CoopAndCondo.com - Addressing the realities of Residential Real Estate

From the Law Office of Ronald H. Gitter, Esq.

Co-ops 1.0

       
Co-ops 1.0

How Did the Co-op Come into Existence in the First Place?

Before discussing the operational nuts and bolts of a New York cooperative corporation (usually called a “co-op”), the question has to get asked, where did the cooperative come from in the first place? Although there are buildings in Manhattan that were constructed as co-ops from the get go, most co-ops came into existence by a developer or “sponsor” converting the operational structure of the building from a rental property to cooperative entity, that is a corporation, formed under the New York Business Corporation Law. That intended conversion required the sponsor to file an “Offering Plan” with the New York State Attorney General’s office describing the salient details and terms of the offering, which at least, theoretically, disclosed all the relevant facts about the conversion. At some point after the sponsor sells a sufficient number of apartments to “declare the Plan effective”, the sponsor will transfer (sell) the property to a coopertive corporation, which the sponsor has formed by filing a Certificate of Incorporation with the New York Department of State, in anticipation of declaring the Plan effective. In fact, what is being sold to each purchaser are the shares allocated to a particular apartment, as the purchase of a co-op is actually the purchase of shares in the cooperative corporation, not the purchase of apartment itself (which is the case with a condo). Once the sponsor transfers ownership of the property to the co-op, the co-op will take ownership of the property and will commence operating the building.

Operational Basics

Once the co-op comes into existence, it is then free to conduct its business as a separate legal entity. Similarly, that co-op, as provided in the Business Corporation Law, will be governed by its Board of Directors, who are elected by the shareholders. That being said, when a co-op is first converted to cooperative ownership, the sponsor will “control” the Board of Directors, until a sufficient number of apartments are sold. Once that happens, the sponsor gives up control of the Board and the shareholders will then take over management of the building. As the current co-op housing stock is aging and since very few new co-op plans are filed with the Attorney General’s office, most co-ops are no longer controlled by a sponsor, even though a number of co-ops still have apartments owned by a sponsor or by a transferee of a sponsor (usually called a “holder of unsold shares”). For my purposes, I will assume that the co-op is no longer controlled by the sponsor.

The By-Laws

When the corporation is formed, the initial Board of Directors (comprised of the sponsor and the sponsor’s designees) will adopt "by-laws" which are the rules of governance by which the corporation figures out how to elect officers and directors and issue stock among other things. The by-laws are the foundation upon which the corporation stands and serves as the framework for all major actions by the corporation. Once the cooperative takes control from the Sponsor, the by-laws are often amended or even restated in their entirety to better serve the needs of the co-op and its shareholders.

The Board of Directors

Although the by-laws establish the operational structure for the corporation, the Board of Directors (whose number is designated in the by-laws) is the body charged with making the day-to-day decisions for the management of the corporation. Once the sponsor loses or gives up control of the Board, the persons who are thereafter elected by the shareholders to govern the co-op have great power over you and over the operation of the co-op. It is New York lore, that some buildings have "difficult boards" and some buildings have less difficult or "easy" boards. A difficult board means it's chock full of bean counters, people who got picked on in junior high or people who just take the process of managing their building just a little too seriously. An easy Board might not take matters seriously enough. There are also buildings that have a reputation of having a "great" Board. Those are the buildings that have an attentive Board, where the Board members actually serve the best interests of their shareholders, that is, you.

Officers

Officers are appointed by the Board to carry out the decisions of the Board. For example, if the Board voted to open a bank account, the officers of the corporation (e.g., the president or a vice president) would be the parties who actually went about the business of opening the account at the bank. Directors and officers are not always the same parties. With institutional corporations such as IBM or General Motors that have hundreds of officers, few of them other than the president or chairman are on the Board. With co-ops, however, the directors and officers are often the same people. You'll often hear someone refer to the "President of the Board" of a particular co-op. That generally refers to someone who is the president of the co-op, but is also on the Board. That individual is usually viewed as the co-op's leader during his or her term in office, but again, all decisions would be made by the Board as a group, not by one individual. In some buildings, you will find that the same person has been president for years or the same people have been on the Board for years. In those situations, a small group of people will be in control of the building, and an individual shareholder has very little chance of shifting building policy. In most co-ops (and condos) the day-to-day management of the building is handled by the "Managing Agent", so the officers don't really do much more than the Board does. Boards often have committees, however, and Board members and officers do get involved in many issues such as approval of prospective purchasers and sublessees; lobby and hallway renovations; interviewing architects, engineers, accountants, lawyers and other professionals to represent the building; oversee construction and building-wide repairs; handle financial matters; attend to building-wide landscaping matters; and resolve disputes among shareholders.

The Proprietary Lease

The by-laws may be the foundation upon which the co-op operates, but the proprietary lease is the mother of all co-op documents. This document is a "lease" executed between the co-op and a shareholder with respect to the particular apartment that the shareholder will inhabit. This document governs all aspects of the relationship between co-op and its shareholders. As I discuss in "The Great Co-op Secret", the relationship between the co-op and the shareholder is that of landlord and tenant. Why is the proprietary lease so important? There are a myriad of issues that the proprietary lease governs, Some examples: a shareholder's right to sublet his or her apartment or assign (that is, sell) the shares; a shareholder's right to mortgage; who may lawfully occupy the apartment; what constitutes a default by a shareholder under the proprietary lease; the co-op's right to terminate the lease; who is responsible for maintenance and repair of a unit; the right to impose monthly maintenance charges; and numerous other issues that impact your ownership of your apartment. Older proprietary leases, let's say more than 25 years old, can be inadequately drafted, so that many unanticipated issues that now confront a co-op are not addressed in the lease. More recently drafted leases attempt to resolve some of the trouble spots, but it is difficult to solve all human interactions in a document. The best example of this problem relates to the individual owner's obligation to make repairs. The general rule used to be that everything from the walls into the infrastructure of the building was the co-op's problem, and everything from the walls into the owner's apartment was the responsibility of the apartment owner. This general rule can be difficult to apply: Let's say that a pipe bursts inside a wall. Generally, it's the co-op's responsibility to open the wall, fix the pipe and close the wall. Most co-ops will not take responsibility for repairing or replacing the wall covering or for repainting. The co-op will only return the wall to a "paintable" surface. If you have expensive wallpaper on that wall, it could get costly to replace or match something that's five years old. According to most proprietary leases, or the interpretation of same, that's not the co-op's problem. Another repair that causes great misery is a defective "shower pan". Each shower has a rubber membrane underneath the tile floor of the shower that insures that the water goes down the drain and not into your neighbor’s below. Sometimes these pans are defective or outlive their useful life. That requires the shower floor to be opened up and the shower pan replaced. I've seen a co-op argue that replacement of the shower pan is the shareholder's responsibility. Many times the co-op will tell the shareholder to look to the prior owner for the faulty construction or system failure, but in almost all cases, the prior owner’s responsibility ended with the closing.

Rules and Regulations

Every cooperative corporation also adopts rules and regulations to address general rules of behavior and life-style issues. The rules are usually found at the end of the proprietary lease. Rules usually dictate how late musical instruments can be played, where to store baby carriages, garbage disposal, deliveries and similar issues. The rules can also address the owner's right to have a pet, using an apartment as a home office, how long a guest may stay in your apartment if you're not there, furnishing the hallways, and landscaping of terraces. The rules can greatly impact on an apartment owner's daily existence and must be reviewed as a part of a purchaser's due diligence process.

Board Approval

Proprietary leases provide that a shareholder cannot assign or sublet his or her interest in an apartment without "Board approval". This restriction on an owner’s ability to sell or lease an apartment is the primary aspect of co-op governance. The Board of Directors, pursuant to the provisions of the proprietary lease, has the right to vote on the proposed sale or sublease of a shareholder's apartment. To get technical, a shareholder would be requesting the right to sublet the occupancy of the apartment or the right to sell the shares allocated to the apartment which have an appurtenant right to use a particular apartment. So, if you have a "tough" Board, that can make the process of subletting or selling equivalent to the inquisition. Accordingly, the transferability of your apartment is reduced. Further, Boards can limit or eliminate entirely a shareholder's right to sublet depending upon the language of the proprietary lease. As a result, short-term co-op ownership may be very difficult or impossible in such co-ops. Unlike a condo, where the condo's right of first refusal to purchase the unit offered by the selling unit owner is rarely exercised by the condo's Board of Managers, co-op Board's often turn down a potential purchaser or proposed sublease to the dismay of the selling or leasing shareholder. As the owner of a co-op, there's not much you can do about it except make sure you're represented on the Board by reasonable people. In order to mitigate the problem, there are co-ops that govern themselves like condos. Sometimes these hybrids are called "condops", that is, a co-op that rules itself like a condo. Everyone wants financially sound, reasonable people living in their building. There's no denying, however, that some Board members take the process to an absurd level and make the process more difficult for all involved. In one recent situation I was involved in, it took the Board two months to consider the purchaser's application. It was the summer and no one could be bothered to meet in August. In Manhattan, you pay extra for that kind of treatment.

Residential Reality: Understand the Corporate Personality of Your Co-op

So you now know that you wear two hats when you buy a co-op. You are a shareholder, that is, an owner of shares in the cooperative corporation, with the right to cast your votes to elect directors who manage the co-op. You're also a tenant, pursuant to the terms of the proprietary lease, with the co-op as landlord. Co-ops have personalities, just like the people who live in them. It is in your best interest to investigate that corporate personality to make sure that it jibes with your own outlook and way of life. Moving into a strict building with lots of rules, can be a real burden if you're not used to it. Similarly, if you like organization, a loose building with a Board that never meets, can be just as maddening. As always, the more due diligence done before you sign that contract, the happier you'll be when the movers show up.

For more on the basics of cooperative owernship, see "If You're Buying a Co-op".

Simplifying the complexities of Cooperative and Condominium transactions in New York City

Asked and Answered

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I don’t smoke, but the smell of smoke is wafting into my apartment from my neighbor. Is there anything that can be done to remedy this condition?

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I’m selling my co-op tomorrow and my bank attorney has not yet received the stock certificate and proprietary lease from my bank. Will the closing have to be adjourned?

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The seller has indicated that there was a leak in the bathroom from the apartment above that has been repaired in all respects? Can I rely on seller’s representation to that effect in the contact?

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My mortgage lender has informed me that the cooperative in which I am purchasing an apartment has inadequate insurance coverage and has requested that the co-op increase its coverage to meet the bank’s new minimum requirements. Can the bank withdraw its underwriting due to a lack of insurance coverage by the co-op?

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The commitment letter included a condition that my loan was subject to a “second review” by the investor to whom the loan will be sold. Has my commitment letter been issued?

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Can I purchase my co-op in the name of a trust?

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Can I allow the seller to remain in possession after closing?

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There’s a repair needed in the apartment that the Seller promises to remedy after the closing. Is that a good idea?

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Do I care who the bank attorneys are?

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Do I have to go to the closing?

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One of the conditions in my loan commitment states that the monthly maintenance cannot increase by more than five percent? Is that a problem?

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Can I have a roommate after I purchase my co-op apartment?

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Can I undertake renovations before the Closing?

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Do I need a home owner’s insurance policy for my apartment at the time of my closing?

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Should I let the broker do the walk through?

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Once I get a loan commitment, is my loan approved?

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When it comes to purchasing an apartment, what exactly is due diligence?

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Do I have to let the maintenance people in to fix a building system?

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Does my dog have to be interviewed by the Board?

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Is buying an apartment in a small building a good idea or a bad idea?

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Can I fudge on my numbers in my financial package to the Board?

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Should I use a mortgage broker or should I go direct to a bank?

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Should I have the apartment inspected before I sign the contract?

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Do I Really Have to Give the Board My Tax Returns?

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I am purchasing an apartment with extensive landscaping on the terrace. Can the co-op or condo make me remove landscaping that was existing at the time of my purchase?

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I have an opportunity to buy a garage space, but the sponsor is calling the arrangement a “license” rather than a “purchase”. Does that matter?

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We are considering an apartment that will require us to move the bathroom to another location in the apartment. Is such a move possible?

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The seller’s bank can’t locate the stock and lease for the co-op closing. Can we still close?

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The broker told me that I can adjourn the closing for 30 days? Is that correct?

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The Offering Plan for my condo indicates that the apartment has a “lot line” window. Is that a problem?

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My dog bit someone in the lobby and I have been notified that if it happens again, my dog will have to go. Does the Board have the power to restrict me from having a pet?

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There is an unobstructed view from the apartment I am considering, but there is a vacant lot directly in front of that side of the building. Is that reason for concern?

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The Managing Agent called and it looks like my finances will not be sufficient to get Board approval. Is there anything I can do?

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The managing agent has had our application to purchase a cooperative apartment for three weeks and nothing has happened. Is there anything we can do to move things forward?

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We are considering an apartment in a co-op where the sponsor still owns units. Is that a problem?

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The seller’s apartment presently has a storage unit. Does the storage unit transfer with the apartment?

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We’re closing in three weeks, but our lease is up next week. Can we move in before the closing?

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I just did the walk through on the purchase of a sponsor unit and we have an extensive punch list. Will the punch list be completed by the time of closing?

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I’m buying an apartment from a sponsor and the Offering Plan requires me to pay the sponsor’s transfer taxes and attorneys fees. Do I have to?

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The purchase price of my apartment is over $1,000,000.00. Is the transaction subject to the “mansion tax"?

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I’m selling my apartment, but I’m not a resident of New York State. Are there any special closing costs?

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We did the walk through and the apartment was filthy. The contract required the apartment to be “broom clean”. Can we complain at the closing?

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I have to sell my apartment in order to afford the new one I’d like to buy. Can the contract be contingent on the sale of my existing apartment?

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I’m a famous person (no, I really am) and I really don’t want my financial information given to eight strangers on a co-op Board. Is there a way to avoid that?

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I’m the executor of the estate of a deceased shareholder. Do I have to go to the closing?

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I just graduated law school and have a job with a large law firm. I have a significant salary, but no liquidity or significant assets. Will I be able to buy a co-op?

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The listing indicates that the apartment has “roof rights”. How can I be sure?

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When buying a condo, is it worth the time and effort to get an assignment of the seller’s mortgage?

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The Seller removed an expensive chandelier right before Closing. Is that permitted?

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My husband and I found an apartment we love, but there’s a bidding war. Should we participate?

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We love the apartment, but the building has bad financials. Should we go ahead?

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My closing is in December, but the lease for my apartment does not expire until the following March. What do I do with my lease?

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We are buying a condo, but we have a delayed closing as the seller has a tenant in place for the next six months. We will be able to retain our loan commitment for an extended period of time?

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Should my husband and I take title as tenants by the entirety, tenants in common or as joint tenants?

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When a gay couple buys the shares of a cooperative or buys a condominium apartment, what is the best way to hold title?

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I have not been able to make my co-op mortgage payment for the past three months. If the bank declares my loan in default, how long will it take before the bank forecloses on my apartment?

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A co-op owner asks: I have found that maintenance is usually higher in coops than in condos because of the contribution by the shareholders to the building's underlying mortgage payments. In condos, the unit owners only pay for real estate taxes and common charges for common areas. Will the monthly maintenance be reduced after the underlying mortgage has been fully amortized?

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Can a corporation or other business entity own the shares of a cooperative apartment?

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I’m buying an apartment in a building designated as a “landmark.” Should I be concerned?

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I am buying a co-op that needs major renovations. The super has offered to do the work at a significant discount. Is that a good idea?

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We just submitted the Board package and we realize that we neglected to disclose a lawsuit against my husband’s company, in which my husband is named as a defendant? The lawsuit is covered by insurance and my husband is indemnified from liability by his employer. Should we notify the managing agent and amend the purchase application?

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We are negotiating the contract and we just found out that there is a substantial assessment that will go into effect the month that we close on the purchase. Should the assessment be deducted from the purchase price at closing?

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The bank attorney was two hours late to the closing. Was that my attorney’s fault?

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I’m buying a cooperative apartment in Manhattan, but I move out to the Hamptons from June to the end of September each year. Will I be able to sublet the apartment each year when I’m away?

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I just got the purchase application package and it's twenty pages long. Should my broker be helping me with organizing the required documents?

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It’s the day before the closing and I just found out that the maintenance for the apartment is higher than the maintenance stated in the contract. Is that grounds to terminate the contract?

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The financials for the condo are more than a year out of date and there is a delay issuing the new financials. Should I be concerned?

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The contract requires “official bank funds” in the form of certified or official bank checks. Can I bring “official" checks from my brokerage account?

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My parents want to buy me an apartment while I’m in graduate school in Manhattan. Will a co-op allow me to purchase the apartment, if my parents are co-owners?

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I obtained sole ownership of my condo in my divorce, but the deed for the apartment is still in both of our names. Will my ex-spouse’s cooperation be required when I’m ready to sell the apartment?

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I just found out I have to pay a fee to have my mortgage recorded. Is that right?

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I am buying an apartment in a small building and I just found out that the elevator is being renovated and will be out of service for three months. Do I have to close if the elevators will not be operational on the closing date?

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My husband and I own a co-op and we would like to transfer the shares to an irrevocable trust that we recently created for estate planning purposes. Will our cooperative allow us to make that transfer?

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The seller is a foreign citizen and does not have a social security number. Does that prevent the seller from selling the apartment?

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An “assessment” was imposed by the co-op Board after the contract was signed. Is payment of the assessment the seller’s responsibility?

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There is a leak in my apartment and the Resident Manager is not being responsive. Should I call the Board president?

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I just bought an apartment and I am only refinishing the floors and repainting. Do I need the consent of the Board before I get started?

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The co-op I’m interested in is pet friendly and I have a dog. Is there any chance the Board could approve my application without approving my pet?

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We purchased our apartment in January, but our first mortgage payment is not due until March 1st. Why isn't the first payment due February 1st?

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I’m buying an apartment from a sponsor and the contract does not provide for a “mortgage contingency”. Is that a provision that I can negotiate into the contract?

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I am buying an apartment from a sponsor and the contract provides for the buyer to pay the sponsor’s transfer taxes and legal fees? Is that normal?

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I'm buying a condo and my attorney just ordered the "title report". What's a title report?

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There is a leak in my apartment and the Resident Manager is not being responsive. Should I call the Board president?

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My boyfriend and I are interested in buying our first apartment in a new construction condominium. Our mortgage broker tells us we should qualify for a 90% loan, but it will be a close call for the bank. The sponsor wants us to sign a “no contingency” contract. Is that a good idea?

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We are considering a condo purchase in a new development that is only 25 percent sold. There is a bank that has approved the project and will make the loan, but should we be concerned about the number of units that the sponsor still has to sell?

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We are buying an apartment that has been extensively renovated. Among other things, the size of the master bath was significantly increased. Can we rely on a representation in the contract that all required approvals were obtained from both the Cooperative Corporation and from the New York City Department of Buildings?

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We received a draft of the contract of sale for the cooperative apartment we are buying and our social security numbers are on the front page! Our attorney told us that we will have to provide our identification numbers to the managing agent for a credit check as a part of the Board package, so it’s not a big deal. Do we have to list our socials on the contract?

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The listing stated that the apartment was 1,100 square feet, but the appraisal measured the apartment at 900 square feet. Can we cancel the contract and get our money back?

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I'm about to pay off my co-op loan. What evidence will I have from the bank that the loan has actually been paid off?

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I am considering an apartment in a new construction condominium. There is park under development by New York City that will greatly enhance the value of the condominium when it’s completed. Although the sponsor’s salesperson indicated that the first phase of the park will be completed in the next year or so, the Offering Plan contains a “Special Risk” that states that the sponsor gives no assurance as to when, if ever, the park will be completed. Who and what should I believe?

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We are in negotiations to purchase a co-op apartment on the Upper East Side. Our lawyer reviewed the minutes and discovered that the building has a bedbug infestation. Should we go forward with our purchase?

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My purchase application was approved by the co-op Board, but it is conditioned upon my providing a maintenance deposit and guaranty by my parents. Do I have to comply with the conditions?

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At my closing, I had to reimburse the Seller for his New York State “STAR” rebate that appeared on the maintenance statement for the month following the Closing. What exactly is the STAR rebate and will I be able to obtain the rebate as well?

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I'm selling my co-op next month and my attorney aked me to "freeze" the line of credit I have with my bank. What exactly do I have to do?

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I just found out that the seller will be unable to close for an additional two weeks. As a result, I will have to extend my rate lock, at a cost of $1,200.00. Is the seller obligated to reimburse this cost?

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I am buying a new construction condo and the Offering Plan is over 400 pages. Do I need to read the entire Offering Plan?

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We ran across a co-op that has a few “sponsor owned” apartments for sale. Is there any advantage in buying one of the remaining sponsor apartments?

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I am about to make an offer on an apartment, but I have not been provided with the current financial statements for the co-op. Am I entitled to review the financials before I make my offer?

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We are selling our apartment to our neighbor, but our neighbor can’t afford to purchase our apartment unless she sells her apartment. Her lawyer wants the contract to provide that the purchase of our apartment is contingent upon the sale of her apartment. Our lawyer is advising us against including a provision that makes the transaction contingent on the sale of the buyer’s apartment. Should we go along with the contingency?

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We are selling our co-op and the buyer is not obtaining a mortgage in connection with the purchase. The contract required the Board package to be submitted within 10 business days after the fully-executed contract was returned to the buyer. The buyer is two weeks late in submitting the package. Is the buyer in default?

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I’m selling my condo and I have not been able to pay my common charges for the past six months (I lost my job). I have a buyer for the apartment, but the Board of Managers will not release the Waiver of the Right of First Refusal, unless I pay the outstanding balance of the common charges. I’m between a rock and a hard place, as I don’t have the money. What should I do?

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I am combining two adjacent apartments that I own and I want the co-op to issue one stock certificate for both apartments. There is an outstanding UCC lien against one of the apartments. The other apartment is owned free of any liens. Can the co-op object to the combination?

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My attorney asked me to contact the managing agent to verify the maintenance and assessment information that's disclosed in the contract for the apartment I intend to purchase. Isn't that my attorney's job?

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Our application to purchase a co-op was turned down by the Board without an interview. Although our attorney asked the managing agent to disclose the reasons for the Board’s decision, none were given. Can the Board just turn our application down without any explanation?

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My bank issued a loan commitment, but then withdrew its underwriting because private mortgage insurance was not available. Will I have a problem canceling the contract and getting my deposit back?

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The seller has a storage bin, but the contract indicates that the apartment does not come with a storage bin. If I buy the apartment, can I be sure that a storage bin be avaialable?

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I’ve been asked to serve on the Board of my co-op. Could I be held liable if the co-op is a party to a law suit?

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I am buying a co-op in Manhattan. The managing agent is located in Brooklyn and refuses to send a closing representative to the attorney’s office for the buyer or seller located in Manhattan. Will everyone have to go to Brooklyn for the closing?

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We are purchasing a condo that was occupied by a tenant at the time the contract was executed. We just did the walk through and there is damage to a portion of the floor that was hidden by the tenant’s furniture. Are we entitled to a repair credit at Closing?

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A loan commitment was issued, but the bank requested an explanation for a $14.00 missed credit card payment that occurred nine years ago. Could the bank withdraw its commitment as a result of this missed payment?

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I'm selling my co-op, which I own with my mother and father. Is it okay to have the closing checks made out to the three of us?

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A leaking pipe inside the wall of my co-op was recently replaced. The following month, my maintenance account was charged $1,000.00 on the theory that the pipe only serviced my apartment. Am I responsible for this repair?

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A condo buyer has a mortgage contingency, but the closing will not take place for six months as the seller has a tenant in the apartment. When should the purchaser apply for financing?

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We submitted our Board package a month ago, but the Board has not scheduled an interview or asked for any additional information. To make matters worse, the managing agent won’t give us any indication as to what’s going on. Is there anything we can do?

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My co-op contract included the seller’s flat screen, but the bank underwriter required that it be removed from the contract as it was “impacting” loan to value. Can the bank do that?

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I am buying an apartment in a small co-op that is self managed. How does the bank obtain the required “co-op questionnaire” in order to complete its underwriting?

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Contact Ron Gitter

Buying or Selling? Email me at