For various reasons, my co-op is giving some consideration to assessing shareholders to pay off the balloon payment on our ~$300,000 underlying mortgage. If we did this, what kind of change in apartment values, if any, would we see? E.g., $500k apartment with $750 maintenance gets assessed $30k. Maintenance is reduced to $500. What's the apartment worth now? (Maintenance is almost entirely taxes,... [more]
For various reasons, my co-op is giving some consideration to assessing shareholders to pay off the balloon payment on our ~$300,000 underlying mortgage.
If we did this, what kind of change in apartment values, if any, would we see? E.g., $500k apartment with $750 maintenance gets assessed $30k. Maintenance is reduced to $500. What's the apartment worth now? (Maintenance is almost entirely taxes, insurance, and reserves.)
I think assessing to pay off the mortgage is a "win" for long-term shareholders on various fronts -- no risk of huge maintenance increases when interest rates rise, no hefty refinancing expenses every 10 years, etc.
But what about shorter-term shareholders who may want to get out in a year or two? Is this a win, lose, or draw for them (assuming they have the money to pay the assessment)? Are they going to recoup all or more of this assessment when they go to sell?
Thanks for any help.
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Response by 875gator
over 15 years ago
Posts: 193
Member since: Sep 2010
With rates so low wouldn't it make more sense to continue to finance the mortgage and not assess? I don't think the $250 difference in maint will have a big impact of the price of an apartment there and not sure why you would have to deal with increased rates before it gets paid off.
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Response by REMom
over 15 years ago
Posts: 307
Member since: Apr 2009
In a perfect world, the value of your unit would go up by the reduction in your maintenance. When someone compares your unit with a lower maintenance to another with a higher, he/she should offer more for yours all other things being equal.
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Response by Mikev
over 15 years ago
Posts: 431
Member since: Jun 2010
I just feel in this environment when no one knows which way the housing market will turn next, it is a big risk to take to pay that sort of money with no guarantee that your market value will go up.
If you are saving $250/mo it will take you 10 years to break even on that.
Plus how are the individual owners going to finance the 30k? If you are going to force people to refinance personal mortgages, would they not be better of letting the coop finance the mortgage? I would think that would come out cheaper. Not to mention that each persons personal mortgage i would assume would need board review, because you need to know that they can actually afford what you are asking them to do.
I would vote down the request to do that assessment. It seems like a lot of work for no real savings.
Because if you think about it, that $250 in savings on maintenance is being pushed onto my mortgage payment instead.
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Response by W19th
over 15 years ago
Posts: 9
Member since: Oct 2010
There are a few reasons we're considering this.
1) Co-op debt is a lot more expensive than individual debt. There are few lenders willing to deal with co-op loans this small. We're looking at 5.5 - 6% interest rates with $20k in closing costs for balloon payment loans.
2) Most lenders will not lend to small co-ops beyond 10 years. A 10-year self-liquidating loan would raise maintenance exorbitantly to the point that our apartments would be almost unsellable. A 10-year balloon loan basically just keeps the principal even. What you pay off in principal, you eat back up in closing costs when it's time to get another loan at the end of 10 years.
3) Individual shareholders would be able to get conforming loans a full point or more cheaper than the co-op would, for whatever term they want, with about $2,500 in closing costs (less than their pro rata share of the refinance costs in all cases). A building shareholder sick of this constantly-revolving debt has even offered to hold loans for anyone who cannot get one through other means, and I expect we would skip full financial reviews in this one instance.
4) Our maintenance then bears no interest rate risk, ever. Projecting what our maintenance payment would be at 10% interest rates (not that far fetched for co-op loans) is frightening.
Over the long-term, I am convinced this is a good move. The short-term is where I have questions and would appreciate any thoughts. In practice, does $500k in purchase price + $30k in underlying debt = $530k in purchase price + $0 in underlying debt?
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Response by front_porch
over 15 years ago
Posts: 5321
Member since: Mar 2008
This is really a question for my much more experienced colleague 30_yrs, but I'd say off the top of my head that $500K in purchase price $30K in underlying debt = $510K in purchase price $0 in underlying debt.
In other words, future buyers will reward you for your prudence, but I don't think anything near dollar-for-dollar.
For one thing, you're not avoiding that large a cost. When you break it down, your "hefty" refinancing expenses are less than $25/shareholder/month.
For another, if the building loan is 6% with a $20,000 closing cost (shared by 7 people) and the individual debt is 5% with a $2,500 closing cost each, then building debt isn't "wildly" more expensive, it's only about 25% more expensive (not counting here whatever tax breaks are generated in either situation).
It just doesn't seem like you're saving "enough" money to make it worth the pain.
ali r.
DG Neary Realty
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Response by W19th
over 15 years ago
Posts: 9
Member since: Oct 2010
Aw shucks, I was hoping to hear that paying off our building mortgage would raise values similar to those of a condo.
I think some in the building may be out of touch with the realities of maintenance. They think the $750 - $1,350 maintenance for our one bedrooms (some smaller, larger with dens or outdoor space) is excessive for a walkup with no services, and that we have to cut it somehow. But there's really nothing we can cut except for paying off the mortgage. I did a search on Streeteasy, and it seems our maintenance is within range. I think this may be the new norm after all of the real estate tax increases of recent years.
Thanks for the advice. I'm still in favor of paying off the mortgage personally, but am rethinking whether it's in the best interest of the building.
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Response by csn
over 15 years ago
Posts: 450
Member since: Dec 2007
Why don't you have the shareholder willing to help with people unable to get a mortgage to hold the mortgage on the whole building. That would cut the closing cost considerably and maybe get a better rate. The amount you save on the interest rate you can put toward the principal and when the loan matures you have that much less principal due to refinance. In fact I might even be willing to hold the loan!
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Response by gcondo
over 15 years ago
Posts: 1111
Member since: Feb 2009
why dont you pay off the mortgage and then convert to condo then
With rates so low wouldn't it make more sense to continue to finance the mortgage and not assess? I don't think the $250 difference in maint will have a big impact of the price of an apartment there and not sure why you would have to deal with increased rates before it gets paid off.
In a perfect world, the value of your unit would go up by the reduction in your maintenance. When someone compares your unit with a lower maintenance to another with a higher, he/she should offer more for yours all other things being equal.
I just feel in this environment when no one knows which way the housing market will turn next, it is a big risk to take to pay that sort of money with no guarantee that your market value will go up.
If you are saving $250/mo it will take you 10 years to break even on that.
Plus how are the individual owners going to finance the 30k? If you are going to force people to refinance personal mortgages, would they not be better of letting the coop finance the mortgage? I would think that would come out cheaper. Not to mention that each persons personal mortgage i would assume would need board review, because you need to know that they can actually afford what you are asking them to do.
I would vote down the request to do that assessment. It seems like a lot of work for no real savings.
Because if you think about it, that $250 in savings on maintenance is being pushed onto my mortgage payment instead.
There are a few reasons we're considering this.
1) Co-op debt is a lot more expensive than individual debt. There are few lenders willing to deal with co-op loans this small. We're looking at 5.5 - 6% interest rates with $20k in closing costs for balloon payment loans.
2) Most lenders will not lend to small co-ops beyond 10 years. A 10-year self-liquidating loan would raise maintenance exorbitantly to the point that our apartments would be almost unsellable. A 10-year balloon loan basically just keeps the principal even. What you pay off in principal, you eat back up in closing costs when it's time to get another loan at the end of 10 years.
3) Individual shareholders would be able to get conforming loans a full point or more cheaper than the co-op would, for whatever term they want, with about $2,500 in closing costs (less than their pro rata share of the refinance costs in all cases). A building shareholder sick of this constantly-revolving debt has even offered to hold loans for anyone who cannot get one through other means, and I expect we would skip full financial reviews in this one instance.
4) Our maintenance then bears no interest rate risk, ever. Projecting what our maintenance payment would be at 10% interest rates (not that far fetched for co-op loans) is frightening.
Over the long-term, I am convinced this is a good move. The short-term is where I have questions and would appreciate any thoughts. In practice, does $500k in purchase price + $30k in underlying debt = $530k in purchase price + $0 in underlying debt?
This is really a question for my much more experienced colleague 30_yrs, but I'd say off the top of my head that $500K in purchase price $30K in underlying debt = $510K in purchase price $0 in underlying debt.
In other words, future buyers will reward you for your prudence, but I don't think anything near dollar-for-dollar.
For one thing, you're not avoiding that large a cost. When you break it down, your "hefty" refinancing expenses are less than $25/shareholder/month.
For another, if the building loan is 6% with a $20,000 closing cost (shared by 7 people) and the individual debt is 5% with a $2,500 closing cost each, then building debt isn't "wildly" more expensive, it's only about 25% more expensive (not counting here whatever tax breaks are generated in either situation).
It just doesn't seem like you're saving "enough" money to make it worth the pain.
ali r.
DG Neary Realty
Aw shucks, I was hoping to hear that paying off our building mortgage would raise values similar to those of a condo.
I think some in the building may be out of touch with the realities of maintenance. They think the $750 - $1,350 maintenance for our one bedrooms (some smaller, larger with dens or outdoor space) is excessive for a walkup with no services, and that we have to cut it somehow. But there's really nothing we can cut except for paying off the mortgage. I did a search on Streeteasy, and it seems our maintenance is within range. I think this may be the new norm after all of the real estate tax increases of recent years.
Thanks for the advice. I'm still in favor of paying off the mortgage personally, but am rethinking whether it's in the best interest of the building.
Why don't you have the shareholder willing to help with people unable to get a mortgage to hold the mortgage on the whole building. That would cut the closing cost considerably and maybe get a better rate. The amount you save on the interest rate you can put toward the principal and when the loan matures you have that much less principal due to refinance. In fact I might even be willing to hold the loan!
why dont you pay off the mortgage and then convert to condo then