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Q. I'm selling my co-op in a large full-service building and thinking about buying a duplex in a small (12 units), self-managed co-op.
What are the risks and benefits of buying into a building that's not professionally managed? Are there any specific questions I should ask to make sure the building is being run well?
A. The main advantage of a self-managed building is that, in theory, your monthly maintenance charges should be lower without a managing agent on the payroll. But these types of buildings--typically small ones without many units to share the cost of a managing agent--definitely demand a higher level of scrutiny, say our experts.
Let's start with the reserve funds, which tend to be on the skimpier side.
"A building with only 10-12 units usually doesn’t have much of a reserve fund or cash balance," says New York City closing attorney Adam Stone of Regosin, Edwards, Stone & Feder. "They often get by month to month and a benefit of that is keeping monthly common charges down. But if the building needs $100,000 for a new roof, for example, you know who they will come looking to for your share of that."
Hire an engineer to inspect the building, says Stone.
"That way you can get a better idea of the state of the major building systems and try to gauge any major repairs and expenses coming up to which a unit owner may have to contribute to significantly," he says.
Another issue, says Stone, is that "a small building may not have audited financial statements. A conversation with a self-managed building’s treasurer could be helpful to ascertain the amount of money currently available, whether there are any expenses coming up, etc."
You'll also need to find out what jobs, if any, are outsourced, lest you find yourself performing some of the tasks traditionally handled by a super or porter.
"Just because a building is self-managed, doesn’t mean that shareholders are taking on every responsibility for maintaining the building, though they might be," says real estate broke Mike Akerly of Akerly Real Estate.
Is there a super that cleans the common areas, takes out the trash, etc.? Is their job limited in any way--for example, are residents responsible for keeping the hallways clean? Does an outside CPA handle the books for the corporation or does the Treasurer take on that responsibility? Who are the members of the board and what experience do they have?
"Having board members that happen to be CPA’s or attorneys who are willing to lend their expertise can be particularly helpful in a self-managed building," says Akerly.
Akerly also recommends asking your lender if the co-op is in compliance with current underwriting standards on insurance, reserve funds and more.
"This is important even if you’re paying cash because it will give you insight into the operation of the building and potentially affect resales," says Akerly. "Ask your broker to look into this if you are not financing the purchase."
And keep in mind that the self-managed lifestyle isn't for everyone.
"Coming from a large, full-service building, you may be too accustomed to those services, and it could be a difficult transition, perhaps even an unwelcome strain, to live In a self-managed building," says real estate broker Gordon Roberts of Warburg Realty. "You’d have to do an honest self-assessment to be sure that lifestyle is for you, because you will have to pitch in at some level – in fact, it would be an obligation, and possibly more time-consuming than you bargained for."
At the same time, you may discover that you're not saving as much money as you think.
Boards in self-managed buildings are frequently unaware of or don't have the resources to adequately address compliance requirements (everything from Local Law 11, to carbon monixide detectors and building codes), bulk purchasing, vendor selection and proper bidding techniques, and budget preparation, says property manager Michael Wolfe of Midboro Management.
"That can translate into higher operating costs," says Wolfe.
Roberts agrees that the leaner isn't necessarily cheaper.
"Among the pitfalls of a self-managed building is the 80/20 rule," he says, where "20% of the shareholders do 80% of the work. You may also face unpleasant assignments like trying to collect past due maintenance from a friendly neighbor, and possible ignorance or a lack of expertise in building regulations and code requirements that could lead to an expensive penalty. If certain assignments are subcontracted to outside agencies, consultants or attorneys, the 'savings' of self-management can be marginalized."
Still want that apartment? Then you'll need to handle your board interview a little bit differently than at a traditionally managed building.
"In this special case," says Roberts, "they may be interested in what skills you'd bring to the building. This would give you the opportunity to express what areas you'd be effective in, how you'd envision yourself participating in managing, and what you'd be expected to do. You could also ask how the various responsibilities of managing the building are currently divvied-up among the shareholders."
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