- The Washington Times - Friday, September 28, 2007

The New York City real estate market is so notorious for its co-op boards rejecting well-known and well-heeled potential residents that such incidents have become fodder for television comedy episodes.”Co-ops,” short for co-operative apartments, are much less visible in the Washington real estate market. Co-ops are outnumbered by condominiums in this city by about 20 to 1 or more, according to David Bediz, a Realtor with Coldwell Banker Residential Brokerage’s Dupont Circle office.

Mr. Bediz says that unlike the case in New York, few co-op boards in Washington interrogate potential residents. They rely instead on the same standards as a lender to determine creditworthiness.

Some conduct a brief personal interview. Many simply approve buyers through paperwork.

“Usually co-op boards will simply take the bank’s word for it that someone should be allowed to buy into the building,” Mr. Bediz says. “But co-op boards still have the right to reject someone for any reason, without giving an explanation.”

The Edmund J. Flynn Co. (www.edmundjflynn.com), specializing in organization of co-ops since 1920 in the District, manages more than 130 co-op associations within the city, with more than 13,000 residential units.

William M. Karas, president of the Flynn company, says people do not realize how many well-known buildings in Washington are co-ops.

“Most of the historic ‘Best Addresses’ buildings are co-ops,” Mr. Karas says. “Some of the other co-ops in the city that are well-known are Harbour Square, the Chastleton, the Broadmoor and the Ontario.”

Bruce Majors, a Realtor with RE/MAX Allegiance in Georgetown, says many buyers choose co-ops because they are looking for a grander building with such old-style amenities as high ceilings, hardwood flooring and lots of square feet.

“If you look at the co-op buildings along 17th Street near Dupont Circle, you can just get more square feet for the money than some of the condos nearby which have been built or converted more recently,” Mr. Majors says.

“A disproportionate share of the buildings in the ‘Best Addresses’ book have become co-ops,” he says. “These turn-of-the-century buildings in Cleveland Park, Kalorama, Adams Morgan and Dupont Circle have been well-preserved and have a very specific style. You can also find homes with 1,200 to 2,400 square feet, which is much harder to find in a condo.”

In many ways, co-ops are similar to condominiums. Owners pay a mortgage and a monthly fee in both types of buildings. However, there are some significant financial differences between the two types of ownership.

Co-operative owners purchase shares in a corporation that owns the building, with a proprietary lease that establishes the terms of occupancy of each home. Condominium owners purchase their own unit and own the common areas and facilities of the development as tenants in common.

“In the past, co-ops had a bad reputation in D.C. because it was sometimes hard to get financing and the lenders required a higher down payment,” Mr. Bediz says. “Now more lenders will finance co-ops.”

Mr. Majors says National City Mortgage and Citibank are two of the most common lenders for co-ops, but he also points out that co-op buyers need to be certain that their lender has a “recognition agreement” with the co-op board.

A recognition agreement must be signed by the borrower, the lender and an officer of the co-op board at settlement, according to published materials provided by the Edmund J. Flynn Co. The agreement means that the co-op board recognizes that the lender has a financial interest in the purchaser’s unit and establishes the steps to be taken if the borrower defaults on the loan or on the co-op fees.

“The recognition agreement is in place because if there is a foreclosure on the co-op, the lender won’t actually own the property,” Mr. Majors says. “The agreement has to show that the loan will be repaid when the shares of stock in the co-op have been sold.”

Mr. Majors says that even if a lender has a recognition agreement with a particular co-op, the lender or the co-op board occasionally has a quota so that no one lender will own too many of the shares in the building. In that case, another lender may have to be chosen.

Mr. Bediz says some co-op boards require buyers to make a minimum down payment of 5 percent to 15 percent, regardless of whether they can obtain financing for a larger loan. Similarly to condominium buyers, potential co-op purchasers need to investigate the rules and regulations established by the co-op board.

The financial structure of purchasing shares in a co-op results in some significant differences that can offer savings to both co-op buyers and sellers. When buying or selling the unit, no transfer or recordation taxes are owed because the co-operative owns the building.

“The D.C. government currently charges 1.45 percent as a recordation tax to the buyer and another 1.45 percent recordation tax to the seller,” Mr. Bediz says. “Assuming a $600,000 sales price, this can save more than $8,700 for the buyer.”

Similarly, no title insurance is required for co-op purchasers. Mr. Bediz says this can save about 0.5 percent of the purchase price, or $3,000 on a $600,000 sale.

Monthly co-op fees are generally higher than condominium fees, in part because they include property taxes on the building rather than having each individual owner pay his own property taxes. However, while condominium fees are not tax-deductible, some parts of a co-op fee generally can be deducted.

“Co-op owners pay a prorated property tax for the whole building,” Mr. Bediz says. “But while condominiums are reassessed every time they change hands, co-op buildings are rarely reassessed because the entire building doesn’t change hands when individual homes are bought and sold. Generally, the tax assessments on co-ops are very low.”

Mr. Bediz says the portion of the co-op fee that goes to property taxes is tax-deductible, along with any interest paid on a loan taken out by the co-op board.

Ben Gehrig, an associate broker with Long & Foster Real Estate in Bethesda, says co-op fees include building maintenance, property taxes and a payment for the underlying mortgage on the co-op.

“The key to determining whether a co-op offers good value is to look at the underlying mortgage on the property,” Mr. Gehrig says. “Not all co-ops have this, and if it gets paid off, then the co-op fees could go down.”

Mr. Bediz says co-ops sometimes take out an underlying mortgage to pay for large improvements to the property, similar to a special assessment in a condominium.

“Underlying mortgages transfer to the new owners, and the value of this mortgage is subtracted from the purchase price of the home,” Mr. Bediz says. “The payments on the underlying mortgage are just like regular mortgage payments shared among all the units in the co-op. The interest on these mortgage payments is tax-deductible. But most co-ops do not have underlying mortgages.”

Potential buyers should ask the co-op association if there is an underlying mortgage or if there are plans to borrow money for future projects.

Mr. Gehrig says condominium fees usually include a portion of money set aside for reserve funds for future projects and maintenance.

“In a co-op, the board borrows against the property rather than having everyone contribute to the reserve fund,” Mr. Gehrig says.

Prospective co-op buyers also should determine whether rules forbid owners to rent their homes, a common regulation that can be a major disadvantage for some buyers.

“Co-ops want residents to consider themselves a member of the cooperative, so they insist that owners live in the building,” Mr. Bediz says.

The inability to rent a property tends to keep values slightly lower because the homes cannot be sold to investors. Mr. Bediz says many co-ops do allow a home to be rented temporarily under special circumstances such as job loss or transfer or an illness. Some co-ops have no restrictions on renting a home.

“Some buyers of co-ops appreciate the rental rules because the building has only long-term owner-occupants rather than students or other tenants who move in and out,” Mr. Majors says.

Mr. Majors says because many District co-ops are relatively small buildings with as few as four or six homes, they often develop a character. In some cases, one person will buy a place in a co-op and then as other homes in the building become available, their friends will purchase them until the building becomes almost completely owned by friends.

Co-ops traditionally have been priced lower than condominiums because they are less popular in Washington and many of them are older buildings. It is rare to find a newly built co-op in this area.

“One of the disadvantages of buying a co-op is that while they have the charm of an older building, it is rare to find one with central air conditioning,” Mr. Bediz says. “Usually they have radiator heat, and some don’t have the option of adding a washer and dryer.”

Few buyers actively search for a co-op versus a condominium, but real estate agents certainly can help buyers find a home with either type of ownership.

Before buying either a co-op or condominium, consumers should determine the financial viability of the homeowners association and whether the rules and regulations will fit their needs. For example, pet owners should check the pet policy for each building.

When comparing co-op fees and condominium fees, buyers may instantly dismiss a co-op because of their higher monthly fees. A better method of comparing the fees, though, is to determine what is paid for within the fee and what portion is tax-deductible.

In particular, it is important to recognize that property taxes are included in the co-op fee and will not be paid by the individual owners as part of their monthly mortgage payment.

Money saved because of the lack of recordation and transfer taxes and the lack of title insurance also should be part of the calculation when comparing co-ops to condominiums.

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