When Bigger Isn't Better: Purchasing in a Small Co-op or Condo
When Less is Actually More
Everyone knows that size matters in New York, particularly when it comes to co-ops and condos. But sometimes the notion of less bureaucracy and fewer neighbors can be very attractive. That being said, small co-ops and condos have their own unique features. Here are five issues that should carefully be considered when contemplating a purchase in a small building.
First, What Exactly is a "Small Building"
There's no formal dividing line from big to small, so for our purposes, let's call it a building with 20 units or less. As discussed below, a small building may not have a live-in super, porters, or a management agent, if the building is self-managed. These are the usual tell-tale signs of a small building, so you'll know it when you see it.
More than any other issue, small buildings often struggle with finances. With a handful of unit owners responsible for the maintenance of the building, when something significant has to be replaced (like a roof), that cost is spread among a smaller group of people. Since small buildings often do not have substantial reserves, when a major expense does have to be incurred, it is usually paid for by assessment. If the building is well maintained, occasionally incurring an assessment to handle a building wide capital expense may be an acceptable protocol. In other cases, chronic maintenance issues can get costly and can make resale in that building a significant challenge. Then there's the issue of being able to finance a purchase.
Is Financing Available?
Obtaining a loan in a small co-op or condo presents a number of issues. As smaller buildings may not have audited financial statements, the ability to satisfy Fannie Mae requirements may not be possible. Further, if insurance coverages that are maintained do not satisfy the latest lender guidelines, it may result in an inability to obtain financing for that reason. Owner occupancy may also be a concern if the building has a liberal leasing policy. A purchaser in a small building is well-advised to investigate which banks have loaned in the building previously and which banks are currently making loans.
Who is Responsible for Building Maintenance?
Those of us who live in large buildings, are accustomed to a co-op or condo's staff attending to the daily maintenance issues, and hopefully, keeping the building clean and safe. Small buildings often do not have a live-in super and "staff" to address daily operational activities, like removal of refuse. Part time employees may be sufficient to address a small co-op or condo's needs, but it is incumbent upon an interested party to investigate the current physical condition of the building to determine the potential costs that might be expected in the reasonably foreseeable future. For this reason, it is essential that a purchaser retain a competent and experienced engineer or architect to inspect the entire building, mechanical systems, as well as the roof and façade (if possible), to determine whether a prospective purchaser is buying into a problem. In my view, this is an absolute condition to going forward with a purchase.
Small buildings are sometimes self-managed, which means there's no managing agent and the residents themselves deal with the day-to-day affairs of the co-op or condo. Managing agents can be the bane of our existence, but they serve an important function in keeping a co-op or condo on the straight and narrow. When the unit owners themselves undertake that responsibility, due to financial limitations or out of choice, a purchaser has to be satisfied that the owner-managers are doing a good job. Further, small buildings often don't hold regular monthly Board meetings, so getting an up-to-date reading of the physical and financial condition of the co-op or condo can be problematic. In self-managed buildings, therefore, it is essential that the Board president or treasurer be interviewed to determine the most current information on the physical and financial health of the building. If there is resistance to having the buyer's attorney speak directly to the officers of the co-op or condo in these situations, and if information is not freely given, take that as a red flag. Remember, once you're an owner, you will have a pro rata liability for the financial obligations that are incurred.
Offering Documentation Can be Sketchy
In some cases, the offering documentation for these buildings can be ambiguous, incomplete or non-existent. This complicates the due diligence process as small buildings often have unique features and amenities that are appurtenant to specific apartments. Roof rights are a good example. In older buildings, the designation of roof rights might not be clearly spelled out in the offering plan (to the extent one is available) and conflicts can arise over where the roof rights begin for one owner and end for another. With a condo, the recorded declaration may clarify the rights of unit owners, but clarity with a co-op may be more difficult to achieve. Again, questioning the folks that are responsible for building management may help close the loop on the rights to a particular feature or amenity.
On the Other Hand...
All of the above being said, a number of my clients have bought and sold apartments in small buildings and things have worked out just fine. I think it's fair to say it's a personality-driven purchase, where purchasers prefer the more intimate setting of a brownstone or townhouse in a particular neighborhood over a larger development no matter how grand the amenities might be.
Residential Reality: Think of it as a Partnership
When purchasing in a small building, the relationship with your fellow unit owners is often akin to partners who decide to buy a building and agree to share profits and losses in accordance with their respective equity interests. Management and ownership are much more closely aligned and a managing agent may not be there to act as referee. If there were ever an example of when due diligence is appropriate and essential, it would be in connection with the purchase in a small building. As always, measure twice, cut once...