Although cooperative apartments involve real estate, they are not real property. What you bought when you purchased was shares of stock in a corporation and that corporation generally owns the land, the building(s) and everything in it (them). You became a shareholder and a tenant of the corporation. The shares that you purchased are attached to the apartment in which you became a tenant. If you didn’t understand it then, by now you know that almost everything you do has to be approved by the cooperative board, which is elected by the shareholders to manage the corporation. And, just as when you bought (unless you purchased directly from the sponsor of the project) you must obtain board approval for the sale of your shares and leasehold (apartment).
COOPERATIVE RULES FOR SELLING
When you are prepared to sell “your apartment,” you should first consult the board or the managing agent about the rules imposed by the board on shareholders as a condition of selling the apartment. Most likely you will need to obtain board approval of the sale. This entails presenting a transaction to the board and asking the board to authorize the sale to your buyer.
There is usually an application that must be completed by the buyer once the contract of sale is signed. That application contains financial information about the buyer and requests copies of certain documents, such as income tax returns, bank statements and other pertinent financial disclosures.
At this beginning stage, the most important step is to find out what you must comply with and the fees that you have to pay at closing or before. Some cooperative corporations impose a “flip tax” or “waiver fee.” This is a charge for the right to sell your shares. This fee is impossible to calculate in general, as each cooperative has its own formula for calculating it. It may be imposed as a set number of dollars for each share you own. It may be imposed as a percentage of the sales price or as a percentage of the profit on the sale (which profit is calculated differently from the way you would calculate your profit or the way profit is calculated for capital gains tax purposes). Thus, it is important to determine if there is such a fee and, if so, what the fee would be in your particular instance. There may also be some other fees owed to the cooperative and its transfer agent, the company that will transfer the shares and lease to your buyer. All these fees can add up to substantial sums and it is important to know them so that you don’t have any unpleasant surprises before you accept an offer.
It is also important to determine the qualification rules for a prospective purchaser. For example, there may be a minimum down payment requirement, as well as a minimum income required of a purchaser. If this is the case, you want to make sure that you screen your potential purchasers so that you don’t waste time accepting an offer that will go nowhere.
PROSPECTUS, AMENDMENTS AND FINANCIALS
If you did not keep a copy of the prospectus or offering plan, a full set of all the amendments to the plan and the financial statements that the cooperative has emitted throughout the years, now may be the time to get them. You may get them from a neighbor and make a copy if you have easy access to a copy machine. If not, you can ask the managing agent for a copy (for a fee of course). You will most likely need them because most prospective purchasers will ask you for them, and most competent realtors, when they take your listing, should ask you for them. If a realtor does not, you should ask yourself if the word competent applies to that realtor.
Together with the prospectus, amendments and financial statements you should also obtain a copy of the board application and the current house rules so that you can provide them to the purchaser.
Do you have a profit on the sale of the apartment? If so, how much is the gain? Did you use the apartment as your primary residence for at least two of the past five years? These are all important questions to answer, because you may have to pay a tax on a profit depending on the answers to these questions. It may be a good idea to consult an accountant or an attorney about any potential capital gain.
Although it may sound self-serving, I think that the selection of a lawyer is probably the second most important step in the process of selling a cooperative apartment, the first being the selection of a realtor (see below).
There are important issues to consider when selling your apartment. You must obtain information from your cooperative board about the rules for selling, consider what expenses you may have and get direction on how to proceed. An experienced lawyer can guide you through this process in a way that most realtors don’t. And, once you have selected a realtor, you should not sign a listing agreement without first consulting your lawyer. Know what you’re signing, whether you can cancel the listing, whether you can sell the apartment on your own and, if so, under what terms, whether you can sell to friends and relatives without paying a commission, and how you can take the apartment off the market if you change your mind about selling. It is important to know, before signing a listing agreement, how long is the listing for, how long must you wait after the listing has expired to sell the apartment to someone who visited the apartment while the listing was in effect, without having to pay a commission.
The following is a checklist of expenses:
- Broker’s commission: to be negotiated before accepting an offer;
- Transfer taxes: 0.4% of the sales price to New York State. In New York City, 1% of the sales price if same is $500,000.00 or less and 1.425% if the price is more than $500,000.00. There is a 1% “Mansion Tax” when the price is $1 million or more, but it is imposed on the purchaser, unless otherwise negotiated. Make sure that your contract specifies who’s responsible for paying the transfer taxes;
- Flip tax, also called waiver of option fee: some cooperatives impose a fee on the sale of an apartment, commonly called a flip tax. It is a fee for the right to sell the apartment. This flip tax may be based on dollars per share (for example $5.00 per share), or on a percentage of the profit (but as calculated by the board, which may not be the way you would calculate it, or an accountant would calculate it for capital gains purposes), or a percentage of the sales price, or on a dollar per room basis (for example $1,000.00 per room);
- Cooperative fees: in addition to the flip tax, cooperatives may have other fees, such as administrative fee, processing fees, and the like, and these can add up;
- Transfer agent fee: at closing, the cooperative will be represented by someone and that someone will prepare transfer documents, such as a new stock certificate, proprietary lease (or occupancy agreement), and a number of other documents. This transfer agent may be a lawyer or a managing agent. Whoever it is, the parties will pay a fee for the services;
- Lender’s representative: if you have a loan against the apartment, your lender kept your stock certificate and lease. Now is time to bring those back. A lender will send a representative to the closing to exchange payment of your loan balance for the stock certificate and lease. That representative will also collect a fee, generally less than $500.00;
- UCC 3 filing: if you have a loan against the apartment, the lender probably filed a UCC 1, or evidence of a lien, with the city register or county clerk. If so, that evidence of a lien will have to be terminated. It is terminated with a UCC 3 and there will be a fee for filing this UCC 3, generally between $75.00 and $150.00. UCC stands for Uniform Commercial Code, the law that governs liens on personal property;
- Legal fees: you should have already consulted the attorney you plan to retain and should know the attorney’s legal fees. Again, this may sound self-serving, but keep in mind that you are retaining a professional service and that the value of that service should be measured by different factors, such as experience, the bar committees the attorney belongs to, his/her knowledge of the subject matter, etc. You are not buying a can of soda which, at whatever price and in whatever store, is the same can of soda.