Co-op requiring Maintenance in Escrow

I think that's relatively standard, or at least frequent as a requirement.

Co-ops are well protected in case of a foreclosure on your part... but they have no protection if you stop paying maintenance and everyone else is assessed the shortfall. They are just covering their ass.

Tends to happen if salary is low relative to bonus...

We have not spoken to the board yet. The Seller wants us to agree ahead of time in the contract that if the board asks for this we have to go along with it. Is it unusual for this to be in the sales contract prior to speaking to the board?

And how long do they usually hold on to the money?

I've never been involved in a co-op personally, but my friend who bought into one just barely squeaked by financially, so he had to put two-years maintenance into escrow... but they are actually just deducting his monthlies from that escrow account - 99% sure after 2 years the plan is they should trust him enough to pay like the rest of them, and no more escrow.

So there is my ironclad second-hand anecdotal hypothesis... should totally put your mind at ease!

In this case we were told the maintenance would not be deducted from the escrow. We would still have to pay the maintenance each month and then later the board would eventually return what was being held in maintenance.

Just to keep things together: http://www.streeteasy.com/nyc/talk/discussion/12060-maintenance-in-escrow-in-a-co-op

Well the simplest way to find out then is to ask the seller - I don't think they can reasonably ask you to just give away money for a totally indeterminate length of time. After all, if you are putting money in escrow and only one party can control its use and disbursement at their discretion under no obligation, its not really escrow, it's just their money now.

I don't see that it makes much difference either way. The money's coming from your liquid assets. You're essentially lending the co-op money at no interest. All you're out is what you would've netted on it over the two years, and any possible appreciation. It's not as if you're just handing it over to the co-op as a gift. The co-op carries it on its books as a liability, and you on yours as an asset.

For buyers' with marginal financials, boards do indeed sometimes ask for up to 2 years of maintenance to be locked into an account. Concerns of the board may stem from insufficient liquid assets, inconsistent past earnings, job held for a brief period of time, earnings the board sees as risky such as those depending upon bonuses, parents buying for children...

It is not run-of-the-mill since most buyers have sufficient financial positions in the view of most boards, but requiring 1-2 years of maintenance be held on account is not novel or eye-raising either.

The sellers here are probably hedging their bets. They don't want to see the contract fall through because the board demands 1-2 years maintenance and the buyer refuses and thus legally cancels the contract. By including the type of clause you describe, you would still have to go forward. Much like a mortgage-contingency waiver.

You'll have to decide if this is a deal-buster or not for you. But it's not as if there is a clear cut answer like: never do this, or the converse.

As an off-topic... would it be unreasonable to request something similar of a new development sponsor if they are undersold? It's the same risk with the tables turned... if the seller has financial issues than the buyers are stuck with their maintenance.

One possible reason they are asking for your agreement upfront is so you cannot get out of your contract based on the board making this a condition of your approval to purchase the apartment. Most contracts have a "non-conditional" clause that says you can back out of the contract if any conditions are imposed on your purchase.

I went through this three years ago as a purchaser. We were not aware of the clause, but we were very glad it was in there. During our board interview they were very candid about the building's poor financials. The maintenance was already fairly high for the apartment and the board warned that there were capital expenditures on the horizon, an outstanding debt that needed to be paid down and that assessments would be needed to cover the expenses.

I did not want to move forward with the purchase after the interview. Luckily for us, the board insisted that we put two years worth of maintenance into escrow (about $29K) - despite the fact that:
- we were paying over 55% percent in cash (45% mortgage),
- we had a guarantor with $2million in liquid assets, and
- had a decent amount of liquid assets ourselves.

I called our lawyer to find out what we could do to get out of the deal. He said there would be no problem due to the non-conditional clause (not sure what it is actually called).

The sellers were then left in a very bad situation as they had already purchased another place (and our coop board interview took forever to schedule). They offered to put 1 year of the maintenance into escrow for us. Our lawyer believed we could definitely get more, but that didn't really sit right with us since the board was really screwing them.

So my guess is that the people selling the apartment your considering are aware that this is a very distinct possibility and don't want to be left in bind.

I was insulted at first, but after the market roller coaster the past few years I'm happy to have a little stash of money that has been unaffected. We have not asked about getting any of the money returned but plan to do so in the next year.

soontobeowner: What is your attorney's opinion? S/he will be writing the addendum to the contract. What would be the time frame for the monies to be held in escrow? One year, two or open-ended? Does the seller have a reason for this request or is kylewest correct and seller is doing cya? Do you feel comfortable having thousands of $$$ yield no return for the next year or two?

our attorney refuses to put a time limit in the contract for how long the money can be held in escrow. and we are not comfortable tying up thousands of dollars because you never know if something terrible will happen and you will need that money. we have almost 2.5 years of mortgage and maintenance after our 25% down payment and closing costs. the process is frustrating and we are thinking that we may just rent if every board will do this to us since we plan on moving out of manhattan in 5 years.

soontobeowner: I don't want to question your advocate's decision, but it would be interesting for you to know the reason. Every board will not necessarily ask for escrow; you don't even know if this board will.

I had to do this on a coop once and I didn't get the money back for 6 years - until I sold. It was incredibly annoying. I was young when I bought my first property and I agreed to the request. Every year I would write them a letter (with my most recent w2) requesting the money back and they always denied me. It was bizarre. I was never late on a single maint payment. It was like a weird power struggle.

After that experience, I would not do it again. The money is tied up in a bank - you earn minimal interest, lose liquidity and have really no upside.

Plus, in this market - is the apartment *that" great of a deal that you can't find a comparable one? I would probably walk but only you can decide what is best for your situation. (you didn't ask but I also probably wouldn't necessarily buy right now if I was only planning to stay 5 years)

Kyle - it is more common than you think and the main reason is not a low salary or high bonus job. We had this happen to us when we bought and the reason was we did not have 50% of the value of the apartment in cash after the downpayment. Our building will keep the 2 years maintenance in escrow and we can get it back either:

a) when we show that we have 50% of the apartment's value in cash

or

b) when we sell

or

c) if we don't have the 50%, but are close and have paid maintenance on-time for a minimum of 2 years we can petition to have it returned.

Just out of curiousity, I'd like to know whether the technical term is actually "escrow", how it's documented, what it's called on the co-op's balance sheet, etc. I assume it's not the prepaid-maintenance line.

I do not know where but its absolutely not pre-paid maint - its not treated as some debit account that your maint comes out of ... it just sits there!

this is just plain annoying: this same poster asked this same question just 4 days ago. It's bad enough we go over and over the same concepts in different threads, do we really need reruns on a 4 day cycle?

hey 30yrs, how does this being posted twice ruin your life? relax, I was hoping to get more opinions on this issue and that is why i posted it again. there must be a better way for you to use your time than this.

Because it wastes my time looking through pages of threads, and worse, IT DILUTES ALL CONVERSATIONS. As a result, each conversation is less meaningful, ans eventually people will stop posting as they find opening up a thread less useful. So even if there is something valuable that someone has to add, it will be missed.

If you want more opinions, JUST GO TO THE EXISTING FUCKING THREAD AND BUMP IT instead of creating confusing, conflicting, and otherwise redundant bullshit. Perhaps this is a cycle which has been gone through in this board already before i came on, but it's stuff like this which makes people stop posting, reading and CONTRIBUTING VALUABLE INFORMATION FOR OTHERS. It also "crowds out" good info which was posted in the original thread. I realize you're a self centered asshole so you don't care about this, but if someone were to come to SE and try to search for information on this subject (hhmmmm... why would anyone do that instead of just making 59 new threads about it?) they would probably miss the REAL info because they wouldn't wade thru all the BS which show up in the 58 BS threads where people didn't re-post their "good answers" over and over again.

You are diluting the forum and adding little or nothing. Some of us come her to CONTRIBUTE information, but if stuff like this goes on, I can personally say that it makes me much less likely to go thru the trouble of taking my time to post because it makes it a waste of time.

soontobeowner, it's just a question of common sense and common courtesy. If you didn't get the answer you wanted in the previous thread, you should've just said so there. Or just googled "co-op maintenance escrow".

I obviously posted it again because I did not get a sufficient feedback the first time. It is a message board. People post questions. If you have seen a topic already then ignore the discussion. That is common sense and common courtesy. People repeat topics here all the time. Get over it. The only thing that dilutes message boards is when people harass each other because they do not like a given post. Stop trying to harass me and others on this board.

soontobe, 30years, please play nicely with each other.

soontobe,

It is not unusual for a board to ask you to escrow a year's worth of housing costs; what is unusual is for the sellers to ask you to put your acceptance of that in the contract.

As Kylewest has pointed out, normally the board would ask for you the escrow, and that would be a decision point for you, and at that point you could say no to the escrow request and back out of the contract if you wanted, getting your deposit back.

This way, the sellers have locked you up beforehand, which I perceive as awfully favorable to the sellers. (Disclosure: I'm not a lawyer, I'm a real estate agent).

If you want to buy the place and you're willing to do this as a condition of purchase, go ahead. Contracts tip both ways, and putting in an extremely pro-seller clause might be balanced by another clause in the contract, or simply by the overall deal that you're getting. It might be a great marriage even if the bride picks a wedding hall you hate.

Be warned, though, that I feel like putting your acceptance of the escrow straight into the contract pretty much tips the board over the edge into asking for it. I'd expect that money will be locked up for a while.

ali r.
{downtown broker}

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30yrs: chill. bit over aggressive here.
soontobe: 30 yrs is sort of right--better etiquette to have bumped your original post up to the front and just said you'd like some more opinions, but whatever.

Please don't let's make this post devolve into the personal attacks of others. Would one of you please exercise restraint and just not engage the other in the back and forth. Please.

Is this a joke? It is somehow ok for the bull/bear losers to spew the same crap literally 24 hrs a day, for brokers to post their bullshit nonstop yet .............. we are collectively going to draw the line at someone asking the same question twice hoping for a bit of new perspective?! ie: me, I had expereince with this issues and I didn't see the first thread. I don't live here.

30 yrs: I usually find you pretty fair and insightful. This rant seems out of character. You are one of the few regular broker posters who actually seem to have any basic level of business acumen and common sense.

soontobe.. it is concerning that it seems like your own attorney refuses to put a time limit on how long the escrow is held, the attorney should be working for you, or did you mean the seller's attorney? My guess is that the seller is probably aware that the board routinely asks for this, especially in the current financial market boards are asking for this more and more, I have one building where I am selling where it is a given that the board will request this regardless of the buyers finances. I would have your attorney ask the seller and or broker directly, is this something that they feel the board will require, and see what their reaction is. Regardless, if you do move forward, at least in the contract I would absolutely put a time limit on it to protect yourself should you not be happy with the boards later requests.

as noted earlier, this apartment should be the buy of the century or you should forget the whole deal. if and when you need to sell, all of this nonsense will just make it harder for you to find a purchaser.

and on a personal note, i believe that 30 yrs has provided so much value, insight and humor from his experience that he deserves any and all lattitude and that your comments to him and about him are way out of line.

Well-put, cc.

This is not NORMAL. Screw the sellers. The Board may request it -- but it is not normal. When i bought my first coop in 1997, the broker suggested that I get my family to co-sign, even though I had ample cashflow and liquidity. This is just extra insurance for them -- but unless you are trying to fix a problem, it is absurd. I had no problem. My parents would be on the hook for the duration of my ownership. If they want to keep a years maint upfront that gets used for the first year, it is a cashflow issue for you. Do not agree to keep a year of maint. in escrow indefinately.

Someone posted that putting 2 yrs maintenance into escrow is a 0% loan to the coop. I think that's not right. Escrow is not under the control of the counterparty - that's the whole point of escrow, it can be tapped only on presentation of documents giving a right to access the funds. Also, escrow earns interest (admittedly very little now, but inflation is flat-to-negative). This is a scrupulous way for a coop to enhance its financial strength. Not true?

That's why I asked whether "escrow" meant escrow in the usual sense, held by a third party. In that case, does nothing for the co-op's financial strength. Off the books. Can be released to the co-op if certain conditions are met, or to the owner ditto.

It is not a 0% loan to the coop. My escrow was put in an escrow account in a bank, clearly labeled. Neither the coop nor I could access it without appropriate paperwork. I even received a k1 on the interest and had to include it with my taxes. And when the money was eventually returned to me, of course it included interest earned.

Thanks, scoots. My co-op's never done it, so wanted to know the mechanics of it.

It is irritating and I would never do it again. If it genuinely was the deal of the century, I would only do it with very clear parameters. Mine was open ended and like I mentioned above, the coop board treated it like some weird power play!

scoots, I hear you. But for some buyers, it is more a question of their finances being of likely concern to any coop. If the finances are so marginal that they are likely to get rejected at many buildings they are interested in, then including such a clause may tip the scale in the buyer's favor if it is a close call and the buyer really wants to own. I'd generally agree that the situation is not one I'd accept, but there are circumstances under which I can see it being a necessary evil for one's person situation if certain aims are to be met by the buyer.

given everything that has happened, why would someone want to buy if their finances were marginal? at least two years ago, the answer would have been: because I want to get in on the upside. surely, people can't still be thinking that?

Our board requested this without an out-of-town buyer using the place as a pied-a-terre since he would be difficult to track down if maintenance weren't paid.