When you purchase a co-op you are actually purchasing shares of stock in a corporation, not real property. Hence, co-ops do not have to abide by many real property laws such as the Property Condition Disclosure Statement Law. You should speak to your attorney regarding the difference between a co-op and real property.
Having said that, owning a co-op is owning an asset, just like owning stock in any other corporation. There is a certain amount of risk involved. Just like any other stock, the value can go up or down. Just like stocks, if you are looking to hold onto the asset for a while, long term the risk level decreases statistically. Heck, there is always risk associated with any asset you purchase, even real property.
So you ask how can I make a smart choice? The answer is... do the research. It is not that difficult. First visit with a mortgage banker and get yourself pre-qualified to find out how much you can borrow. Once you know that you can prepare a budget and know how much your monthly living expense will be. Then you can speak to your accountant to find out how much money you will save on your income taxes, I bet you it will be quite a bit! Then you will fully understand why it is better to own than rent if you can.
Even if your budget only allows for you to purchase a co-op, if you can afford it you are much better off than renting. You just need to minimize the risk I had discussed above. The way to do that is to make sure that you have a great real estate attorney representing you. Your attorney will review the financial statements of the co-op to see if it is in good financial condition. If the co-op is operating at a profit and has a good rainy day fund, it is a pretty safe bet. Lets face it, the same can be said of any stock you purchase. And like stocks, if you buy good ones and hold onto them for a long time, although it is never a guarantee, you usually do very well!
Important points to take note of when purchasing a co-op:
1) Aside from getting your mortgage, most likely you will have to also submit an application to the co-op board and go on a personal interview with the board in order for the co-op to approve the sale. These interviews are similar to a job interview so be prepared for that.
2) All co-ops have their own "house rules", make sure you know what they are ( i.e. no pets allowed, no subletting). These rule can vary dramatically from co-op to co-op and can have an effect on the value of the co-op and/or your desire to want to purchase in a particular co-op building.
3) Find out if there is a flip tax and if so how much it is. The flip tax is a tax that you pay when you SELL the co-op (not when you buy it). It is a way that co-op developed to bring additional funds into the co-op. In the past 20 years I've been in real estate I have seen flip taxes ranging from $0 to 20% of the sales price (crazy right?). If a co-ops flip tax is too high, it makes it harder to sell and you can get hurt down the road. Plus, if the flip tax is too high, the bank you go to for the mortgage may not want to lend you the money! You have to check with your mortgage banker what their policy is regarding flip tax. Your best bet is to go with a co-op with little or no flip tax.
4) The co-ops house rules and flip tax policies can change over time. As an example, if it turns out that the co-op finds itself short on funds, the monthly maintenance may go up or they may establish a flip tax. Even though it would be put to a vote, if you own in the building you really cannot fight it because if you do not raise the additional funds somehow the co-op can go bankrupt (not a good thing).
5) This is why it is so important that you see the financials and have a qualified person review them to make sure the co-op is in sound financial condition.
Hope that helps, if I can be of further assistance, please contact me direct. Good luck!
Mitchell S. Feldman
Associate Broker/ Director of Sales
Madison Estates & Properties, Inc.
Office: (718) 645-1665/ Cell: (917) 805-0783