I am looking to buy a condo or co-op in New Jersey. To my surprise, the co-op complex I was most interested in requires buyers to get their mortgage from only one bank. Let’s call it Bank A. This is not the bank I’m using, since I am getting first-time home buyer grant money from Bank B.
Is it common for co-ops to require that you use a certain bank? I knew they had stricter rules, but I didn’t think it extended to where you got your mortgage. My real estate agent told me that Bank A might be the only bank willing to work with them, because this complex seems to be above 60 percent renter-occupied instead of owner-occupied.
That changed my mind about wanting to live there. But I’m wondering if I will face this with other buildings, too.
It’s hard to imagine what sort of craziness you’ll face from a co-op. That’s why the ownership is a co-op rather than a condo; the folks who live there likely have quite a bit more control over the building, the financing of the co-ops and other aspects of life in the building.
It seems as though your real estate agent has provided insight into the building’s decision to steer you to Bank A. If no one else will work with buyers because the owner occupancy rate is too high, then you’re stuck with lenders that will portfolio the loan and lenders that work with that building. It’s possible you could find another bank that will do this, but it’s more likely that there are only a handful of local lenders that can deal with a co-op in this situation. It’s in the building’s best interest to let you know as soon as possible.
You should also know that financing a co-op purchase is quite different than a condominium. Let’s step back a second and talk about buying a cooperative apartment. When you buy a co-op, you generally get a lease that allows you to rent a specific unit and an ownership interest in the building usually by virtue of stock in the cooperative company that owns the building. A lender, under these circumstances, will want to secure the loan by taking the shares as collateral and having the building agree that if the lender forecloses on the loan, the lender would have the right to sell the shares and get its money back. For this process to work, the lender must have the co-op board’s cooperation. Otherwise, the lender won’t be able to get out from the deal if the borrower defaults under the loan.
In some places, cooperative buildings are not well known and lenders aren’t familiar with making loans to those buyers. There are parts of the country that are very familiar with co-ops, but even in those areas there are banks that specialize in lending to co-ops. We think you may have dodged a bullet. If it’s this hard to buy into the property, imagine how difficult it will be to sell the co-op down the line?
We lived in a co-op for five years, and it was very difficult to sell since younger brokers didn’t understand how co-ops worked (taxes are typically included in your monthly assessment, for example, which makes it seem like a much more expensive place to live than comparable condos). Now, more than 20 years after we sold our co-op, it seems that even fewer agents understand how to sell a co-op.
The short answer, of course, is that co-ops, and many condos, make up all kinds of crazy rules for reasons that aren’t always well understood. If you buy a co-op, it could be a fabulous experience, or it could be one headache after another.
Ilyce Glink is the creator of an 18-part webinar + ebook series called “The Intentional Investor: How to be wildly successful in real estate” as well as the author of many books on real estate. She also hosts the “Real Estate Minute” on her YouTube channel. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam at ThinkGlink.com.