The Real.Est List
Ask an Expert: Signs of a toxic co-op
Q. Although I'm not thrilled about having to pass a co-op board, I'm seriously considering buying a co-op rather than a condo because it seems like I can get more space for the money.
I've never owned before though, and I don't want to get stuck with crazy co-op board or a building that's not run very well.
What are some signs that I might be buying into a bad situation?
A. There are a number of ways to spot a poorly or despotically managed co-op, say our experts.
Some signs may not be very obvious to you, which is why it's important to hire an experienced closing attorney who takes due diligence seriously--starting with a thorough review of the board's minutes, which can turn up evidence that the board is "difficult" or just plain inept.
An abundance of turndowns can signal a difficult board, says real estate attorney Sandor D. Krauss of SDK in Manhattan.
"If more than 10 to 20 percent are getting rejected, you really have to look at why," he says.
The minutes can also provide circumstantial evidence that a board president has gone rogue or an officer has "too much of an ego or is not carrying out his or her duties," says Krauss.
Lots of litigation, frequent appeals of board decisions by shareholders, and unusually high legal fees are some hallmarks of a contentious board, says Jeffrey Reich of Wolf Haldenstein Adler Freeman & Herz.
At the other extreme--and potentially just as worrisome--is a weak, unstable board.
"If there have been few increases in maintenance fees and the co-op operates with losses, this could be a sign of a weak or unprofessional board as well as of a future increase," says Dean M. Roberts, a real estate attorney with Norris McLaughlin & Marcus.
Substantial, ongoing turnover in board members can also point to instability, he says, and so does high turnover of managing agents.
"If managing agents have been replaced every 3 to 4 years, that would be a red flag for me," says Roberts, though he notes that in very small co-ops (10-20 units), higher turnover is normal.
Financial statements tell their own tale.
"Compare budget to actual expenses," suggests Roberta Axelrod, a real estate broker and asset manager at Time Equities. "Check the amount in the reserve fund and whether there is a line in the operating budget for reserves."
If more than 5 percent of shareholders are late paying their maintenance or assessment fees, that's cause for concern, says real estate attorney Stuart Saft of Dewey & LeBoeuf. So are sales prices that are significantly lower (more than 10%) than neighboring buildings.
More clues that you and/or your attorney should look for include:
- Financial statements that are not audited or are delivered more than four months after the end of the fiscal year
- A board that doesn't meet on a monthly basis or record minutes
- Negative cash flow
- A history of constant assessments
- Interest or penalties owed for unpaid taxes, or late fees to vendors or contractors
- Dirty public areas of the building
- Problems with mice, rats, and/or mold
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