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In reviewing the financials for a brownstone apt I am interested here are some points (there are only 5 units in the building):
a. there is no underlying mortgage (a plus)
b. 2010 and 2011 negative retained earnings (= 2 times the Total Assets Value) (a minus)
c. no cash reserves and a small negative net income in 2011 (a minus)
d. as for another building, they do not release in the financials any estimates of futures costs of major repairs/replacements
What I am not clear is how to put an offer to cover for some of the points above since I like the apt. Any views? Thanks
a. This is a big unambiguous benefit.
b. This is true of substantially all co-ops I have seen - largely due to depreciation on the building.
c. Net income small/negative is not unusual. They have no cash on hand?
d. This is accounting boilerplate required by rule. Never heard of anyone making those estimates in the financials.
Do you have substantive concerns? Focus on things that actually matter. The zero cash reserves is the only thing I find interesting about this.
The one plus about having an underlying mortgage, particularly on a building this size, is that it forces the co-op's hand into compliance on a lot of issues. E.g., the underlying mortgage company sends an engineer once a year to do inspection, may order repairs, require the co-op to submit financial reports, sprinkler statements, budgets/statements of reserves, etc.
How is the maintenance? In a building this size, they may choose to assess for repairs as needed rather than fund a reserve maintenance account. It's a valid board choice in a debt-free, 5-unit building, in my opinion, as long as it's not negatively affecting ability to get share financing.
THANKS for both comments which are extremely useful. The maintenance is very low, so if there are any unforeseen expenses they will need to raise cash. What a friend of mine found surprising was that two units are for sale within ten days (this is a building where sales have been quite rare since its conversion in the early 80s). Could it be that they know something/potential expenses/building issues that future acquirers do not know?
You need to be looking at net cash flow, not income or retained earnings - these include non-cash charges like depreciation and amortization. You can ask for their annual budget, but I bet they don't have one. We are in an 8 unit coop and don't maintain a budget.
Agreed - cash flow and assessment history will give you a sense of the business' real financial situation. If it turns out your assessments will get you back to average market maintenance levels (albeit with more lumpiness), then bid accordingly... (e.g. if you are paying a premium because of the low maintenance, you may want to rethink that)
If 2 out of 5 units went up for sale within 10 days, I would ask each broker what the reasons for selling are. If the owners are related, then it might be favorable to you when negotiating the price. If you get a feeling that the brokers are holding something back, then trust your gut feeling.
I used to live in a co-op in a brownstone. I lived there when it went co-op.
I had a very hard time selling it. People wanted doorman buildings. This was on the Upper West Side. I finally got a buyer and was happy to leave. There were numberous buglaries.
But if two apartments all of a sudden became available, I would be very uneasy about buying there.
About where is this brownstone located?
Real Estate Broker
Remember, your goal is a best guess on the future financials. The 2010 and 2011 can be a good baseline but you need, best you can, make mental adjustments to them as a guess for what maintenance charges are needed going forward:
* Does the income statement show little to no repairs in 2010 and 2011? You may need to assume higher going forward. Unless the broker is telling you final bids in this weekend, you would be within your rights to ask the seller to make comments on the state of the roof or boiler or if they have expenses converting to that cleaner heating oil standard.
You should also overtly ask if there have been any disclosures made to the owner about assessments expected going forward.
* Property taxes - I am unclear on the vagaries of brownstone assessed values and rates, but this information is accessible online- (there are threads on this or ask NWT)- you can plot out recent years assessed values and rates and forecast if a big rise is coming.
Most important is who are your co-owners, and how is the upkeep of the building. That's much more important than the financial reports.
When you're buying into a brownstone co-op, keep in mind that you will know your neighbors VERY well. You're likely going to be on the board, will have to help with building operations, and will have to deal with e-mail and/or in person discussions about every building issue.
Keep in mind that with 2/5 units turning over, the building dynamic could change quite a bit. This could work in your favor if you want a more disciplined approach to building management. My building has shifted to being much more fiscally conservative with the new wave of younger, more financially oriented buyers.
Definitely conduct your due diligence, but I don't find it all that unusual that two units are up for sale at the same time. My building (seven 1-2 bedroom units) had it happen three times during the real estate boom, but then only one sale in the next seven years as prices flattened and trade-ups became less attractive. A friend who bought into a five unit co-op last year had two of the five units subsequently turn over, with nothing unusual about the building. Sometimes it happens. Is there a flip tax in the building? If so, that might help with the reserve situation. :-)
You definitely want to have a home inspection. Given the lack of reserves and your share of the responsibility for any repairs, you may also want to have a structural engineer check out the building. It won't be cheap, but it could be peace of mind. Hage Engineering, Silman Engineering, and Rand Engineering have all done small consulting jobs for my brownstone building.
We have not had any resale problems in the building, either in terms of price or time on the market. (We are a unique building, though.)
Thanks! I was contemplating having a structural check in fact, what would be a range price I can expect to pay (5 units, one unit per floor approx. 1100 sq each floor).
By the way, there are no representations made in the financials about future works/repairs and the selling broker has sent me some summary info she gathered on the building -- e.g. boiler: routine yearly maintenance; roof work recently done; selected windows replaced in the last 2-3 years.
This is a rough guestimate, and maybe someone else would have a better idea, but I would say in the neighborhood of $2,000 - $2,500 for a structural engineering inspection (v. about $500 - 750 for a standard home inspection). The engineering report will probably still have a fair amount of caveats about things that can't be seen, etc. due to finished walls and ceilings, lack of access to pipes, beams, etc.
If you go into contract, see if your lawyer can talk to the Treasurer of the building as part of the due diligence. You'll likely get most of your intel there, unless there are annual meeting and/or board meeting minutes (don't count on it, based on your description).