Co-ops don't require title insurance and that reduces their closing costs.
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When you buy an apartment, part of your research will be to make sure no one else has any claim to it through debt owed on the building or unit (also called a lien) or an open permit or building code violation. This process is different depending on whether you are buying a condo or a co-op.
If you're buying a condo you are often required to buy title insurance to cover you against third-party claims. As shareholder in a co-op you need to do the same due diligence but because the structure of a co-op purchase is different, it isn't done through title insurance. The good news for co-op buyers is this brings down your closing costs. Instead of title insurance, you need to do a co-op lien search.
A title company can perform lien searches to determine if there are open mortgages, liens or judgments that might "encumber the co-op shares," says Lauren T. Piechocki, a real estate attorney with Braverman Greenspun. For example, you'd want your attorney to make sure the seller's mortgage was paid off so the shares and lease are no longer collateral for the mortgage the seller had.
“Co-op purchasers have the option to purchase policies similar to title insurance, which are known as bonds or leasehold policies, but these types of coverages are usually only obtained under special circumstances or when the co-op board specifically requires it,” says Piechocki.
It is possible for liens to be misfiled. It's usually the result of a mistake in the lien recording process. Some recording issues are more complicated than others to correct, but contacting the person who recorded the lien in the first place is a good place to start. Piechocki says, "The party who recorded the lien usually has the authority to correct mistakes in their filing."
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