Earl White
This is real estate attorney Earl White. And this is a video about some of the differences between a party buying and selling a cooperative unit versus buying and selling other forms of real estate, particularly in a competitive market, where there are a lot of buyers hunting for deals, a co-op may be a good alternative, or they can not have to overpay, not have to waive everything, not have to waive appraisal and still get a property that meets their needs.
That said, co-ops can be very different and it’s good to prepare all our clients ahead of time, about how that process is going to go, so there’s no shocks, difficulties as it’s moving forward. Now this video’s going to cover, what is a co-op from a legal perspective?
What are the differences in co-op sales versus standard other real estate transactions and strategies and tips as to how you can approach those differences. First, what is a cooperative, and I’m going to reach straight from Preston versus Sailor from the appellate division, 1980 legal title to the real and personal property of a cooperative complex or project is vested in a cooperative corporation.
And individuals purchase shares of stock enable them to occupy it dwelling under a proprietary lease. There’s two main items here from this definition.
One, is the shares of the corporation. When you’re moving in and buying in cooperative, you don’t own real estate. You own shares in the cooperative corporation.
In addition, you have the proprietary lease, lets you stay, occupy the unit that your shares are assigned to. At high level, that’s the legal definition of what a cooperative is in New Jersey. When the cooperative Association’s being formed, there is several of documents they have to file with the state.
Now I’m going to read right from the cooperative, the cooperative act of New Jersey. They have to create bylaws and file those bylaws, which are essentially the rules and regulations for the cooperative.
Not so much the day to day rules and regulations like pets, policies, not so much that, but more dispute resolution. How the properties going to be set up, high level issues that you’re going to come up not every day, but when disputes arise, when they’re transferring shares, those type of things have to be laid out in the bylaws.
In addition to that, they have to file any restrictions on the use occupancy, transfer, leasing or other disposition of any unit that the restriction limitation is otherwise permitted by law and limitations upon the use of the common elements. When they’re forming the cooperation, they have to register how the properties can be used, any limitations on that use and how they can be transferred.
That’s some legal background on co-ops. How is the co-op process different?
Now in New Jersey standard attorney review process, right, is realtors prepare draft contract, submit it to the buyers and sellers. They sign the contract and then they kick it to the attorneys to sign contract to the attorneys for standard three day attorney review.
Standard realtor contract is only applicable to one to four units and single family vacant lots. It doesn’t apply to co-ops. The initial contract is either just not binding at all, or it serves more as a letter of intent for the main terms of the contract.
A lot of times I’ll see agents just do a one pager. What’s the price, what’s the deposit, what’s the mortgage and what’s the closing date.
And then at that point you send it over to the attorney’s to draft. Now it’s drafted from scratch.
I think it’s worth, when you’re sending the cooperative deal to the attorney, just make sure they don’t forget to add in standard terms, such as appraisal contingencies, inspection periods, because I can tell you virtually every draft cooperative contract is not going to have the inspection contingency. And I’ve seen some transactions where the attorney drops the ball and it never makes into the contract.
I get an inspection report and I’m like, Hey, there’s no inspection contingency in this contract. Why did you send me an inspection requests?
We want to make sure the attorneys are on the ball on that. In terms of drafting the contract, some co-ops not all have requirements about what has to go in the contract.
I always recommend if it’s not an established co-op or a smaller one that you haven’t worked with before, it makes sense to find out ahead of time. I did one recently where there actually…
I called the co-op attorney and asked them if there were any rules or regulations for the offers. No, no, no. As we get further down the road, it turns out that there’s a minimum of a 10% down payment on the offer.
My client was at 5%. We did get an exception made by contacting them and explaining. We reached out a month ago, we were told there was no issues with our offer. We drafted it and we’ve come down here and can they make an exception for us?
And they did make an exception for my client after we pushed them. But still the deal could have fallen apart if given that we didn’t have the information, but if you didn’t even ask there would’ve been no way to know that until later in the process.
The other thing to really be careful with is the timeframe for getting the mortgages. You’ll have a mortgage contingency in the co-op deals, just like you would other, deals, but the mortgages takes so much longer to get.
I can’t remember the last time, standard realtor contract, a mortgage contingency, default 30 days, if it’s an FHA, maybe 45, I can’t remember the last time that I had a mortgage commitment in a co-op in 30 days. It just never happens.
Tell your clients up front. Yeah. It’s 30 days. That’s what the contract with deadline and figuring it on the seller side.
You’re not going to extend it, but what I tell every client I have, when I get a contract for a co-op and everyone’s looking for 30 days for the mortgage commitment, I’m like, look, let’s leave it there. We’ll do our best to get it, to get the mortgage commitment in 30 days, but just be ready.
It’s going to probably take 45 or even 60, just because of the nature of the co-op. That way, when the dates start passing, same thing with the closing dates. I get co-op contract closing date might be 30 days, 45 days, whatever it was set up and I’ll tell my client, look, it’s somewhat not realistic.
We can go forward, figure fair on the seller side. You’re not short on the dates.
I mean you want to keep a little fire under the buyer, but you prepare your seller client, look, we’re probably not going to meet this deadline. If it happens, don’t get upset if it happens and we’ll keep moving the transaction forward, but just prepare them mentally that things are going to take longer than if it had been a standard sale. Now also another big difference in the co-ops versus other sales is the board approval.
Normally in New Jersey and in even condo sales there’s no… Other states are different, but normally in New Jersey, even there’s no approval process even for condo, it’s a little bit, but that’s really not substantial compared to what you might see in Florida or other states.
It’s with the co-ops it’s a little different. They… Once you get the mortgage commitment, that’s when they’re going to schedule an interview, between the buyer and the co-op. And I’ve rarely seen a deal fall apart at the interview. It’s pretty rare, but there could be issues that come up and I’ve seen issues come up regarding debt to income ratio, because you’re taking out a lot of fees in the co-op.
The co-op may then sort of look at the income, even beyond the mortgage commitment, the mortgage is good, but the co-op then has their own rules about what the debt to income has to be. And that can be something to deal with. But that’s just one example, where you might come up with something at this interview, but again, the interview also delays the process, right?
I’ve seen… They won’t do it until you have a mortgage commitment. Mortgage commitment takes longer than you have the mortgage commitment.
Then you’ll wait two more weeks to get the interview. Then you got to wait another week to get the approval after the interview. And now we’re talking about…
Or almost three can be, let’s say we can almost two months into the transaction and we don’t have a clear to close on the mortgage or a closing date yet. Be ready for the mortgage and the interview process taking longer. Now the closings of the co-op obviously, substantially different.
Traditional closing for standard real estate transaction. The once we get this clear to close for the mortgage, we pick a closing date. Usually the seller at this point, the seller will mail over their closing document.
Flyers will come to the buyer’s attorney’s office. In most cases, settlement agent will come to the title company, will assign a bunch of mortgage documents and then, either scan them back to the lender or maybe that completes the closing and the deal gets funded to the seller.
And then we’re done, key transfer and then we’re done. Co-ops is not the same. Obviously there’s no deed. As we talked about before there’s shares certificate, we talked about four and proprietary lease, that has to get transferred, but the difficulty, one of the things to really, really be aware of is that when the seller originally bought it, they got a share certificate proprietary lease, like we’ve been saying, and they may have copies of it, but they need the originals, the original share certificate, the original proprietary lease.
And normally those are held by the lender and the lender’s attorney and or whoever gave the seller the mortgage to get that property.
It is difficult. I mean, it’s an understatement how difficult it is to get the lender, to give you those doc, because you need to give the original. Now, in some cases it’s almost proved impossible to get the documents, I’ve had cases, where the lenders have refused to even give them over until the deal closed.
What you can do in those situations, if you run into it, is get a certificate of lost shares certificate or a lost proprietary at least. They’re not necessarily lost. In some cases they are, in some cases, the lender can’t find them, the client can’t find them.
Then you can do that. If you you don’t have the originals. In other cases, if the lender’s not going to review it, then you can do some kind of documents, like lost documents.
And then normally the buyer will indemnify the seller in a short indemnity agreement that should there be an issue because we didn’t have the originals. Then the buyer indemnifies the seller, which is only fair because the buyer can’t get the closing documents to the seller, can’t get the closing documents to the buyer.
That’s the other thing to be aware of. That’s the breakdown of what a co-op is, some of the differences in the process and how you can prepare your client and, get everyone on the same page as to make a go as smooth as possible for a process that is going to be more difficult than other processes.
Hopefully this video is helpful for you and helpful for passing on information to your clients. If that’s the case, and please give it a like, please give it a share if you found it helpful.