Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.
New York co-op apartment purchasers generally do not pay for co-op title insurance. Usually, it’s not a required closing cost. Besides, a co-op lien search already grants buyers $50,000 in coverage against any liens missed during the due diligence. So why do buyers sometimes ask their attorneys if title insurance is required for New York Coops?
Attorneys only recommend Coop buyers get title insurance for a coop purchase in the case of an estate sale or foreclosure.
When a buyer pays for title insurance, this protects him from any liens generated by previous property owners. This insurance protects the buyer from potential claims against their purchase or ownership and covers the risk of someone claiming they had rightful ownership in the past. In short, title insurance protects buyers from events that happened in the past before they purchased the apartment.
In contrast, a home insurance policy protects the buyer from events that occur in the future.
The precise technical term to name co-op title insurance is “co-op leasehold insurance.” Remember, a coop is not a real property like a condo or house. Instead of a deed for real property, co-op apartment purchasers receive a proprietary lease.
The stock certificate describes the number of shares they own in the coop. Therefore, the proprietary lease allows the buyer to occupy their apartment. As we already explained, co-op owners are somehow tenants.
Technically, owners are shareholders of the co-op that is the landlord of the entire apartment building.
Furthermore, co-op leasehold insurance ensures that the coop was duly formed and holds title to the building. This insurance also protects against any missed liens imposed by the co-op (delinquent HOA assessment).
Finally, the co-op title insurance covers the legal for which there is no limit. No maximum limit exists on how much a title insurance company may spend to defend the purchaser & policyholder.
As a rule of thumb, title insurance companies spend as much on legal defense costs as on claim payments.
A co-op leasehold insurance policy typically costs about 0.30% of the purchase price, and this premium includes a sliding percentage and a fixed fee. This is cheaper for a coop than a condo or house (generally between 0.40% and 0.50%).
There are cheaper alternatives for buyers concerned about liens than claims, such as the UCC insurance policy. This costs 0.10%, includes the co-op lien search fee, and provides coverage up to the purchase price.
Title insurance is required by lenders when buying a condo or a house with financing, and it is widespread, even for all-cash deals. However, we do not see it too often in co-op apartment transactions, and mortgage lenders don’t require borrowers to utilize a mortgage to get a leasehold insurance policy.
However, real estate attorneys don’t push buyers to get them either. Therefore, we recommend buyers pay for co-op title insurance in a few unique, risky cases.
An estate sale is messy, and having a clear title may not be as simple as a regular deal. For example, the trustee may not have identified all beneficiaries. Another example: a brother has taken over the sale process but did not get written consent from his sister. The sale may go through without the sister’s permission, which is a significant risk.
For Coops, the seller must physically give the original stock certificate and proprietary lease to the managing agent. The latter will cancel them at closing, reissue a new stock, and lease to the buyer. However, this can be an issue if a seller loses their stock and lease.
The managing agent sometimes asks the seller to cover the cost of co-op title insurance to protect the management company in case of any potential future disputes.
In this case, the seller will pay for the insurance covering the managing agent’s risk. In parallel, if the purchasers want to protect themselves, they must pay for the insurance.
This situation entails higher and more specific risks. Previous owners could complain that the co-op foreclosure process was improper. This increases the risk since the co-op foreclosure process is non-judicial, and co-ops do not need to go through a court process to foreclose.
The third situation where we recommend buyers to get co-op title insurance is if the buyer has an attorney from out of town. We saw closings where a seller’s attorney had no idea what a co-op is. This situation is not entirely surprising, considering co-ops are a very NYC concept.