Co-op financials

I live in a small, < 10 unit, self-managed building that is a bit loosey-goosey at times, but we have an independent accountant and audited financials.

Does the building have an underlying mortgage? One of the pros of an underlying mortgage is that the mortgage company normally forces the building into compliance on paperwork and repair issues.

Living in a small building is a big lifestyle choice. Realize that situations like the above are always going to come up and may be resolved by volunteers who (frankly) don't know what they're doing but usually have good intentions. If you're comfortable with that and want to know your neighbors, then proceed with caution and get ready to do a lot of digging in the diligence process.

I love my building and am happy with my choice, but the big difference is that my building is small enough that everyone who wants to be on the board usually can be, so I've had a voice almost from the start. I'm not sure how I'd feel about a 20 unit building especially if self managed.

I think you are out of your mind. You aren't purchasing some silly item. Its the largest purchase you may ever make and you are asking if getting involved in a building that sort of wings it is okay. Good luck.

I think every real estate purchase involves risk, and that non-audited financials are certainly that risk in a very codified form.

So I would 1) want to be compensated for that risk. I would expect a psf discount off the price of a comparable audited-financial building.

and 2) I would try to get more clarity about that risk by doing due diligence through other sources. (The first example that comes to mind is that even if you were planning a cash purchase, I might try to get a small mortgage just because the answer to the next round of questions -- like "what size is your fidelity bond"? -- might be more forthcoming to a lending bank than to you.

The second example is I would try very hard to sit down with a non-board current resident of the building.)

Red light? To me, no. But strong yellow light, certainly. Make sure you have a good buyer's broker and a good attorney.

ali r.
DG Neary Realty

last thing you need is a buyers' broker--it's a buyers' market--find a place where financials are in proper order--if you must have this apt (must have is a bad way to be for big investments), get an acct and a lawyer

I live in a small walk-up building and our financial statements are not audited but they are prepared by a independent accounting firm. I am a CPA myself and this doesn't trouble me, we have an underlying mortgage, just because financials are not audited, does not make them wrong. I would be concerned in your case about the non-independent part. If the person compiling the financial statements lives in the building, that could be ok, but make sure they are at least an accountant.

For a personal mortgage, I don't think I needed audited financials. For the building's underlying mortgage we definitely did.

I agree with Ali that you need to go rogue here and start talking to others in the building. There is a limited amount of information that a lawyer can or will provide to you in situations like these. A broker may be helpful but again has to be able to network within the building (and be honest with you). The best thing to do, in my opinion, is to get your hands dirty and do the diligence yourself with your future neighbors.

I would not like the idea of the building's accountant or attorney also being a board member, but in reality small building financials are very simple yet kind of expensive. It's possible that someone on the board, who can do this type of stuff in his or her sleep, is doing for $200 what an independent accountant would charge $2000. Would I be entirely comfortable with this? No. Would I walk away from a place I otherwise loved? Not necessarily. A friend bought into a place that did the above but had no underlying mortgage and strong reserves.

My first question would be the does the building have an annual meeting? If not that's strike two.

The second question would be whether there are board minutes. If not, strike three, done deal; you truly do not have to evaluate what you're getting into.

Sorry, last sentence should read "... you truly do not have ENOUGH to evaluate what you're getting into."

artk:

Those are warning signs to stay away. Remember Bernie Madoff's accountant wasnt independent either.

You lost me at "walk-up". Walk AWAY.

i wouldnt listen to anyone, as relates to this or any other major investment, but for an expert with fiduciary to me, as in RE lawyer, coop acct--and if the financials are unaudited, who cares what fiction or non-fiction they include? without audit whatever they say re reserves, underlying mortgages, ongoing liabilities is useless--you'd be nuts to buy in such a bldg--and there are plenty of comps to a 20 unit walkup in midtown

you should also make sure you get a good attorney to perform due dilligence on the building.....someone who knows what questions to ask. good luck!