Back to basics: Co-op and condo fundamentals matter.

Over the past weeks, a relentless press chorus has sounded off about the froth in the real estate market. In order to make their case that co-ops and condos are too richly priced, the naysayers have looked to such external measures as rental vs. sales cost, additional number of work weeks necessary to purchase an apartment, comparative percentage price increase over past quarters. Largely absent from the discussion, however, has been a focus on perhaps the most important indicator: a building's underlying fundamentals. Because buying a co-op or condo is not only acquiring a home but also investing in a business-like enterprise, these benchmarks matter. In the event the market corrects (or worse) those buildings with sound fundamentals will be the ones that best retain their value.

The New York Co-op Bible provides useful lessons for making that analysis which should enable brokers to help their clients to buy smart.

Past is Prologue: Unlike stock funds, where past results are no guarantee of future performance, a building's financial history is relevant as a predictor of its future health (especially if the same board is in control of the purse strings.). Have maintenance increases been measured over time; are the levels equal to or less than those of comparable buildings; have there been stealth maintenance hikes in the form of recurrent assessments? The answers will give a quick snapshot of how the building handles your money. A major caveat: virtually every building has been impacted by the city's substantial increases in real estate taxes, a factor largely beyond the board's control.

Get a Building with a Body Lift: Think twice about purchasing an apartment in a building that requires a systems overhaul: new windows, elevators, and roofs all come with headaches, and hefty price tags. As an outsider, it's not always easy to tell what capital improvements are coming down the pike. Look at the minutes (usually made available to prospective buyers). Ask what work already has been done, and what remains, especially if you're considering one of those 60s boxes covered with light-colored glazed bricks and often have to be replaced brick by expensive brick.

Cash Is King: It's nice to have a cash cushion: a reserve fund equal to $5,000 per unit or 3-6 months' worth of maintenance is ideal. More likely, there's lots of work and not enough cash, which means you may be assessed to make up the difference, especially in condos (where it's harder for boards to borrow despite recent changes in the law). If the project is already in progress, you should know up front whether maintenance plus assessment are too rich for your blood. The real danger is if there's work on the horizon but you can't tell how much it will cost or when you'll get the bill.

Don't Get Stuck on a Time Bomb: This means steer clear of buildings that don't own, but only rent, the land. (By law, condos must own the land they sit on.) If it turns out the building rents, beware because one day (maybe years down the road) when you least expect it, the building may be faced with the Hobson's choice of renewing the lease at some exorbitant rate or buying the land outright, which could result in skyrocketing maintenance and--in the case of purchase--an unsustainable debt burden.

Make Sure The Karma Is Right: Money isn't everything, not even with apartments at record high prices. Not only the apartment, but also the building of which it is a part, must feel comfortable; its persona in sync with your personality. The best way to psych out the building's mindset is to take a look at its policies on both life-defining issues (subleasing, flip taxes, and alterations) and more mundane matters (pets, repairs, guests). Planning to wall off an alcove for a roommate, or live with your pug, or work from home or sublet when you go off to Paris for a year? Better find out in advance if your priorities mesh with the building's rules.

Avoid Top Heavy Buildings: Although conversion fever is over, there are still plenty of buildings where the sponsor holds sway because it owns lots of apartments or maybe shareholders just haven't stepped up to take their rightful place. Whatever the reason, banks don't like to lend to top heavy buildings or to finance individual apartments, so it's hard to sell and values can go down. Anyway, as long as the sponsor dominates the agenda, you won't have control over your residential destiny, which presumably is a big reason why you're buying.

Don't Become Overextended: Usually when you buy a co-op you're also acquiring a share in the building's underlying mortgage. (By law condos don't have such mortgages.) Look for a building where the average debt per unit ideally is not more than $50,000, including mortgage and any other outstanding borrowing. Beyond that the building may be overextended, especially if there's an interest-only balloon mortgage that becomes due as rates rise. Better to find a co-op with a mortgage that is paying down debt as it goes, otherwise you and the building may be treading financial water forever.

Beware Easy Money: In order to stretch their purchasing power in this market, lots of buyers are opting for interest only, adjustable, or other exotic mortgages. In addition, existing owners are seeking to take cash out of the increased equity in their apartments, forcing many boards to refashion their refinancing policies to adjust to current market conditions. These loans start off with teaser rates and low payments, but have the potential to rise significantly and squeeze owners beyond their financial limits--a problem that could come back to haunt not only affected owners but also the building, especially in condos where the bank has priority if there's a default.

Find a Building That's Run Like a Business: It's a scary thought, but when you're buying an apartment you're also acquiring a stake in a multi-million dollar enterprise in which your neighbors are your business partners so you want to make sure it's managed right. Does it operate on a balanced budget, are expenses under control and revenues maximized? Does the board know what it's doing? Does it attend to problems right away or wait till litigation looms, is it reasonable over admissions or reject buyers without reason?

Know What's Right: Condos are perceived to be preferred over coops because of the relative lack of financial interdependence among owners and freedom from board interference in buying, selling, and leasing. So if you don't want to go under the microscope and don't care who your neighbors are, they may be right for you. An important trade-off, however, is that due to the relative lack of financial scrutiny, owner default is potentially more likely. In such event (as we've seen), the bank takes priority over the building so you could get stuck paying your share of the defaulter's shortfall.

In this frenzied market, offering a little higher education to your prospective buyers not only makes good sense, but good business because it is a value-added service that clients will remember when they go to sell.

Sylvia Shapiro is the author of The New York Co-op Bible.