Reading Co-op Financials
OK I know. Let the lawyer handle the financials. But in today’s ever-increasing competitive environment, super brokers are conversant in all issues affecting their clients’ purchases. Understanding all aspects of the deal, makes clients loyal and your advice to buyers and sellers all the more valuable. This is part 1 of a continuing series to help brokers understand the issues surrounding building financials, and how they affect the deal.
Co-ops can have underlying mortgages. Condos cannot. You can tell if your listing is in a building with an underlying mortgage by looking at the balance sheet of the co-op’s financials, and checking if a mortgage is listed in the long term liabilities section. If the amount owed is a “round number” like $2,000,000 or $3,000,000, chances are this is an interest only mortgage, as it’s very hard to get a mortgage payoff to that “round number” amount if it is amortizing. So, an interest only mortgage on a building means the co-op is paying only the interest on the loan, and is not required to repay any principal. So the loan balance should remain the same (if payments are not made, then there will be arrears, but the principal amount should remain the same). The advantage of an interest-only mortgage is that the payments are lower, very simple. But of course you are only “renting” the money, and after 10 years of payments the co-op will owe the exact same amount they borrowed.
Contrast this with a 30 year amortizing mortgage, with a 10 year balloon. This means that the loan is initially paid back as though it were a typical 30 year amortizing loan. But, at the end of the 10th year, the entire balance of the principal amount remaining becomes due and owing. Sounds scary, but it’s actually quite common for a co-op to have a balloon feature. This loan will have a lower interest rate than a non-balloon, and simply requires the co-op to carefully plan its finances to either accumulate the necessary reserves to repay the loan after 10 years, or be in a position to refinance the loan into a new mortgage, paying off the ballooning mortgage amount.