Condo vs. Co-op's. What's the difference?

Anyone? Bueller?

I'm sure most of you out there are very familiar with condos, but you may not be familiar with co-ops - mainly because not may co-ops exist in DC.

You encounter co-ops much more frequently in NYC, and was made famous there when former President Richard Nixon was denied from purchasing a co-op. After President Nixon's resignation, he tried to purchase a unit in one of the co-op buildings in NYC only to be denied by the co-op board on basis that the owners in the building didn't want to attention and the media circus President Nixon brings. And in this little story basically summarizes the difference between co-ops and condos.

When you purchase a condominium, you clearly know the outlines of your unit, in a 3-dimensional space. Since you purchased your space, you can do almost anything you want to it without endangering or infringing on your neighbor's ability to own a home. However, in cooperatives, you don't own the outlines of your unit, in fact, you only own a share of the unit and you have the right to use that property. Basically, co-ops are more like a company where you purchase x number of shares of that company, and with those shares, you are given a right to use or rent (at no cost) the unit from the company.

Because of this difference, you have much stricter rules in co-ops where each purchaser has to be individually approved by the owners of that unit. The owners can decide to disallow you from purchasing a home in that building for any reason as long as the reason doesn't violate national and state Fair Housing laws. So, in essence, if everyone in the building owns Lexuses, and you drive a Honda, the owners can discriminate against you for driving a Honda. Of course, this is an extreme scenario, but can happen.

Then why would anyone want to live in a co-op? Co-ops were designed to specifically protect the owners against bad tenants. Just about all co-ops have rules against renting, where you can only rent out your unit for a year; maybe two consecutive years max. The idea is that tenants will not take care of their unit or the common area as well as the owners and they want to preserve the units. Therefore, theoretically, co-ops are better than condos. But then why hasn't this caught on with people? My opinion is that people don't understand co-op's fee structure, which is higher than condos and therefore did not want to bother with them.

But fear not, I'll enlighten you here.

When you purchase a condo, everything is clearly outlined. Here's the home for sale. Your "home" is bounded by this, the price is $400,000, your condo fee is $350 and it covers water,common amenities, etc. Very simple to understand. However, in a co-op, the fees are split up into two mortgages - the building's and yours. The building itself has a mortgage based on what it cost to build and was sold for to the original owners and you have another mortgage that pays for purchasing the shares of a particular property based on market price.

For example, if a 1 br co-op is on sale for $400,000, then the monthly payments usually get split up into $200,000 (usually somewhere in the 50/50 or 60/40 split) in your personal mortgage to purchase the share of the property and the remaining $200,000 gets paid to the co-op board in terms of the typical fees (similar to condo fees). In short, the amount of money you pay is the same, but how you pay changes depending on the co-op's financial structure. This is why people balk when they hear co-op fees of $1,500 per month, without realizing this distinction. Further co-op fees include taxes whereas condo fees do not - something most people don't calculate when first crunching numbers on what the buyer can afford. A $400,000 condo/co-op will run you anywhere from $300-500 per month in taxes and that is disclosed up front in the co-op fee.

In summary, the big difference between condos and co-ops is that co-ops have more right to accept or reject who lives in the building, and the exchange in funds are different. One more thing to note, however, because of the low popularity in co-ops in DC, many mortgage brokers don't know how to process co-op and may not be able to get you the loan. Think of it this way. If you avoid things that you're not familiar with, then the banks will too since they take on a huge burden. This doesn't mean co-ops are bad, but that you are limited in bank choices.

Caveat Emptor Buyer Beware!!

Thinking about buying a home in Virginia? Have you heard of the term Caveat Emptor? You can get the Wikipedia definition here.

This term is important when purchasing a home in Virginia because the sellers do not have to disclose ANY DEFECT about the property. This means a house can have a flooding basement, a leaking roof, a drug dealer next door, and they don't have to say a thing. However, in DC, you have to disclose ALL material facts that the owner is aware of. While I'm not a lawyer, I thought you should know this fact.

VA's history - this law was a result of an incident that happened in the VA Beach/Hampton area where a house was well known for the basement flood on a rainy day. It was so well known that almost every neighbor knew about the flooding problem but the buyer never asked. You then have a buyer, not knowing this information purchases this house, and on the first rainy day, the basement flooded. Naturally, the buyers were upset and decided to sue the seller for their negligence to disclose such pertinent information. Well, unfortunately the result was that the information was so readily available that the court ruled for the sellers stating "caveat emptor" as the reasoning....meaning that the buyers should have done their due diligence.

This was obviously an extremely case and won't expect such events to occur very often, but you don't want to be part of the landmark scenario. So, how do you protect yourself? First, inspect the house carefully. Visible signs of any damage is a clear indication of any possible issues. Second, hire a home inspector. While the home inspector can't, and won't, clearly identify the cause of the issue, he should be able to help you narrow down the possibilities. Third, ask lots of questions, especially to your Realtor? While Realtors may not be builders, we have seen lots of homes and we can detect a pattern of home defects.

Sign a "Buyer Agency Agreement"? Why?

Realtors often ask potential new buyers to sign an “Exclusive Buyer Agency Agreements” prior to showing them homes. Naturally, most people are thinking: “there is no way I’m signing something with a Realtor I just met.” And it’s ok. Some surveys rank Realtors below used car salesmen when it comes it trust and honesty, so of course you are going to be skeptical. However, you should know that signing a Buyer Agency Agreement can be beneficial to you. But, before you sign, you should definitely be comfortable with the agent before signing an agreement with him or her. The following outlines how a buyer agency agreement can help you:

• First, it doesn’t cost you a thing. You pay nothing, yet you get professional advice on how to go about purchasing your home. Remember, the Realtor is to serve as your agent, meaning they should act and help you make decisions as if the Realtor is you and protect you to ensure you don’t go into any agreement that hurts you, at the same time find ways protect you. However, you could argue that you are indirectly paying for the buyer agent’s fees since you’re “writing” a check for the house. You could even extend that argument that you can save 3% on the house by bypassing you as the buyer agent and get that 3% discount. Sounds great, but that’s not how it really works. Buyer agents are not technically paid by the seller, but the listing Realtor. Meaning that before a house is on the market, the seller has already has agreed on a listing agreement with the listing Realtor set at a certain % of the sales price, typically 6%. If you have a buyer agent, then the listing broker pays the buying broker 3% of the 6% to secure a deal. Listing agents love it when you purchase a home directly through them. Why? Because the listing agent gets the full 6% commission AND he doesn’t represent you. Meaning that his job is just to have you sign the necessary paperwork but won’t have to protect you in any way since he is already serving as an agent of the seller. That means the selling agent doesn’t have to tell you that the foundation could be sinking, or that water damage in the basement could be serious. You can have a dual agency agreement, meaning the Realtor represents both the seller and the buyer, but is that really protecting you? Listing agents will even pretend to give you a 3% discount by not having a buyer’s agent, but this discount would have occurred regardless whether you had an agent or not. In fact, if the seller is so eager to quickly give you a 3% discount off the listing price, then buyer agents should be able to get you a bigger discount.

• Technically, agents aren’t representing you w/o a buyer agency agreement. This means that, by law, if you are visiting homes with an agent w/o a buyer agency agreement then the agent technically represent the seller and doesn’t have to protect you, the buyer. Of course this is not how the industry works. However, remember the possible problems I’ve identified in the previous bullet-point? Yes, the same thing could occur.

• You’re not hiring a chauffeur; you’re hiring a buyer agent to look out for your best interest. You’re hiring him for his knowledge, his experience, and his expertise. An analogy I’d like to make takes us back to the first time we used a computer. For most of us, a computer was a big, heavy, black & white machine that was considered “delicate.” During your normal usage, the computer would do funny things where it would just “freeze” or just stop working. The first time this occurred, you didn’t know what to do so you called someone for help and he told you to re-start your computer. Second time this happened, you didn’t know what to do and again you called for help to got the same advice. After a while, you’ve experienced these problems enough to know that you just need to re-start your computer to fix most of the problems. This sort of experiences is what buyer agents can help you with, except that it’s much more important because you don’t want to make a $700K mistake. You may only purchase and sell a handful of homes in your lifetime, but Realtors do this much more frequently and are experienced to help you sort through potential dangers. My belief is that an intelligent Realtor can make up for experience, and experienced Realtor can make up for lack of intelligence, but just make sure you don’t get caught in with a double-negative.

• Price – everything is about price. Every house has a price. You may hate the house, but I’m pretty sure that you will buy that house if the seller sold you that house for a $1. So, that’s what a buyer agent is here to do – or should do. Let’s say you have two homes, home A and home B. Both single-family homes A & B are in the same good neighborhood, has four bedrooms, three full baths, and the structure and floor plans are identical. However, home A has a new kitchen, new bathrooms, new hardwood floors, and a finished basement, but comes at the cost of $50k more than B. Well, $50,000 is a lot of money, so I’m definitely going to purchase B. It’s cheaper and therefore it has to be a better value; the houses are almost identical. Well is it? Possible, but not necessarily. What I like to do is take home B and add in costs for upgrades and then compare. For example. A new kitchen that has new cabinets, new gourmet stainless steel appliances, new tiles, and new granite countertop will cost $20,000. The new hardwood floors will cost another $8,000, new bathrooms will cost $3,000 each and $6,000 for the master bath. So far, that’s additional $40,000 required to make home B look like home A. We then add another $15,000 to finish the basement, which puts the price of home B higher than home A. Then, since home B isn’t updated, the owner did nothing to take care of the house to do the everyday maintenance such as caulking, paint touch-ups, and proper winterization, servicing, which means the house can break down much faster. So, it looks like $50,000 discount doesn’t seem like a good deal. While the Realtor can’t tell you exact pricing to make the homes identical, Realtors can give you ball-park figures to ensure that you’re not excessively overpaying for the house. But then you have to answer the question: do you want a home, or a house? A home is your home, as in “there’s no place like home.” A house is an investment, a value proposition. Understanding what you want will save your significant amount of time.

• Price II – negotiations. As I mentioned in the first bullet-point, if the seller is eager to give you a 3% discount very quickly then buyer agents should be able to do better. Realtors are experienced in negotiating on the price and can help you negotiate the best price for the house. We have all the previous sales data and use that to argue your position. And in some cases, we can even predict whether the buyer has room to negotiate at all with you.

• Further, buyer agents will help you identify different things to help you better understand the houses you visit. For example, how to identify the overall quality of construction by checking the quality cabinets, hardwood floors – wide plank or standard, type of faucets they used. Additionally, I help my buyers better stand what could be occurring behind the walls. I try to leverage my two engineering degrees and my experiences as a developer to point out potential problems, such as the existence of polybutylene piping – which some insurance companies will not insure homes with polybutylene piping because of high failure rates. My goal here is to help you look at a house in a different light that can help you make an informed decision.
  

• Buyer agents also need to do the work to help understand YOU. After spending some time with the buyers, the agent should have a general understanding of what you are looking for. The agent may have new ideas that may help you, or help you eliminate existing ideas. I try to go even further. Once the buying agent understands what you are looking for, you’re desire to see homes go down significantly. It’s just part of the learning curve that occurs and you know what you don’t want in a home. At this point, let’s say you saw a home that looks very interesting but there are no photos of the property? In this case, I will drive to the house, take multiple photos of the place, and even put up a quick video on Youtube.com to help you get a better understanding of the property. Most of the time, that’s enough for my clients to know whether they want to visit the property or not.

So, after such a long thread about buyer agency agreements, when should you sign? First, a quick meeting or a discussion over the phone about what you’re looking for and how the agent’s experience can help you with this. Then, maybe go out and see a couple of places and see if the agent is someone you can trust and truly look out for your best interest. After a few times out, you should know if you’re ready to move forward with the agent. Besides, you can always part ways if you decide you don’t want to work with the agent.

What's your goal?

You've been searching for months now and you still haven't found a home you want to buy. You've spent every weekend with your Realtor visiting homes after homes in the past few months. The houses you like are too expensive, and the houses in your price range are not what you like. While you feel like it has taken too long but you don't want to make a mistake in the "biggest" investment of your life. And besides, the market is bad. I'm not going to pay full price. My friends and these blogs I read says I have to get 10% off the list price so I'm not going to settle.

Sound familiar? Yes. I've had some clients like this. My question to you is, what is your goal? Do you want to buy a home or not? Notice I said "home" and not "house." A home is a place you come home to, your base camp, your sanctuary, etc. It's a place you want to be, not a place you got a sweet deal on. I tell people that regardless of the market, I (a practicing Realtor) am willing to pay 10% above the asking price to get the home I want. That means, even in this market, I'm willing to pay $70K more to purchase a $700,000 home. Why? Because I want to come home everyday and love the place I call home. I don't want to think "I got a sweet deal." If you only care about a deal then you might as well said "while a trailer homes wasn't my choice, I got it at a sweet deal on it." So, I say again, you have to know what your goal is. If it's to buy to rent, then it's just a financial model. If not, you should buy a home you love.

While doing this, you want to do it efficiently while eliminating choices. First, pick a neighborhood you want. Next, visit various types of places - even those you may not think you want. Once you visited a particular type of place, the rest will be very similar so you can start eliminating them. Then, keep progressing until you can narrow things down.

If not, you may end up in the same place you started which isn't the best use of time. Think of it this way, if you spend 100 hours to save $10,000, then that's a saving(earning) of $10/hour. Conversely, a person making $60,000 per year make $28/hr while at work. You get a much better deal by leveraging your background to make more money.

And don't religiously follow the recommendations of saving 10% off the listing price. Why? If I listed my house for $7 million, then sold for $700,000 then you saved 90% off the listing price. Is that a good deal? No. you should only pay attention to what's sold in the area: the comps. Trust me, I have a very technical and statistical background and most of the blogs out there that does such analysis is so horrible that a high school student could have performed them. These are the same people who doesn't properly understand difference between the mean and median.

Lastly, if you believe that this is the "biggest" investment of your life, then you especially don't have to worry about short-term fluctuation. The real estate purchase is similar to the stock market. It's a long term view and everything will even itself out in the long run if you buy in the right neighborhood. Besides, we live in a transient world. The days of having one job and living in the same for for 30+ years are over. You're going to buy another home again.

"I'm going to buy when a good deal comes up"

This is one of the most common statements I hear from First Time Homebuyers (FTH) - "I'm going to buy when a good deal comes up." What does this mean? Well, to me, it means that you're not even close to buying a home.

Why? Because this tells me that the buyer is not committed and just "shopping around" and because the buyer probably has no idea what a good deal is. I've helped many FTH and just about every single one says this, yet, when I actually show them good deals, they never buy the place. In fact, they don't even consider submitting an offer.

I was perplexed the first few times this happened, but then I was able to figure out why - because the "buyers" were not ready. You see, a home isn't just something you buy because everyone else is doing the same or because you're told to do so. It's a major investment. Thus, you need to be truly committed and believe that buying a home is a logical step in progressing your life. Further, buying a home isn't just a financial decision; it has to fit your lifestyle as well.

So when are you ready to buy a home? Well, if you're serious, then you need to know:
1) how much you can afford
2) what general neighborhood(s) you want to live in - try to limit to less than 3
3) what type of homes you can get in the neighborhood

I know this is a lot, but you're not ready unless you know these things.