Co-op financial scenario: please evaluate

You might only want to live there one year . . . you'll throw most of what you have into it. Sounds like a bad idea to me.

R u here herr field hamster?

It may have difficulty selling those rental units off if the building is not going to pass muster with a bank since the buyers of the rental units will likely need mortgages. The new rules about qualified mortgages are more strict than ever which means the pool of potential buyers will go down. I am a little confused when you list the debts then say they plan to borrow another $100k. Do they plan to get a large loan and then use that loan to pay off the debts and simply add $100k cash? Or are they letting the debts age and plan to pay them down once the sell the units -- which may be hard to sell? And then on top of this borrow another $100k? The latter puts them in a difficult situation because liquidity is not easy when one's asserts are unsold coop units. The short conclusion here is that the building seems like a risk to pay off its debts in general. The lawsuits, death, and other things all seem irrelevant. But how much the building needs in repairs can be a concern because with no reserves, you can find yourself in a situation where the elevators cannot be fixed. I would certainly go far beyond a blog on Streeteasy. Most typical real estate attorneys will not be qualified to answer this question either as it needs some detailed accounting analysis. My initial hunch is that you are buying shares in a corporation that could find itself in receivership in a worst case scenario. It seem unlikely you would ever lose the property but by the law corporation (the coop) can be seized by the lender and sold at marker. It is rare but it is not unheard of. Given what seems like a long period of bad management, you might consider looking into who the board and managing agent is. I realize that with a co-op this can be tough but how did they get to this problematic place in the first place? Finally, since the shareholders agreements and bylaws will require certain minimal maintenance standards, you could also find yourself with significant increases due to assessments. Based solely on what you write here, it seems like it is higher risk than what your attorney says. Frankly I would never take accounting advice from an attorney. Short of hiring the right accountant or consultant, the best people to vet the financial viability of a coop would be the bank writing you a mortgage. But since you are not getting one, you don't have that luxury. Best of luck. Hopefully all will be ok. But I would not let your passion for the apartment drive you into a decision you are already worried about.

Hey, Guywithcat, congrats on the recent apartment purchase!

Zero reserves is not evil in my view, in a building that is otherwise stable with occupants who can comfortably afford a sudden large assessment. But That's not the picture I'm getting here.

Your attorney calls this investment "moderate risk." That means it should not be the bulk or totality of your investment portfolio, only a minority share, depending on a host of other factors--your age, risk tolerance, other investments.

So maybe 20% to 50% of your net worth could be put in a moderate risk investment. Sounds like you're contemplating 90%, maybe more.

If I were you I would move on.

Thanks for your input. I believe that the building is in a turn-around period. It seems that they only recently hired a management company. But they do seem to have a plan in place. The 100k is for repairs and capital improvements. My impression is that they want to get that underway without waiting for sales to happen.
My unit seemed to be very desirable and received multiple cash offers. And my sale should pay the debt down by about 20%. I wonder if the units will be that tough to sell. Seems like I've lost out on apartments with troubled financials that went to closing with someone else.
I kind of doubt the receivership situation will happen as well. But are you suggesting that if they persist with the loan that it puts them at risk for being seized and for such a tiny amount? Hadn't thought of that.
I was thinking more that it would be a bummer if all the subsequent units for sale had to go for a much lower price than I paid.
...I am definitely not only asking here. But I don't know exactly who to contact. I've sent a more detailed version of this summary to a financial adviser who works with a family member. But he has stated already that he doesn't understand NY real estate and that I should take his opinion with that in mind.
...I should say also that I would be worried about this decision even if the co-op had a million in reserve. I've owned before, and I can't really remember what courage enabled me to go ahead and sign things so easily then. The co-op I owned in DC also had huge risks, a rip off mortgage and no managing company. I doubled my money on that extremely inexpensive co-op unit when I sold. I was lucky though because I never even bothered to check their financials when I bought. I was completely clueless at that time. All I saw was that it was remarkable undervalue for the size and space.
I guess I want to confirm that going ahead is not obviously doomed to fail. I know there are risks present and that it will take time to sort out. None of the rental units are even vacant yet so there is a waiting game involved and that's where selling in a year could be a mess.

P.S. I doubt I would need to sell so quickly so that is probably not a dealbreaker.

But could if be a ballbusterz

I would take a look at CPAs like this (link below) because they specialize in properties like coops. The fact that it is HDFC does not seem like an complication for which you would need a particular specialist. I could be wrong but CPAs deal with legal changes and technicalities for a living so it should be well within their purview. Again, and I reiterate, I would NOT take financial advice from an attorney. One post above tells you something about your portfolio percentages based on the attorney's advice. This is just wrong on so many levels. My masters degree is in finance and I would simply never take legal advice from my accountant and I would never ask my plumber to fix my microwave. As for the CPAs, I am sure they can refer you if they cannot help you.

http://greenbrenn.com/

Just wondering, what happens if the units they plan to sell to pay their debts don't sell well, or sell very slowly, because no one can get a mortgage? They are probably in estate condition.

On the other hand, there are multiple cash buyers for your unit (assuming you have accurate info on that). So this may be some kind of specially attractive building, which would help with sales.

HDFC buyers I have encountered (not many) got money from parents to buy. Remember the income restrictions also tend to hold down the net worth of the individuals trying to buy, which is why mortgages are common (or at least they used to be; this market is super competitive, as we all know by now)

I agree that receivership is so unlikely it's not even on the table. But there are lesser consequences, such as long term assessments, that could be problematic for your monthly cash flow.

I would pay close attention to how much deferred maintenance and updating to code the building needs at this point. That's important to assessing all this. It might be in the board minutes.

Finally, your success is D.C. was fantastic, but as somebody said to me recently, "You're not a genius, so sell some stock." You got lucky in D.C.; it's not because you made a brilliant decision. These two apartments are wholly independent events. In fact, the D.C. place is not even relevant, but the fact that you brought it up suggests in your mind you think they might be. Lightning does strike the same place twice, ask the Empire State Building, but I wouldn't want to invest my net worth assuming that it will.

Flutistic - Thanks! I definitely don't think the DC apt is relevant in that sense. I brought it up because I considered it a kind of mistake even though I was lucky. After I sold and found out how in debt that co-op was, I told myself I wouldn't take that kind of risk again, even if it also left me surprised in the end to learn that financials were surprisingly not a universal dealbreaker.

So yes, Guywithcat, it's clear to me too that disciplinary training is the most helpful. I will contact the company at your link and see what it costs to get a quick analysis done. Unfortunately I can't afford much.

I have no real idea how the units will sell. The neighborhood and the block are very desirable, and the pre-war design of the building has some charm as well. I understand that this kind of lack of liquidity is an issue. But it doesn't seem like the worst of all problems. I tend to doubt the units can't garner within 40k of what I'm paying. In fact I believe that the debts could be cleared with the sale of my unit and 2 more rentals for which the building will receive a higher percentage. If I were the second apartment's buyer, I think this would go down a lot easier. A lot of the immediate debts will have been paid, and the sale of the second unit will pay off everything but part of the insurance. *If* the market is as strong now as it was this year, it seems like it could be ok. Flutistic - That said, you're saying that the mortgage market is super competitive? I totally get that. I've heard from other agents that the "hot" housing market in NY is mostly based on cash buyers right now. But I also know that the building doesn't want parents buying for kids. They believe they can get a mortgage but haven't tried yet. And that might be a rude awakening with the apartment after mine. I definitely worry about that.

I'm going to try to track down a better estimate of capital improvements and repairs. That does seem major. My understanding is that the loan is supposed to cover all of the necessary work. I think they need the loan to get the work done immediately in order to make sure they are not in violation.

The co-op is talking about issuing a 15% (max) maintenance increase next year, but they are also talking about raising rents first. The maintenance is very low right now. And they've also stated that they plan to reduce maintenance later after the debts get sorted out.

The input from both of you is really helpful. It gets me to think through issues I hadn't considered. Thanks again.

Are there any mortgage analysts out there who would be up for doing a quick analysis?

I can't believe what I'm reading here. With all the possible liabilities (and losses), you'd be absolutely crazy to even consider such a purchase. Bad, bad, bad.

Gelleresque - I hear your logic and while it all makes sense, it's very hard to make any kind of evaluation based on the limited data we have access to. I would really be careful about talking yourself into buying something without a full due diligence. If you spent $2000 to hire a CPA to do an analysis or even $5k and it showed you a giant mess about to happen and saved you from disaster, would it not have been worth it? Reaching out to people on streeteasy is an interesting but ultimately somewhat useless --if not dangerous-- way to make this decision.

>Reaching out to people on streeteasy is an interesting but ultimately somewhat useless --if not dangerous-- way to make this decision.

Come on now, your 293 posts have all been useless?

Again, it's definitely not the only source I'm using. But I definitely don't have thousands to pay for advice. Thanks again.

Another post by herr hamster.

Been an hour. W67 is worried about herr hamster.

This coop is definitely a big risk other HDFC buildings I have heard of were in much better condition. I would skip and find a better one.

I'm thinking about it. I'm giving myself until Wednesday to decide. The problem is my price range. This one is listed at $364 psqft, with the true sq footage calculated. It needs to be renovated fully, and that will run me another 50-60k. After sale of my unit and one other, the situation will be much better. I don't know. Been stressing over this all weekend. I really like the place. Haven't found anything else so close to perfect.

Gelleresque - sounds pretty speculative. Consider if this goes worst-case scenario (death-spiral and you lose the apartment) or more-likely bad case (much higher assessments and maintenance, much of which unpaid if most owners are income restricted), if you would lose sleep over it. If you can afford to take a zero on this investment and are willing to run that risk for a chance at a well-priced home you love, then take the leap. For me it would be an easy pass. Life is too short to throw in your hard-earned investment dollars into a corporation headed the wrong direction.

Hey gelleresque- I think we are in very similar situations. The financials of the HDFC co-op that I was interested in did not look good and the building was declined by 4 banks that I approached for the loan. It sounds like the financial condition of the co-op you're interested in is even worse than mine. I hate to a "Debbie Downer", but you can't ignore the facts in front of you.

I was absolutely in love with the unit I found and kept trying to come up with different scenarios that would result in the co-op getting out of the red. In the end I pulled out of the deal. The possibility of drastic maintenance hikes or assessments what too big a risk for me. I know it's tough to pass up a place you like (especially when you have to sift through all the overpriced crap in NYC), but something will come up for you again!

Thanks for your input. I do see what both of you mean. But believe it or not, I actually think I'm going to go for it. I don't think there's any real chance that it will end up at zero. I've asked everyone a million questions now. After I buy, there should be 200k of debt + 100k in a loan for capital improvements. I really can't afford anything in NY in any neighborhood I would want to be in. I can't even afford to stay here and keep renting. I burned through a huge percentage of my assets last year on getting the cheapest rents possible (with roommates etc.) I actually went and looked at condos in another city, but I can;t deal with intense crime waves there. I don't really see an option here. But I also believe that this building is in the process of turning around right now. The minutes reflect an attempt to address all these issues. I think it's risky but not all bad. One of my friends teased me last week and said "you get a great apt AND you get to save a building." Maybe I have a little bit of a sense of that challenge too. But not being anywhere and burning through money is carrying bigger risks I believe.

I've also been told that the maintenance will not go up ad infinitum. The building has too many low income residents. And as it stands, the operating expenses are definitely below income. The building will be screwed if it suddenly needs to cover huge repairs. But I think they're on top of that.