If bank approves,then coop is financially sound?

Absolutely 100% incorrect. You need to have a real estate attorney and/or accountant study the financials for you. While there may be some overlap, you have different concerns than a bank does. You should understand the amount of the reserve fund, how it has been used, how it is to be used, what capital expenses are looming, how they've been paid for in the past, what the building's approach has been to debt, how all this has affected maintenance over time, etc. There are no shortcuts here. Hire a qualified attorney.

CPA > RE attorney..

when it comes to co-op financials..

some attorneys are limited to footnots, and can't navigate the fs as well as accountants...they see a loss or negative retained earnings and don't even back out depreciation or don't understand why AP/AR is reversed in cash flow statements, or how to estimate bad debts (outside of mtge) thru all vendors/shareholders based on past previous fs..

It is not only the financials but also the minutes. You really need to stay ahead of what repairs and possible assessments lay ahead.

The bank will not dig into to much detail and it would be a mistake to think that.

You need someone as the others have pointed out who understands how to read financials and understand what is in them and may be disclosed that could affect you.

definitely wanna see the minutes and what any previous assessments have been..cap. projects..etc.

cpa is definitely stronger than RE attorney

be sure you hire a good nyc-based, experienced RE lawyer--s/he will have done hundreds of residential deals, such that they will have seen it all, and know how and where to look for everything important

a cpa is unnecessary---the financials are just not that complicated, and a good RE lawyer will likely know more of the ins and outs of RE financials than a CPA

in fact, you should verify the work of your atty, under any circumstance--there are several threads here on se where posts specify what your atty should be reviewing, and what is acceptable for your to feel safe re your significant, likely biggest leveraged investment ever---a home, yes, but your biggest financial exposure by far

trickiest thing out there these days are contracts for new contruction, finished or not--if you are purchasing new, make sure when you vet your atty, you inquire as to what/how many new deals s/he has done--some of these contract are total shit, skewed totally in favor of the developer, and require serious negotiation--a legacy of the bubble days when people would sign anything to get on the bull train

The lawyers at the mortgage divisions of the big banks -- usually located in flyover country (Missouri, Texas, etc.) -- generally have no clue about New York real estate. Most don't understand the difference between condos and co-ops, let alone how to evaluate a building's financials.

Thanks for all your replies. The thing is, I don't have an accountant, so I'm relying on the attorney...which I got a feeling it's just an okay one. I didn't get the feeling that he went through each and every financial statement (last 2 years) in details and scrutinize each number.

Probably like other mediocre attorney, he just looked at the final numbers like total revenue vs. total expenses, and said if it's positive then it's good. And the reserve fund is healthy....but not going through each number and question, why is this number significantly higher/lower than last year (ie. cash down $300K from previous year), what was the line of credit drawn...etc. that sort of thing.

He kept on telling me that he thinks the building is healthy. "Key" numbers are in line. No capital improvements needed in near future from managing agent. No recent assessments...etc.

I just don't know how carefully one would need to look at the numbers and question every single item on it. Many thanks.

Oh yes, I would definitely say that if it's good enough for the bank it should be good enough for you. After all, these are the same banks who closed and then pooled thousands of A and Alt-A mortgages upon investors which in turn almost collapsed the entire financial system. Read "The Big Short" by Michael Lewis and then answer your own question.

I owned a coop and was on the board. This is critical stuff. Banks approve anything. We had our building declined by some banks and approved by others. My brother was buying a coop, and after I looked at the finances, he renegotiated the deal becuase of the state of their operating budget. My suggestions:
- Check the earnings, if they operate at a loss, then the budget is not balanced
- Check cash flow, if they have negative cash flow the budget is not balanced. Cash down $300,000 from the last yeart is a MAJOR red flag unless there is $300,000 more of investment grade bonds.
- Check commercial renters, if they are past due, you may have an issue
- Check past assessments, if there have been any, the mainenance that is quoted is understated
- Check the reserve fund, there should be at least 6 months worth of revenue in reserve
- Check the size of mortgage - how much is your share?
- Check the terms of the mortgage - does it expire soon and will the rate for the refinancing be higher?
- Check to see how much taxes and expenses have gone up in the last 12-24 months, the past may not be the best indicator of current state.
- How old is the building? Does it need to do local law 11 work (pointing)? That could be $500,000 or more. What about the elevators? another $300,000. The roof? Any other major items?

"- Check past assessments, if there have been any, the mainenance that is quoted is understated"

Not necessarily. Most of the time, assessments are for one-time (or once in 30 years) expenses for which a) it makes no sense to make a permanent adjustment to monthly maintenance, and/or b) the board doesn't want to blow its savings nut on this unusual major expense.

Oh, and you'll want to look at whether there were assessments for the last 4-5 years, given the cash flow dynamic you described.

Re NYMATT, a well managed coop will have a reserve fund for one-time expenses, like pointing. Also, I found that their are one-time or once in 30 year items happening every 2-3 years.

I suppose some people take out loans for their kid's college and other save for it...

I don't understand why everyone freaks out about Local Law 11 inspections--if you are buying in a 6-story or higher building and plan to hold long term you WILL encounter Local Law 11, which is mandatory every five years. So what if the building has an inspection coming up soon? What diff does that make if you're planning to live there more than five years? Local Law 11 work sucks, but it is inevitable, like death and taxes.

"Re NYMATT, a well managed coop will have a reserve fund for one-time expenses, like pointing."

That's your opinion. Many other boards (including mine) disagree.

*****

"I suppose some people take out loans for their kid's college and other save for it."

Frankly, either way is stupid. The KID should be responsible for putting himself through college.

Say what you like, but my preference would be to live in a coop that has a balanced budget and a reserve fund to cover the various one-time events. The best way to ensure the building you are buying possesses these attributes is by checking the financials.

If you would like to live in a place that is just getting by and needs to assess you for every one-time event (pointing, roof, elevator, new carpet, new lobby, boiler, furnace, etc.), then don't bother checking the financials. You and NYCMatt can share a taxi to the bank to pick up your assessment checks every year.

>Frankly, either way is stupid. The KID should be responsible for putting himself through college.

Idiot.

Excuse me, but my building has more than enough of a reserve fund. But rather than dip into it for one-time major events, we would rather do an assessment -- and keep the maintenance low for the long term. One way of managing isn't necessarily better than the other.

Actually, I believe a well run coop plans for financial outlays. When I was on the board, we didn't want to have assessments or raise maintenance. However, the financial reality of our coop was we needed to do one or the other.

If you are buying a coop that needs to use assessments to pay for things, then plan for more assessments. As I said ealier, if there are assessments, the maintenance is understated. It's just simple math.

NYCMatt - If it has MORE THAN ENOUGH in reserve, why not use some of that dry powder to pay for operating expenses and up keep of the building. You didn't make a bad financial decision by purchasing in a coop that has assessments. However, those coops should sell at a discount to coops that have strong finances and can pay for "one-time" items out of operating cash flow.

"Actually, I believe a well run coop plans for financial outlays. When I was on the board, we didn't want to have assessments or raise maintenance. However, the financial reality of our coop was we needed to do one or the other."

..you can also reneg union contracts..

my old board did so, with renegged payout of pensions plan and instituting self-managed plan for co-op employees..

SS, this reminds me, another way my old coop managed its unbalanced budget was to start to cut services. We went from two porters to one porter, we cut one of the doormen and made the super spend some time at the door, reduced insurance coverage for the staff, raised fees for shareholder activities (storage, moving in/out, etc.). The financials of the coop hugely important and impact everything.

Local Law 11 is different and matters. Here is why. Each local law cycle is different. They have required different degrees of inspection and remediation. Local Law 10, for example, permitted simple repointing where necessary. Not too expensive. Local Law 11, however, was/is a completely different story. Deeper inspection is required and no simple patching is permitted. The actual infrastructure of the facade and building are to be sounded and inspected for water intrusion. Where this has happened, deeper inspection is needed to determine which, if any, of the steel beams need to be reinforced/replaced, etc. This type of inspection can reveal horrible defects that are enormously more expensive to correct than any past Local Law cycle. A terracotta faced building I am familiar with required massive restoration of the terracotta facade with involved crafted dozens upon dozens of individualized forms to be used for an aggregate compound to be molded into replacement tiles (true terracotta would have double the cost of the work); then two of the three brick facades were found to require massive correction due to water infiltration over the last 100 years. This otherwise healthy and well-run coop, which thought it had been maintaining the facade well, had to pay $2,000,000+ to satisfy the Local Law. Spread over just 100 units, that was a lot of money.

Or look at the 2 Fifth Avenue nightmare. That facade was plainly a mess to anyone looking from the street for years. But when a few bricks fell off and inspections were done, it was discovered then ENTIRE brick facade of this enormous building had to be replaced at a cost that is likely to exceed $20,000,000 and could be 50% or more than that estimate. It is a Local Law 11 extreme example of expensive compliance, but it illustrates why it is very very important to know where a coop stands in terms of compliance. If you are just moving into a place that hasn't yet satisfied Local Law 11, you could be in for a massive special assessment and possibly years of disruption (a typical Local Law 11 project for a building takes between 6-24 months).

"NYCMatt - If it has MORE THAN ENOUGH in reserve, why not use some of that dry powder to pay for operating expenses and up keep of the building."

Because eventually we'd have to boost the monthly maintenance to replace that reserve. Better to just bite the bullet early and get it over with in the form of an assessment.

@NYCMatt - also, low monthly maintenance increase property value. don't raise it unless you need to...

Low monthly maint + annual assessments, it's the low-end coop mantra... This is why you need to read the financial statement before buying.

Wow Leecube -- that may be the best example of moronic thinking I have seen in years...

Let's see -- If a bank is willing to lend -- AFTER you have place a 20%+ equity cushion into a coop -- is the building financially sound?

Wow -- TRY TO PASS THE BUCK on ALL personal responsibility. What do the financials show? What is the reserve? How often have assessments been made? Maintenance increases?

There is a 20% cushion before they have to be concerned...

you should be concerned buying at the first dollar.Not after a 20% burn level

Your comment reminds me of the douches that blamed the banks because they over levered themselves. Own it or stifle, Edith.

Frankly, either way is stupid. The KID should be responsible for putting himself through college.

yes.

and great thread too

The bank just assumes the coop will eventually balance its budget, just like China and the US retiree universe assumes the US Govt will eventually balance its budget.

Wait until your coop follows the path of Europe (and eventually the US) to seeks austerity measures - no night doorman, higher fees, $4 for a load of laundry, surcharge for direct debit payments, a fee for flushing the toilet... That will do wonders to your property value.

Books and NYCMatt - if you have some dough, why put your kid into debt to pay for college? We hire a lot of bright kids with great grades from top schools. Very few of them were slaving away at some retail shop to pay for tuition. Their parents helped them pay for school, so they could focus on school. Suck it up.

P_H--agreed--if 50k per year is being spent on college, i want my kids focused on their work, not some 8$/hr job at bestbuy--if i'm sunk for 50K, why compromise my kid's ability to max experience/learning at college, so they may chip in a few grand at best

i'm lucky--my kids are motivated, good students--they handle their end well--my end is to pay, and not saddle them with huge debt--any decent parent in this day and age aspires to this--some succeed, some fail, but this should be an objective

and re coops, it's so simple the due dilly one should do--it amazes me the cavalier nature so many bring to RE investments--re is by leaps the biggest financial exposure of the avg american, and they just dont care to advocate for themselves carefully--conned

"Low monthly maint + annual assessments, it's the low-end coop mantra... This is why you need to read the financial statement before buying."

This is why you need to read the financials closely.

My building hasn't had an assessment in at least four years.

It's not always an "annual" assessment.