I recently sent a first time buyer that I'm working with, a purchase application for a co-op apartment that we have an accepted offer on. The buyer asked for clarification about the difference between the purchase agreement and the co-op's purchase application. It served as a reminder to me that every individual's real estate transaction is a very unique, important, and sometimes confusing experience. As a broker it is important to relay the basics for those who may have never been through it before. I took the time to explain in probably greater than necessary detail, and thought an excerpt of my response might be useful for those contemplating their first co-op purchase:

In effect, in buying a Manhattan co-op there are two hurdles, first to reach agreement with the sellers; then to reach an approval by the Board of Directors of the co-op corporation.

"The 'purchase agreement' is commonly referred to as the 'contract' of sale with the sellers, and is an element included in the Board package. It controls the process by which you and the sellers have agreed to transfer the shares of the corporation in their name. It dictates the essential terms of the sale including price, closing date, inclusions, exclusions, contingencies, etc... It is not binding on the co-op and its Board of Directors. Purchasers of Manhattan cooperatives must seek the approval of the Board to buy-in, and complete the transaction. The Board has the final say in accepting or rejecting an applicant. That process begins with the purchase application.

The 'purchase application' is made with the co-op corporation, to become a shareholder of a company that owns the building, and issues you a proprietary lease to occupy the apartment; in much the same way as a landlord does in a rental building. In this case the rent is called 'maintenance'. The Purchase Application outlines the documentation that the Board requires for review, to transfer the stock and lease to a new shareholder. It contains the required forms and disclosures by the co-op corporation and is the beginning of your prospective relationship as a shareholder in the company. As your broker, it is my job to assemble the documents that are asked for in the purchase application into an easy to understand 'Board package' that I'll then submit to the building's manager for distribution to the members of the Board. The process usually leads up to a face to face interview; and ends with an approval, or rejection, of the applicant. An approval is a green light to schedule a closing where the stock and lease will be transferred, after reviewing and signing a mind-numbing amount of legal papers."

In effect, in buying a Manhattan co-op there are two hurdles, first to reach agreement with the sellers; then to reach an approval by the Board of Directors of the co-op corporation. The process is rigorous, but the extra layer of oversight that co-op boards have imposed in NYC is one of the reasons why we still have a stable housing market here. It has created fiscal scrutiny and owner equity requirements that exceed most lender's underwriting guidelines. Many co-op owners come to really appreciate the control, along with their neighbors, over their common interest in their buildings, which this form of ownership governs.

"I am extremely pleased that the tax code will treat people who live in co-operative housing the same way as homeowners and condo owners are treated when it comes to their renting out part of their property"

The Mortgage Forgiveness Debt Relief Act of 2007 passed in December, contains a provision pushed through by House Ways and Means Chairperson Charles Rangle, which specifically affects co-operative housing by changing the criteria to qualify for co-op status known as the "80/20 rule". The rule meant that co-operative buildings were required to get 80% of their income from tenant-shareholders, and could not show revenue of more than 20% from other sources, like collecting commercial rents on retail or office space in the same building. That's now changed. Broadening the rules may help the Boards of cooperative buildings have greater confidence about compliance, and simplify everyones lives. It is unlikely however, to create any real windfall in commercial income for the co-ops in most cases. Under the new law almost all NYC co-ops look like they will qualify under one of these new criteria:

1. If 80% or more of the co-op's gross income is from the tenant stockholders
2. If 80% of the total square footage of the building is used or for residential purposes.
3. If 90% of the costs of operating the building are for the benefit of the tenant stockholders.

what do the changes mean for shareholders?

If the building did not meet the old 80/20 threshold, the shareholders were in danger of loosing their tax benefits. Real estate attorney Michael Dym explains, "Shareholders lose the ability to deduct the interest portion of their mortgage payment and a portion of maintenance attributable to paying the underlying mortgage and real estate taxes on the co-op's building. In short, assuming the co-op ran afoul of 80/20, under the old rules, they would loose the principal tax benefits of homeownership." It was similar to the way other corporations work where the tax benefits of owned real estate, cannot be passed along to shareholders. This however, differs greatly from a how rental income is utilized by an owner of mixed-use real property, where collecting market rent from a retail store or medical office, can greatly offset the costs of operation and ownership of the property. The new, broadened, criteria for co-ops, will make it easier for co-ops to collect market rents and still permit the pass-through of those tax benefits to shareholders, who's buildings might have been in violation under the old law.

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Q. My wife and I are selling our home and relocating to another area. Can we roll the money over into the next house without paying capital gains?

A. Get a load of this: I checked with tax expert Robert Hoberman of Hoberman, Miller, Goldstein & Lesser, P.C. in New York City. He advised that if you own the home jointly and you’ve lived there for two of the past five years, you can exclude up to $500,000 of your gain when you sell (for singles, the exclusion is $250,000) and you don’t have to roll the money into another house to enjoy the tax benefit.

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We again welcome Barbara Corcoran with a Q&A on how to best utilize the equity in a home, from her column 'Ask Barbara' in the New York Daily News.

Q. I plan on purchasing a home and starting a business within the next year. If I take out a loan for $80,000 to start my business, can I still get a loan toward purchasing my house or should I use my house as collateral to get a business loan?

A. Wrap a business loan into your house mortgage. Your payments will be lower, and you’ll have more time to repay. Besides, the rates are cheaper. When most people start a new business, we expect it to take off a lot faster than it actually does.

By giving yourself the cushion of lower payments and more time to repay, you'll be thankful that you never signed up for a short-term business loan with high rates.

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The Robb Report is publishing a new magazine, that has its premiere issue on newsstands, called Vertical Living. It covers super-luxury, high rise, developments in global destinations like London, Mexico, Singapore, Australia, and of course, New York City. Contributing editor Kim Fredricks interviewed me about buying into a new development. That interview follows here in its entirety and has some good advice in it; as does the very nicely crafted piece she wrote for the first issue called Small Promises (tear sheet pdf 320 kb) in which I'm quoted. Buying new construction is a place where even the most savvy buyers will benefit from their brokers' depth and breadth of knowledge. I'm pleased indeed to have been asked to comment on a subject that I've written about before. In fact, I learned a couple of weeks ago that my post about closing costs in new developments, is being excerpted and included in the next edition of New York Real Estate for Salespersons, one of the textbooks for the NY State Real Estate licensing exam; it was also a selection in the Carnival of Real Estate which is a sort of traveling show of the best real estate blog posts that Zillow blog's Drew Meyers started up. These are a few nice and unexpected validations, of the connection with the audience and the growth of my blog, which has been public for just shy of a year now.

the Robb Report Vertical Living interview

Vertical Living: Buyers are lured by the benefits of getting a good deal on pricing when buying pre-construction, but what are some red-flags that the buyer should look for before placing a down payment?

Comitini: I don't think that buyers in our market in Manhattan think they are getting a break on price. They are willing to pay well for a premium product. Sometimes with a year or two lead time to delivery, the market accelerates past the contract price and seems a bit better. New construction is generally higher priced than are re-sales, on a price per square foot basis, with higher out of pocket closing costs. Have your broker identify a couple of previous projects of the developer so you can understand if they have performed as expected.

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