Maintenance

If we say $2000 might be "normal" maintenance for a two-bedroom with similar location, level of service, etc., then you might pay $300K less than you would for that similar apartment. That's a lot of ifs, and has nothing to do with what you bid, as the high maintenance is probably factored into the asking price.

I think I've seen $10K less for each $100 above "normal", but that doesn't seem to account for a lot of variables. Not that any formula could....

Seems as if $1.50-$2.00 per sf is about standard for a full service building (fulltime doorman, live-in super, poerters,handyman). Even looking at condos this seems to hold true when you add up the taxes and the maintenance to get your monthly cost. Maintenance on apartments with terraces will be higher, as the terraces have been added in as a factor of maintenance (though apartment square footage should always refer only to the apartment space itself). So, if this apartment is less than at least 1,500 sf, yes the maintenance does seem high. Does it include electricty?

If the maintenance is high by about $1,000 per month, I would say the apartment should be discounted $200k to $400k, depending on how aggressive the asking price is. Of course, the actual asking price might reflect an appropriate discount already. High maintenance apartments should be avoided. They are second after land lease buildings on a list of bad attributes for property investment.

Depends where the extra maintenance is going.

If the building has higher taxes than comps, then no good.

If the building is staffed to support a higher level of service than you want, then no good.

If the building is carrying a large underlying mortgage, then no big deal. The $1000 interest on the apartment's ~$170K share is as deductible as if you'd borrowed it yourself. So chop $170K off what you'd pay for a normal-maintenance comp, and you're good to go. You can chop off even more, to account for the fear-of-high-maintenance factor.

Good buildings with good owners don't have high maintenance. It is the buildings that were converted and have sponsor interests, or serious building infrastructure problems. Avoid and you'll be avoiding the headache of poor management, and greater potential for increases.
Use the perpetuity formula to determine the economic value of the maintenance and then add in the hassle of having less than ideal building specs and neighbors.
Perpetuity formula is Annual Payment divided by (Long-Term Interest Rate minus the Annual Growth Rate of the Maintenance). P/(R-G). $1000 extra, if it grows 4% per year and if a cap rate for real estate should be 8% is 12000/(.08-.04) or 12000/.04 = $300,000.

debt is like fashion, it goes in and out of style

How many square feet is the apartment? What are you getting for the maint. I would be wary of an apt. with very high maint. Whether it is mortgage or other costs. It is definately hurts your resale.

Yes, but you pay less to begin with. If it's due to co-op's mortgage, even less than is justified.

E.g., my share of my co-op's mortgage was $15,700. (A bit less now, as more shares have been issued.) Had it been $215,700, I'd have paid at least $200,000 less. "At least" because that mortgage interest paid via the co-op would've scared off other buyers who didn't look at the numbers.

BUT maintenance is often kept artificially low - rather than have a higher maintenance, buildings often resort to levying "special assessments", on a fairly regular basis. Once you add those in, you realize that the assessments are taking the place of a maintenance increase. This happened very regularly at Stewart House (70 East 10th Street), a VERY highly regarded building - used to levy special assessments once every year and a half or two years (and that building's maintenance doesn't even cover the units' a/c systems. Owners have to take out their own contracts for that.

And I agree with NWT- the higher maintenance is often ofset by a lower price, and remember that the underlying mortgage has already been taken out by the coop, whereas on a higher purchase price, you have to get more of a mortgage.

"Good buildings with good owners don't have high maintenance."

An interesting statement considering some of "the best" buildings have some of the highest maintenance charges.

"I think I've seen $10K less for each $100 above "normal", but that doesn't seem to account for a lot of variables. Not that any formula could...."

That is the oldest formula classically used, but it was based on higher interest rates and simply accounting for how much more debt one could carry and translate that into purchase money. The only time I remember hearing about anyone taking a look at actual sales data was almost 2 decades ago when Olshan Realty (who at the time handled a lot of corporate relocation sales) looked at some actual numbers. While I am not familiar with the methodology they used to come up with their conclusions, the conclusions were interesting - and also appeared to match with the realities of the market at that time. What I recall those finding to be was that maintenance which was "too high" exacted a toll on price which was somewhat exponential: $100/month too high led to $10,000 purchase price discount, $200/month too high yielded an additional $20,000 discount for a total of $30,000, $300/month too high yielded an additional $30,000 for a total of $60,000 discount, etc. OTOH, maintenance which was "too low" yielded LESS of a price increase - not even equal to "one times" the $10k per $100.

In my personal experience, the "too high" isn't based on a single number, but based on a "range of expectations" (for example, if people expect a 2 BR / 2 bath in a full service building to have a maintenance between $1,600 and $2,000). Within that range, people tend not to do too much price adjusting for differences in maintenance, but once the numbers go outside that range, they have a more severe effect than one would expect from doing a simple direct financial calculation. This is also something which varies TREMENDOUSLY with what the market is doing: in boom times, the effect of a "too high" maintenance seems to be way underplayed, while in bust times it seems to lead to a way too severe penalty. Take a look at various "high maintenance" buildings (but not the one's where the maintenance is high because they are ultra luxury; one's where the maintenance is high for no good reason other than mismanagement of high debt) prices in the early 90's vs the peak: in general, they outperformed the market in terms of percentage price increases. So, I guess I would say if you are able to/plan to hold a Coop for a period which is based mostly on maximizing your profit, buy high mainenance units when the market is down, and offload them when the market rises.

Thanks, 30yrs. You'd posted that explanation of over-reaction before, but I couldn't find it to link to. Now we'll have it when it comes up again in a day or so.

What I forgot to mention when talking about adjusting otherwise-equal co-ops for mortage liability, was adjusting the other way for the co-op's cash. I wonder, though, whether buyers ever are in a position of judging two otherwise-equal apartments and looking at both sets of financials.

the treatment of hi maintenance by the market is consistent with other flaws that exist with specific properties--when the market is trending well and higher, buyers make concessions to "get on the train"--whether its living in LICC, paying uniquely hi mantnce, or taking a low floor or dark apt or whatever--when the market is trending lower and there is plenty of not-so-flawed supply, buyers don't see the need to make concessions and the flawed properties languish and price more cheaply than usual

Does that make the flawed apts a great value in times like now--NO!!--when it comes time to sell you want equivalent or better quality than those you are competing with as a seller...in good or bad markets

30 yrs, I would personally price the reductions a little bit steeper. If I'm not mistaken at current interest rates (5.5 to 6.5) 500 dollars cover between 80,000 and 88,000 of your mortgage, and you get some of that back in tax write-off, so it doesn't make sense to me to discount only 50,000. On the other hand, of course, you're paying those 80,000 many times over the way the loan works. But I'm personally more scared of maintenance cost because it's not fixed and here in NYC has generally not kept in step with inflation but gotten out of hand. Also, because if for some reason you pay off your property, a high maintenance is what could kick you out once you retire.

30years, that's a great explanation. I've also been struggling over whether to bid on a 1300sqft coop with maintenance at $3200, so this is super timely and helpful for me. Let me play out 30years' formula: let's say Siggy98's apartment is asking $1.4M (just a round number I picked for a nice 2br prewar coop) and a similar apartment would have a maintenance of $2000/month, on the high-end of what 30yrs says is 'expected". So the difference between an expected maintenance of $2000 and the $3200 is $1200. Using 30year's formula, (10k+20k+30k+40k+50k+60k+7k0+80k+90k+100k+110k), you get a discount off ask of $660K. My question is, could you actually take that discount? Could you bid $740K on the apartment and have a prayer of actually having your bid accepted? It would be great if you could...

The alternative formula, of $10K less for each $100 above "normal", yields, on this hypothetical apartment, a discount of $120K, so a price of about $1,280,000. What do we think?

Slightly off topic -- how do you feel about maintenance charges at non doormen buildings? Looking at an apartment that is nice other than fact it doesn't have doorman. Charges are about $1.30 psf (according to their sf numbers) but without doormen I don't see how that amount is justifiable. I could be off base though, so curious what numbers people think are "normal". Building has 90+ units, small garden, laundry room, live in super, etc., but is definately not lux and doesn't really have other amenities. Thx.

"Does that make the flawed apts a great value in times like now--NO!!--when it comes time to sell you want equivalent or better quality than those you are competing with as a seller...in good or bad markets"

At times like NOW, no. But that's because we have not seen it happen yet. When you can buy the OP's unit for $10, try and tell me it's not a good play investment wise.

"What I forgot to mention when talking about adjusting otherwise-equal co-ops for mortage liability, was adjusting the other way for the co-op's cash. I wonder, though, whether buyers ever are in a position of judging two otherwise-equal apartments and looking at both sets of financials."

Most people are complete morons in not understanding this concept, which is why they raise capital for various things by increasing the size of the underlying mortgage rather than assessing. Same thing happens when a building finds itself with a big reserve fund and goes spending like a drunken sailor. there's this disconnect that money in the Coop's coffers isn't the shareholder's money. Spending it is almost always seen as "free money".

Right. A few years ago a couple of board members wanted to piss away a huge chunk of reserves on a roof deck. In NYC of all places, in a building where we'll have to cough up for new elevators soon. When put in terms of "how much are you, personally, willing to ante up for the deck?" -- reminding them that it was in fact their own money -- they thought better. I used to be astonished at how many shareholders didn't know how many shares they owned, and thus had no idea what % of every dollar was theirs.

"30 yrs, I would personally price the reductions a little bit steeper."

Just to be clear, I was talking about what has occurred historically, not an opinion on the merits.

But let me give 3 examples from teh past:

1)sometime around 1994 I went to a foreclosure auction for 2 combined 2 bedroom, 2 bath units in Harkness Plaza (you may not regocnize that name for 61 West 62nd Street, which they changed to "The Harmony" since it had gotten such a bad reputation for low sales price/high maintenance). The lien was $1.1 million. the upset price was $150,000. It went unsold since no one wanted to pay the ?$4,000? monthly maintenance.

2) Some time after that, a bank foreclosed on a penthouse at 372 Fifth Avenue. After not being able to sell it as REO, the essentially handed it over to the Coop for the maintenance arrears. The Coop offered it for sale for $10, plus half of the profit when the buyer re-sold it. No one took them up on that deal.

3) Some time after that, there was an auction by the coop at 55 Liberty Street on multiple units (I think around a dozen). I had thought it was a foreclosure sale for unpaid maintenance (the maintenance was not only very high, but they had extensive Local Law 10 issues which they had to take out a large loan AND have a large assessment). When I got to the auction, however, i found out that a significant number of the units up for sale were not being foreclosed by the Coop, but were simply people willing to walk away from their units if someone took over the obligation of paying the assessment and maintenance going forward.

"I wonder, though, whether buyers ever are in a position of judging two otherwise-equal apartments and looking at both sets of financials."

In my experience, most buyers research the neighborhood, the schools, the physical plant, economic conditions, the building's policies, comparable sales and the Coop's financials. And then they buy the pretty one.

"30years, that's a great explanation. I've also been struggling over whether to bid on a 1300sqft coop with maintenance at $3200, so this is super timely and helpful for me. Let me play out 30years' formula: let's say Siggy98's apartment is asking $1.4M (just a round number I picked for a nice 2br prewar coop) and a similar apartment would have a maintenance of $2000/month, on the high-end of what 30yrs says is 'expected". So the difference between an expected maintenance of $2000 and the $3200 is $1200. Using 30year's formula, (10k+20k+30k+40k+50k+60k+7k0+80k+90k+100k+110k), you get a discount off ask of $660K. My question is, could you actually take that discount? Could you bid $740K on the apartment and have a prayer of actually having your bid accepted? It would be great if you could...

The alternative formula, of $10K less for each $100 above "normal", yields, on this hypothetical apartment, a discount of $120K, so a price of about $1,280,000. What do we think?"

Looking back, I should have been more clear that I was using the range $1,600 to $2,000 as an example. Off the top of my head, and without knowing more about the specific unit, I could not say for the specific unit in question what the "expected range" would be. Also,as I said, this analysis that I refer to was doen quite a long time ago, and specifically was valid FOR THAT MARKET. I can tell you with certainty it was not valid in the 2003 thru 2008 period. I don't have the exact quote, but I remember seeing an interview with Barabara Corcoran where she said something along the lines of "last year, people didn't even ask waht the maintenance was, now........" or something to that effect.

It makes perfect sense to me that the correction for extremely high maintenance (especially in falling markets) is very severe, perhaps exponential even. Two reasons:

1) Many people think of monthly cost of ownership as a key metric. That metric is made up of mortgage and maintenance. As many on this board have observed, maintenance is non-negotiable, and rarely if ever goes down. Therefore, in an apartment where the extremely high (fixed) maintenance makes up a larger percentage of the monthly costs, the remaining (variable) cost, i.e. price has to fall more to make up the total reduction.

To use an example, take a $2MM apartment with $2500 maintenance at the peak. Using round numbers and ignoring tax benefits and other details for simplicity, say 20% down and a 6% mortgage gets you a mortgage payment of $9600 and a total payment of $12,100. Now if a similar apartment has maintenance of $5400, perhaps at the peak it's worth $1.4MM, getting you the same $12,100 monthlies.

Now say the market corrects 25%. The $2MM apartment is now worth $1.5MM, and the total monthly nut assuming the same 6% rate and no change in maintenance is $9700. The high-maintenance apartment, in order to compete and have the same monthlies of $9700, has to fall to $900,000, a 36% correction.

2) At extremely high maintenance (including RE tax) levels, some apartments start to approach an appropriate rent for that apartment. I've seen a 3-bedroom discussed here (a very nice one, granted) with over $7,000 in maintenance. I can rent 3-bedrooms for less than that. So all of a sudden "buying" the apartment with the high maintenance seems like I am not really becoming an owner, and so I am a lot less inclined to pay a lot for the "privilege".

Just my two cents.

A very generalized rule of thumb I use when evaluating apartments, assuming doorman with solid but unspectacular amenities: Under $1.25 per real square foot is low and may warrant a small premium, $1.25-$1.50 psf is normal, $1.50-2 psf is high and warrants a discount, whose magnitude depends on how much higher than $1.50 psf the maintenance is, and over $2psf is probably a deal-breaker.

Curious what others think of such an approach, at least in initial stages of evaluation.

How much would it cost to rent a similar apt? $3200 can get a pretty sweet 2 bed in Manhattan, screw the mortgage.

newbuyer99: I generally agree and I'll add a third point to your 2: psychologically, people are more comfortable paying a higher mortgage payment than maintenance payments. When the market is up, this becomes true of almost any unit, but when we see market crashes, you start to see units where the maintenance starts getting close to, then even surpassing mortgage payments. People get very uneasy buying units like that. last go round, even banks got uneasy lending in such situation and one day we found ourselves with a new metric as a lending requirement: it was called "pro rata share". This metric was the percentage of the purchase price of the unit compared to the unit's share of the underlying mortgage of the Coop (number of shares for the unit X underlying mortgage divided by total shares for the Coop). If the pro rata share if the underlying mortgage was greater than Y% of the purchase price, the bank would not make the loan. The irony was, the better the deal you got on the unit, the harder is was to get a loan: think of 2 identical units in a building with a relatively high underlying mortgage. The pro rata share of the underlying mortgage for each unit is $50,000. Buyer A gets a really good deal for $125,000 and want to finance 65% of it, or $81,250. Buyer B gets suckered into paying $200,000 and wants 80% financing, or $160,000. The first loan wouldn't pas the lending criteria, but the second one would.

interesting re the pro rata metric

also: most owners have some small vision that they pay off their mtg and then live with only their monthlies--if the pot of gold at the end of the rainbow is a huge monthly, they keep shopping

similarly those who want to pay cash, whether for a primary res or for a pied a t, generally don't want to pay a high monthly--they shop away from apt's with high monthlies

so much of purchasing should be understanding how it will go when one ultimately has to sell--higher maintenance apts are generally not compelling to a big chunk of those buying

as with all flaws to a given apt, hi maintenance apts sell better in frenzied bidding war markets, such as we wont see again for a long long time

Slightly off topic -- how do you feel about maintenance charges at non doormen buildings? Looking at an apartment that is nice other than fact it doesn't have doorman. Charges are about $1.30 psf (according to their sf numbers) but without doormen I don't see how that amount is justifiable. I could be off base though, so curious what numbers people think are "normal". Building has 90+ units, small garden, laundry room, live in super, etc., but is definately not lux and doesn't really have other amenities. Thx.

The $1.30 seems reasonable. If there were doormen it might be $1.60-1.70.

I'm basing that on my own ~90-unit building, where eight guys are 28.8% of the expenses. We'd still need three if there were no doormen. Two at minimum.

Also slightly off topic, but does anyone have a sense of whether maintenance has been increasing this year in Manhattan coops (e.g., due to increased taxes)?

Yes. Taxes, power, water, wages, etc. are all up. Fuel may be down, but buildings leave a cushion.

Thanks, NWT!

I'm wondering if an increase between 7.5 - 10% seems reasonable in a full-service building where maintenance hasn't increased for at least a few years, but I suspect it's difficult to get a broad view of what coop boards have been doing...

The Council of NY Co-ops and Condos (www.cnyc.coop) used to collect spending numbers from its members and do an annual report with all kinds of interesting statistics. Haven't seen one myself in years, though.