High maintenance

It seems to me that about the time a mortgage is fully paid off, other large maintenance needs will be flaring up. In the last few years my building has had to redo our brick facade, elevators, leaky roofy, boiler etc. So the mortgage which we thought was going to be "paid off" keeps on getting rolled into a new loan.

Basically, paid off mortgage will mean older building i.e. big capital expense projects.

Maybe this building is an outlier / special case though.

That makes little financial sense to me. Better to take a mortgage and deduct the interest than saddle shareholders with special assessments to fund capital projects. With no mortage, 0% of the maintenance will be tax deductible. It seems an odd choice to me. I'd have my attorney look very closely at the financials during due diligence.

high maintenance usually = lower asking prices

Thanks for all the comments. Apparently, it's one of those buildings that got locked into a loan with high pre-payment penalties. Their current mortgage is due in 5 years (not clear whether it will be fully paid off then or they will simply re-finance).

I plan on staying there at least 5 years, but if I need to move after that I don't want the maintenance to keep buyers away. But if there's a high possibility of it remaining the same, I will keep on looking.

As a general rule, maintenance always increases to some extent over a given period of time. Not necessarily every year, but inflation exists and costs increase. Fuel costs have skyrocketed, real estate taxes can go up, etc. All of these have to be paid for and often the means to do so is by increasing maintenance.

yep, it'll go up. and some buyers really don't like not having any portion of their maintenance tax deductible.

Don't take anything you're told by the RE professionals at face value -- you're in a frame of mind where you really WANT these harmless things to be the explanations because you want to buy. Take a cold hard look at the building's financials.

Masterq is right on - the easiest lie to say is the one the other side wants to hear.

"The maintenance is only temporarily high - it'll go down in a few years"
"That scaffolding is just there for another month"
"You're a perfect candidate - the board will accept you automatically"

etc...

Your lawyer's due dilligence will reveal whether the broker is full of it.

One way to gauge if the maintenance indicates a high underlying mortgage is to find out what % is tax deductable.

Do your due diligence. You should be able to review the building's audited financials to determine whether the underlying mortgage is fully amortizing and the time frame for payoff. Look to see how much of your share of maintenance is going to annual debt service - both principal and interest. Calculate a pro forma maintenance and see if it is indeed below market after payoff (which is what you'd expect) You're not going to get a good picture just by looking at tax deductibility of the maintenance since R/E taxes are also deductible, and if they are in a fully amortizing loan, a bigger % of maintenance will be going to principal. Check the engineer's report to determine what additional capital improvements are expected over the next 10 years.

If the financials reflect the statement that the underlying mortgage is being paid down, and material capital improvements have actually been made (should also be referenced in the audited financials), then you may actually have a fiscally responsible Board that is looking to reduce the costs of operating the building. Especially true if this is a smaller building where the costs of refinancing are exhorbitant in relation to the mortgage amount. Also, once you're in, run for a Board position to be able to influence how the company is managed. Personally, I'd rather have a low maintenance with no underlying mortgage and pay for capital improvements through reserves and special assessments.

High maintenance vs low price is a tricky question. I am living in a very high maitenance co-op and have done some analysis on this. Manhattan market is very efficient and for every 100k drop in price the maintenance should increase by around $500/month ( to keep you break even based on lower mortgage at 6%). If you think that the price reduction in the apartment is not enogh to compensate for higher maintenance based on this formula, then you should look at leverage factor. Normally in a declining market you should try to be less leveraged on the house. A lower price and thus a lower mortgage should keep you better protected in current and near term ( 3-5 yrs) market scenario, so i will rather pay a higer maintenance than higher price.

where is the building? does it happen to be in gramercy park?

Anyone have "rules of thumb" for determining reasonable maintenance? Is $1.80-$1.90 per s.f for full service postwar coop reasonable these days?

Is it worth considering apartments above the "normal" range? And if yes, at what discount? Downsides?

bansalpr suggests "100k drop in price the maintenance should increase by around $500/month ". Would love to hear what other people think.

$1.90 per sq/ft is on the rather high side. It had best be a VERY full service coop in a terrific neighborhood with fantastic layout and no real negatives or be offered at a signifiant discount over comparable properties with $1.50 per sq/ft maintenance. I'd also be very careful to scrutinize board minutes and buildling financials to see why the maintenance is high. It is one thing if the maintenance has been high for a decade but for the last 10 years the increases have only been standard small bumps each year or so; at least in that circumstance the situation is stable and not going to get even worse. But if the increases have been in recent years and show no sign of abating, that isn't a situation I'd want to get into.

Generally, even at discounted sale prices, the vast majority of buyers do not want a place with high maintenance. When you go to sell such a unit, it is significantly more challenging. The buying pool is smaller.

The formula of lowering asking price $100K for each $500 of additional maintenance sort of can work--sort of. But it is based on taking a $100K lower mortgage and devoting that money to the higher monthly nut due to mainenance so you come out even at the end of the day. But you really don't necessarily. You have to see what that added maint is for, because on a personal mortgage most of it would be deductible. If only 40% of the maint is deductible, it actually costs you more to pay the maint than it seems in terms of net cost after taxes each year.

I'm not an expert at the valuations of all this, but can tell you personally I hate very high maint apts and cannot really be talked into one. I strongly prefer to run with the pack in terms of maint on a unit and suggest sticking to the middle of the pack in this regard and avoiding the very high end of the range of what is out there unless you don't care at all about resale and have the money to keep paying higher fees each month if they increase further and out pace the average

poohbear, what kylewest said, and see the many other discussions here.

You might want to run some stats. E.g., there're 80 two-bedroom/two-bath co-ops for sale right now in 10023. Of those 80, 37 cite square feet. (Square feet in a co-op is a guess, so you see why best not to list it.) Maintenance per square foot for those 37 runs from $0.92 (the non-doorman 110 W 71st) to $2.56 (Nevada Towers.) The median is $1.65 (142 WEA.)

We have a condo listing with fairly high common charges/RET (right at $2000 for a 1 BR Home office) and in our case, it's because there is considerable terrace space. However, it's tough to find the right candidate buyers because shoppers "search" by price, and then have a mindset that monthlies at their price "should" be X.

I would urge you as a buyer to think instead about monthly carrying costs -- many high-maintenance listings I have seen, not just mine, have lower-than-market psf prices to balance out the monthly charges.

In terms of the building's underlying mortgage, I would agree that it is foolhardy to budget as though maintenance will go down, because you can't predict the future.

However, for a building to run without a mortgage isn't necessarily a sign that it is badly run, because some boards believe that if the money is "available" in a reserve fund it will get spent, whereas running special assessments for specific needs encourages financial conservatism.

The point I'm trying to make is there's no one-size-fits-all rule here.

ali r.
{downtown broker}

Thank you kylewest, NWT and front_porch for all your insightful advice. I share kylewest's feelings about high maintenance and its affect on future resale value - but then again, it seems a shame to exclude some nice apartments!