foreclosures in co-op building

What part of Manhattan is this in? How old is the coop?

I wouldn't even consider purchasing w/o a certified copy of the current P&L.

and accrual (not cash) balance sheet.

My impression is that the 5% is arrears in maintenance payments. Nothing out of the ordinary for a co-op.

"My impression is that the 5% is arrears in maintenance payments. Nothing out of the ordinary for a co-op."

Absolutely no true. I'd find 5% of units in arrears (1 in 20) unacceptable. At any given point in time arrears ought not run more than 1-2% of units. Do you realize what the coop's legal fees would be to initiate actions against 5% of owners every year?

"not true" -- sorry for typo

Kylewest - the legal fees would be prohibitive which is why they only go after the ones who after many attempts still don't pay. After a threatening letter or two from the Board, most people pay up or are at least put on a plan to pay up, that has been my experience. Sure, 5% in arrears is unacceptable just like it would be in any other business, but that's just what it averages out to be, even higher in the this economic downturn doesn't surprise me. Again, that is from my perspective, others may have a different one.

Kyle - there is a certain number of people that go into arrears throughout the year for a variety of indirect reasons. For example, there was water damage to their terrace and the board and management company have been slow to fix it so they are withholding maintenance until it is done. Or there may be disagreements over other payments/duties so they are withholding $ until a compromise is reached. I agree it shouldn;t get out of hand, but most of these particular situations occur for a month or tow to prove a point and they work themselves out (until the next time).

Thanks for the comments so far. The building is UES and built in the late 60s or early 70s. We know two families living in the bldg and they love it, but a bldg manager in the neighborhood (of another bldg we looked at) mentioned the issue with a lot of apts ("about 20") being basically so far behind on payments that they were essentially eligible for foreclosure, even though no "official" movement had yet been made. The residents we know claim that they have not heard these rumors, and that it wasn't an issue as of the last annual shareholders meeting (don't know when that was.)

When you get the financials, check the balance sheet for the maintenance-payable line. See how that number looks relative to the building's income.

In a building that large, there're sure to be owners who look at the financials carefully and would've raised questions at the annual meeting even if the board didn't address it directly in its state-of-the-building blah-blah.

Every building has units in arrears for a variety of reasons. A building can't technically foreclose on a unit - only a bank or other lien-holder can. The building does have powers to remove a non-paying tenant, however, and these should be spelled out in the co-op offering plan. It varies from building to building, but typically you can remove the tenant, sell the unit, pay off the bank, and pocket the rest. Of course this is an ugly route to travel and I have never heard of it happening, but there are worst-case protections in place for co-ops.

That many apartments in arrears is a red flag that the building is horribly managed.

RUN AWAY NOW.

I'm not addressing myself to a shareholder 1 month in arrears because they were on vacation and missed a payment. In my 20 years of coop living and work on boards, I still say 5% is a lot. For example, in my prior 110 unit coop, we had on average one persistent problem every 2-3 years and little hickups in between. If the hiccups are counted, then at any one time I'd say 3 units were involved. Now, if there's a messy capital project and those with patios are griping about equipment on their patio too long, the top floor owners are yelling about cracks in the ceiling, and owners with windows blocked by scaffold for 2 years are complaining, that's another situation.

But in a well-run coop with shareholders of some reasonable means, I say 5% is too high. It is WAY too high if the majority are long-term debtors. That at least raises a flag about who exactly is living in the building and why they can't make payments if life throws them a curve ball. I don't like that. Especially not to the tune of 5% of shareholders.

The board minutes ought to have some vague reference to the situation at least and the financial should reflect it to some degree too. Most people have no idea what is going on in their own buildings, so whether someone has heard something or not is of no real value to me. A rumor is not worth a lot either, but it is a flag that cannot be ignored in a major life purchase.

My first question: what percentage sold? Are the units in arrears unsold shares or 20 individuals? What is the reserve fund like (especially as compared to the arrears)? What is the annual maintenance vs expenses? Is this a building which has high maintenance charges or average? Rather than the percentage of unit which are in arrears, how does the total arrears compare to the annual budget?

While I agree with kyle that 5% is unusually high, we're about to go thru a time where A LOT of buildings are going to find themselves in similar situations. I don't say "run away" on general principles. I can think of MANY things which would make me still buy (with NO discount "just because of this issue").

Let's say they are running the maintenance 8% "hot" already (i.e. they were planning on putting 8% of the annual mtc into the reserve fund, just in case they have capital projects in the future and don't want to have to raise money, but none are currently planned). let's also say the reserve fund is 4 times the amount of the total arrears, and that the total arrears represents only 1% of the annual budget.

You can't just look at the number of people in arrears in a vacuum. You have to know the extent they are in arrears (oh, BTW one thing which WOULD be a red flag BIG TIME is if CURRENT BOARD MEMBERS were in arrears). you also have to remember that in the long run, the Coop will collect every penny it's owed, so the issue is whether other shareholders will end up coming out of pocket to support the delinquent one's, or if the Coop's financials are in such a shape that they can carry the delinquencies while issues are being worked out.

You also might want to ask if the delinquent shareholders have had notices sent to their lenders, and if the Coop has lept proper records of recegnition agreements as to who has taken share loans.