underlying mortgage. It seems to me that in an older condo, there is far less risk to the whole building than in a coop.

Do coop buyers typically factor in the coop's underlying mortgage, if it's not unusually large? E.g., my share of my building's mortgage is $15.6K, which I might have to cough up someday, should the coop be unable to refinance.

Katie - Even if I could accept the inherent risk of a co-op, I would have to persuade my husband. We grew up in NY in the 70's, so we've known times when people couldn't give apartments away. We both tend to consider risk in terms of the worst case scenario. That's partly a personality trait, partly life's training. Yet we're living in an age of "black swans" so we've seen many recent examples of how "playing the percentages" is fatal.

With prices falling, my Classic 6 may be coming into the realm of affordable. I have been re-evaluating some of my assumptions about risk of ownership and may even approach my husband about considering a co-op.

One thing that consistently spooks me is posts where people say co-ops are safer because boards were more strict than banks. While I agree co-ops were stricter on financing, the underlying reason is that they had to be because they are a much more precarious form of ownership to begin with. My understanding is that co-ops are prevalent in NYC because of tax incentives on conversions, not because of any risk assessment vis a vis condos.

I would like to hear how co-op owners assess their risks. Also, am I overlooking hidden risks to condos? What's your building's worst case scenario? What assumptions do you make and what do you do to address risk? Are those assumptions changing in this climate? What happens if many owners lose their jobs and are unable to make their monthly payments or sell for an extended period of time?

I think you are mis-perceiving risks. After all the big risk to NYC real estate is nuclear attack from a foreign power. E.B. White wrote about this over 50 years ago. This risk applies to co-ops, condos *and* rentals. So your real "worst case" "black swan" is not the normal ups and downs of apartment ownership in a collective building with a roof and pipes and neighbors, but being wiped out by nuclear war.

Against this risk, it is rather silly to dislike co-ops over condos, or even to argue that it is better to rent. A high-down payment 100 percent owned co-op seems to me much more financially solid and less costly than a tacky condo.

Go ahead. Buy your fantasy Classic 6. You only live once.

I may be missing something, but historically coops are just not a "risky" investment by virtue of their structure as coops. Put this in perspective. If 3 767s crash in a 10 year period and no other types crash, then 767s are the most risky planes to fly. Yet, during that same 10 year period 1,000,000 flights are successfully completed by 767s. So the fact that it is technically risky has no significance in the day-to-day world and decisions individuals have to make about flying.

happyrenter, can you give actual real-world examples of the financial "risks" you claim coops carry that demonstrate the supposed higher risk you assign to a coop than to a condo? Please post links to any articles about failed coops in NYC where owners lost their homes.

The truth is that some of the finest buildings in NY exist today and escaped wrecking balls 100% BECAUSE they were coops. For example, just after the turn of the 20th century, some of the finest apartment buildings ever erected stood on Park Avenue between 42nd Street and 57th Street. Today the only one still standing exists because it went coop in the 30's or 40s.

There is another risk which many people are not aware of with condos. In the past, investor concentration played a lesser role in getting a building approved for mortgage purposes. With Fannie & Freddie tightening building guidelines, they are now limiting the percentage of investor-owned units a building can have. (The more investors own in a building, the riskier it is.)

The percentage of investor units in many Manhattan condominiums are now above the new threshold permitted by Fannie & Freddie. Because 70% of the market is coops, all the investors flocked to condominiums. And that with a relatively strong rental market here, you have many condos owned by investors. Getting a loan now in these condos, even if you are using it as your primary residence, will be harder and as recent changes have shown, it may even get more difficult. Certain condo buildings are already disqualified with these guidelines. Therefore, even if you have excellent credit, good income, etc. you still may not be able to get a mortgage.

On the other hand, coops are required to have at least 51% owner occupancy to be Fannie & Freddie approved. Because of their stricter sublet policy, 99% of the time it is not an issue.

In these trying times, owning a coop, for the most part, is much safer than a condominium.

Look, on balance if you think a condo is a seriously "safer" investment than a coop you are nuts. There are reasons to prefer one form of ownership over the other, but financial risk of coops is a red herring raised here that I've never even heard knowledgeable people familiar with real estate devote any time to discussing before. Coops in NYC have an outstanding record. I'm still waiting for someone to post links to the contrary. Vague references to "living through the 1970s" is blather.

Can I point out the one naive point not brought up so far. Lets all forget the names coop and condo..Lets call them horny rabbits vs horny squirrels. If the horny rabbits put 50% down and need to be owner occupied, and the horny squirrels put 10-20% down and can do as they please, which nest is the most stable in the long run? Which nest can suffer pullbacks in the value of their nests, I think all would agree why the horny rabbits get all the action and are also known as coops.

anon10, I suspect Fannie and Freddie give coops more latitude on owner occupancy because many of them are conversions of apartment buildings where sponsors hold a high percentage of the building, and not because coops are perceived as less risky. If they didn't give the coops more latitude, too many of them would not be able to obtain financing. A condo that was developed over six year ago is unlikely to have 30% investors, but there are always exceptions. The risk of financing is shared by coops and condos, because a building can be troubled regardless of the ownership structure.

PMG - no, the recent tightening of lending guidlines for condominiums has to do with their track record on a national level. In this downturn, condominiums have had the highest default rate of any residential ownership types.

Can you guess which ownership type had the lowest default rate? Yes, it would be coops. Thus, they left those guidelines as is. Until we see substantially more defaults in coops, if ever, you probably won't see Fannie & Freddie adjusting their lending requirements for them.

And all condos in Manhattan, regardless if they were built six years ago or a month ago, usually have very high investor concentration. Turnover in the city has always been high especially with the once rapidly appreciating values. This gave investors an opportunity to buy.

anon10, You haven't seen coop defaults because such a very high percentage of them are in Manhattan and Washington DC, rather than Miami or San Diego. We have yet to see defaults on Manhattan condos either.

My condo has a very high owner occupancy and no trouble with buyers obtaining financing. Every building, coop or condo, should be evaluated on a case by case basis, since that is how the banks are looking at them.

oh, and by the way, anon, we are talking about manhattan coops and condos on this board. I'm sure when prices decline substantially in Manhattan, the banks will tighten up on both. I seem to recall that historically, it has been harder or at least more expensive to finance coops over condos, due to the ownership structure and underlying mortgage issues,

Kyle, I did post a link to an article about NYC co-ops in trouble in the 90s, and I acknowledged that foreclosure has indeed been rare.

>>financial risk of coops is a red herring raised here that I've never even heard >>knowledgeable people familiar with real estate devote any time to discussing before

I can well believe you have not, and that's the very thing that concerns me. This is an issue several knowledgeable people, including those who wrote the NYU article ogden posted and the authors they cite, have addressed but it does not seem to be part of the popular discussion of forms of ownership, hence my original posting.

happyowner, I am receptive to the argument that I am mis-perceiving risk. If risk assessment involves discounting the risk by the likelihood of the event, I am definitely asking people to consider events which have not happened much in the past to be more likely now, like the stock market dropping 40%, sharply increased unemployment or major banks and insurers failing. People tend to assign a high confidence rating to that risk x likelihood assessment. I may well be erring and incurring opportunity costs in the process. That's why I would like to know how owners are assessing risks and how their assumptions have changed over the last year. Are co-op and condo owners having those discussions at board meetings?

For me, the economic climate brought these structural issues to the surface. Posters have identified risks in condos too which I had not considered. An unattached house in Forest Hills – costs about the same as a Classic 6 but lower taxes – is starting to look really good. Must factor in cost of knee surgery due to all those stairs! ;) There will always be unknown unknowns. I feel better identifying as many known unknowns as I can, so I appreciate the scenarios people have played out above. As I stated above, that may be life training or just a character flaw.

I will add one true life story (I know lawyers involved in the litigation) which struck me at a formative real estate age. It was the early 90's. The owner of a townhouse just west of Park in the low 60's converted to a 4-unit co-op and took a mortgage. Sold 2 units, kept the top floor for himself. Never sold the professional apartment at street level. He then stopped paying the mortgage. Bank foreclosed. Litigation followed, since he had taken maintenance payments to pay the mortgage and didn't. Bank eventually sold to one of the shareholders, who put together enough money to make a deal. The other shareholder and original owner were wiped out. Consider the frantic negotiations where you either had to pony up more money on short notice or lose your entire stake.

Katie, your last post is an example of how the risks that concern you are not being put in proper perspective. Fundamentals of investment strategies dictate that diversification reduces risk. While I have said in these forums too many times to count that thinking of real estate as nothing more than an investment is to distort any analysis, ab initio (unless it is an investment property you won't live in), certain principles of risk management do apply. Buying something in a 4 unit coop versus prudently buying into a building with 130 units are worlds apart. Under any circumstances, in any market, I personally think the 4-unit coop is utterly inappropriate for 95+% of buyers. If the roof fell apart or bricks needed repointing or sidewalk vault had to be rebuilt, the owner of a unit in a small townhouse would be hit with enormous charges that most people couldn't bear. What's more, if one owner ran into rough times, the whole scheme could fall apart. There is no spreading of risk. It is 4 owners. In a more typical coop apartment building, risk is shared among many dozens of people. Expenses and the misfortunes of any given shareholder are shared by many and can thus more readily be tolerated.

I think the example you just gave shows how you are straining to find problems where they don't reasonably exist. If the experience you describe impacted you greatly, the lesson to take away ought to have been the importance of diversification--spreading risk around to hedge your bets--in important in money matters. I'm still think the forest is being lost for the trees here. The mere fact that in support of this fear all that can be cited is a single example from Brooklyn in 1995 speaks volumes.

alanhart - sorry for the delay in answering you. They keep it for a minimum of 2 years and then you can petition to have it returned (with the nominal interest) every year afterwards. To get it returned they would look at total liquid assets, payment history (ie. have you paid your maintnance on time since you've been in the building) and I am sure there is a bit of "are you a good community member" thrown in there.

I think it's a pita, but I also feel confident about our building's financials and that we will be able to get through this downturn. Let's say the economy bottoms mid-year and runs flat until the end of 2009 before showing signs of recovery next year (which is what I think will happen). We should be in good shape going forward (no short sells, no bankruptcies) and will be able to deal with whatever 2010 brings us. Easy? No, but I think we will be okay. (I also want to mention that I am speaking about the economy and not apartment prices, before somebody jumps up and down).

kylewest, you are certainly agreeing then that Katie_eh's concerns are valid. You are saying that buying one unit in a 4-unit coop is not prudent for 95% of investors, while you see nothing wrong with a 100% ownership in an unattached house in Forest Hills (which she also mentioned.) This points out the underlying risk difference between coops and condos: In a coop you are partnering with many on a small investment stake. Those things which "Remove," "Reduce," or "Mitigate" the risks of a coop are PROOFS of the risk difference:

1. Diversification, by preferring a 130 unit building to a 4 unit townhouse (less chance of this kind of individual default producing catastrophe)
2. Escrowing Maintenance payments (Because the building is so massively affected by a default on Maintenance payments, this produces a 'safety-net' of 6 months to 2 years (depending on example)
3. Restrictive purchaser vetting (becuase your neighbors are PARTNERS on your unit (since it is only a shared unit that you are occupying) their financial situation affects you directly)

Certainly we don't use a 'safety-net' when we are walking on the sidewalk, only when we are walking on a rope tightly suspended at a great height. While I think that cost and vetted neighbors are a tremendous countervailing* advantage of coops, there are inconveniences and risks that Katie is right to weigh against getting the Classic 6 she desires. The fact that 'knowledgeable people familiar with real estate' don't discuss a risk difference doesn't prove there is none any more than keeping silent dresses a naked emperor. I think Madoff showed that experts can succumb to risks simply by not discussing them.

d

*Not a word I used much before. Thanks, Katie!

Thank you all for contributing your time and knowledge. I appreciate your insights and have even saved some SE searches for co-ops.

Something to keep in mind is that if you think that you may have to move and do not want to sell when the market is down, if the condo is tax abated and you want to rent it out, your apartment falls within rent stabilization laws. And then if you don't comply with the relevant laws, you have some risk that the tenant will demand that the apartment remain rent stabilized even after the tax abatement expires. But I am not an expert... anyone has thought of this?

You called it SE co-op advocates!

The Downside for Condos in a Downturn
http://www.nytimes.com/2009/02/08/realestate/08COV.html?_r=1&ref=realestate

Yeah, pretty funny, Katie. Speak of the devil and the devil appears. Maybe that Times reporter hangs out here looking for story ideas.

Katie - Yes, go for a larger 100-plus unit building for diversification and better staffing. I agree a 4-unit "co-op" would be a risk even if only to share roof repair costs. The most financially solid co-ops will be 100 percent owned, and have large downpayment requirements. Buildings that went co-op in the 1960's and 1970's will be best, since they will have the smallest common mortgage and the fewest (if any) original renters), and usually the best finances and lowest common charges. Have your lawyer check for a full-up reserve fund (condos usually don't have them). Plus your neighbors will be owners, not transients and renters like in a tacky condo, who leveraged up with 10 percent down and a funny mortgage they couldn't afford. Many Classic 6s will be in such traditional buildings. Yes, condos went up more during the rise, but quality co-ops never go out of style.

Financially, everyone on here is yapping like chickens with their heads lopped off about short term prices, but we have done very well buying estate sales and then fixing them up to our taste. Estate sales are typically good deals in any market, and right now if they have time pressure may be a really good way to buy a place to live in long-term. Just make sure you have cash for a very large down payment, and look at the board interview as a way to protect your investment and standard of living, not an annoying imposition into your privacy.

407PAS, my husband also suggested Times reporters are looking for stories on SE. Sadly, it seemed clear (except to banks) that many people bit off more than they could chew and this result was just a matter of time.

In a related thread, PMG did the kind of analysis I've been asking about.
http://www.streeteasy.com/nyc/talk/discussion/8340-the-condo-trap

I did a quick back of the envelope analysis, and this article rings an unnecessary alarm for many condos. Here goes: I live in typical "seasoned" condo: ONE QUARTER of the units have traded in the las FIVE YEARS, according to SE. If we assume worst case: HALF of those units go into foreclosure and the owners fail to pay common charges for two years, then 12.5% of the common charges would need to be satisfied by the remaining 87.5% holders for two years. We can assume that for all practical purposes anyone holding for greater than five years has enough equity to satisfy common charges in a foreclosure proceeding. In these rough estimates that means common charges would need to increase by 12.5 / 87.5 = 14.3% for two years. Given the improbability of that many foreclosures, I'll accept the risk that my common charges may increase by less than 15% for a short period.

happyowner, thanks for the advice. I'm not especially handy, but I, too, like the idea of an estate sale so I'm only paying for changes I like.

Katie - I got a lot of medium level repair done on my current place simply by asking the super if he knew a good team. Got the work done for less than half the quotes I got through other sources. I work in finance and couldn't unclog a drain if I had to.

I think the Times article does a good job of explaining the ignored risks particularly applicable in new condo construction. Risks, I might add, that virtually no one seems to want to recognize on these threads for as long as I've been raising them (along with a few others) since 2007 when I discovered this site.

Condo, condo, condo. Maybe. But perhaps all those "negatives" of coops aren't going to seem so negative to buyers of all those shiny condos in the last 2-3 years.

Katie,
Yeah, maybe there is a Times reporter lurking on the site. I'm still bummed that my FSBO work did not make it into that Times article a little while back when a Times reporter contacted me. I emailed the reporter right away but I guess she choose other people. The article wasn't that favorable towards FSBOs so maybe it was good not to be included.

This RealDeal video on co-op board concerns is worth a listen: http://ny.therealdeal.com/

thanks angler. That is sobering.

"if a (co-op) building does default, Luxomburg summed it up in two words, 'it's ugly'"

I'm glad I own the deed to my condo outright, and with no legal way of having an underlying condo building mortgage I can sleep at night knowing my neighbors financial reversals won't ever turn me into a tenant in my own home. Not only can I lease it, or gift it to anyone, I know that it will remain mine even if this recession turns into a depression and some co-op buildings default.