Dollar Impact of High Maintenance on Resale

you need to get your arms around why the maintenance is so high. i suspect it is because of a very large mortgage being carried by the coop. that means you have to look very closely at the reserve fund to see if it is beefy or if you will be getting special assessments on top of the high maintenance for every little thing the coop needs. i would also want to know if this is a coop that historically just keeps taking on debt rather than issue special assessments. does this building have an interest only mortgage or is it working to reduce its debt to give it more options when it comes time to re-fi? these are the kinds of things i would want to understand.

on top of what kylewest says about the warning signs that the higher CCs might be signaling, keep in mind the open market doesnt operate in a vacuum.

Ive come across this question many times in the field and on industry seminars. Its interesting to hear the range of opinions on the estimated dollar figure or formula one could assign to this topic. fact is, the open market very likely will NOT produce a bid $320,000 more for a property that has CCs $1k higher than the so called "norm". Its just not realistic, although the logic behind it sounds reasonable.

The two theories I liked the most on this are as follows:

1. Take 50% of the cost in terms of current lending rates. So in your example, perhaps the bid will be closer to $140k-$160k lower to properly price in the risks + added expense + lost opp cost, etc.

2. Add up the 'abnormal' difference from the norm, in this case $1k, to get a total of $12k a year. Multiply that by the average holding period of a home in that local market. Say 7 years. That equals a $90k or so discount the property should expect to trade for on the open market.

Just my two cents. But be aware that the 1k could be a sign of a larger issue that may lead to this # growing even higher down the road until any issues are properly addressed.

WHEN MAINTENANCE = RENT..... the PURCHASE PRICE MUST BE "MORTGAGE DEDUCTIONS" and the "I OWN FACTOR." JSTFU AND PAY WHAT THE SELLER WANTS!!!!

>I've read through Board minutes and financials but there is no obvious rationale for the higher monthlies.

You read the financials and you can't figure out why there are higher monthly charges? You read the financials? Were your eyes open? What exactly did "reading" entail? Maybe you should buy Sprint instead.

>2. Add up the 'abnormal' difference from the norm, in this case $1k, to get a total of $12k a year. Multiply that by the average holding period of a home in that local market. Say 7 years. That equals a $90k or so discount the property should expect to trade for on the open market.

What happens after the arbitrary holding period? I guess in your model, in 5 or 7 or 30 years, there won't be another brilliant person like the OP reading the financial statements trying to figure out if he or she should apply a discount to the subsequent purchase.
Want to reconsider your formula and advice?

>1. Take 50% of the cost in terms of current lending rates.

Why? What is the rationale for 50%? Why not 200%?

I wonder why you decided that the maintenance was approx $1K higher than it should be. How did you decide that benchmark? Are you positive you are comparing apples to apples? Could it be a subjective viewpoint? The reason I ask is because I live in a high maintenance coop so I am familiar with the financials of such a bldg. I have always found it difficult to come up with comps because it's so difficult to compare coop maintenances because they include so much more than just building services. I tend to use $1.60 - $1.75 per sq ft for maintenance costs. Anything more I consider high. But again sq footage is subjective in a coop. Just my 2 cents.

whoa! A PRO!

3% mortgages.... say it with me... 3% mortgages.... SAY IT WITH FEEELINGZZZZ.. 3%

The market already places a price on monthlies vs price.

Say you have an $850K apt with monthlies of $1500, and it'd rent for $3500. You pay $850K cash to save the $2000 differential in monthlies.

Now if someone comes along and tells you that it's $150K per $1000, your response should be WTF. You pay $850K + $1500, or $550K + $3500, or $350K + $5500, or $50K + $7500. For a $3500 rent apt.

hberg -- I didnt say those were my formulas. I simply said I encountered this topic a # of times and listened to appraisers (a vanderbilt appraiser told me about #1) and other industry vets talk about how they would respond to the OP ?. I posted the two theories I liked the best. There is no one formula that is accepted by the masses on this topic. Every situation is so different.

You said you "liked" the theories, so you can't in another breath disavow them.

>There is no one formula that is accepted by the masses on this topic. Every situation is so different.

That's the thing with numbers. There are correct formulas. You happen to like two incorrect formulas that make no sense.

Maybe I a missing something ... but if you don't see why the maintenance for this property is higher than for comparable properties, either in terms of facilities or in details of financials, why buy it?

Either the property is a complete dog (in which case, why bother to figure out what the doggy discount should be? Just move on) or there is some appeal that the property has to certain buyers that you have not found ... in which case, you are not the right buyer for it. Let them that loves it pay up for it.

ali r.
DG Neary Realty

>Maybe I a missing something ... but if you don't see why the maintenance for this property is higher than for comparable properties, either in terms of facilities or in details of financials, why buy it?

I already said that but I was more nasty.

Bc at a certain price even an ugly Ho gets a Jon.

Next.

There is also an "emotional impact", even once the financial reasons are understood and proper adjustments are made; many buyers shun these listings. Take a close look at time on market for the exceptionally high mnt. properties. Do you want to be the seller in the future? (Especially in a soft market?)

Keith Burkhardt
TBG

Thanks all.

W67th Street, agreed. If the price discount is sufficient, it's worth the extra maintenance. I guess I'm just looking for opinions on how much is sufficient. If my total monthly outlay including mortgage is sufficeintly lower than for a comparable lower maintance building then it appears to make good sense to me. I think it has to be more than the model UDs heard of since I'd want to be able to price low enough when I want to sell too!

Keith, I do sense that higher maintenance properties stick around. This is a concern of mine. Hence, why I'd prefer to see a bigger discount upfront to allow for a bigger discount on sale too. This is a good example, asking price has been cut by 33% over the past 2 years and I still feel it's slightly rich.

This property is at $1.92psqft maintenance. I do have an architects floorplan with a square footage from when units were combined so I'm hoping I can trust that (but that's a separate discussion). Comparable post-war red and white bricks appear to have maintenance closer to 1.60psft. On a 3,000sqft apartment that's the $1,000 monthly delta.

FP - the appeal is that it's a large property that's been totally improved to our taste which is selling at a $500 - $1,000 psqft discount to similar apartments in newer build "full service buildings" and at a $50 psft discount to similar buildings with lower maintance. Quite simply, it checks more of the wishlist than any other apartment.

Oxy: $1.92 per F2 for a Manhattan apartment ain't what I would put into the high maintenance group. I think there must also be some other issues you may be overlooking on this one. It may be a bit higher than it's peers but not enough to avoid it at the right price. Just my dos colones.

Keith Burkhardt
TBG

@oxy

consider this 2 separate transactions: 1-the purchase of an asset (price of property) & 2-rental agreement for maintenance (co-op fees)

in order to convert #1 into #2 and vice versa, consider these factors and the choice becomes clearer if you know what your investment priorities are...for ex, are you trying to neutralize your interest rate risk, play the housing market, or simply trying to get out of paying rental costs that are inflationary? i would do a DCF in a spreadsheet and mess with the variables. although from what other quote here and what i've seen, $2/sqft fees are within normal limits for maintenance costs. does not seem that high at $1.92.

avoid coops with relatively high monthlies--period

if due to unforeseen circumstances, you are forced to sell, and perhaps in a weak market with supply abounding, youll be forked!

and regardless of mkt condition and when you want to sell, you will have a harder time than were you to be selling an apt with typical monthlies

also: monthlies are perpetual and experience uglier compounded increases ongoing when compared to typical--and then as mentioned here, higher than typical monthlies can be a flag of ongoing even more expensive issues--why would one knowlingly buy? esp when there are other options--these are the reasons you will be hard-pressed to find buyers when it's your turn to sell

Here is the naive buyer perspective. When I was looking, I knew what I was willing to carry on a monthly basis. I subtracted the maintenance and solved for how much mortgage I could afford and that guided me to what I was willing to offer.

RE mom - I think that's exactly where I started too. Hence, my valuation of $1,000 of extra maintenance meaning I should pay $320k less for this property all other things being equal.

I generally think that there is guidance here that the discount may generally be less but that people think these properties tend to stick on the market longer. To me this suggests that the discount isn't sufficient and that I should continue to think about a deeper discount.

>also: monthlies are perpetual

Urbandigs says that the excess monthlies are only for 7 years or the average holding period.

Go on ACRIS and look at the building's mortgage. In 99% (maybe 100%) of the non land-lease co-ops with high mtce, the reason is the underlying mortgage. One would think that that the apt's share of the underlying bldg mtge + price should be the same as apts in buildings with no or small mortgages, but generally buyer aversion to higher maintenance is greater than the discount.

I think it is more important to figure out why the maintenance is higher than to try to quantify what the discount should be. When comparing two apartments in different buildings it can be very hard to come up with accurate comps to use as a baseline for how much discount one unit should get versus another. Are the layouts, finishes, closets, and views really similar? You seem to really prefer the unit with higher monthlies so there may be a reason for the smaller discount that you expect for high maintenance.

There can be some acceptable reasons (or less concerning) for highish maintenance. More doorman or porters working at one time than a comparable building may not show up as an amenity on a listing sheet, but it can make living there nicer and may be worth the extra expense to you. I have a friend that lives nearby in a building with much lower maintenance than mine, but on weekends there is no extra staff to cover doorman breaks so they lock the front door during breaks, and guests have to use their cell phones to call, and residents have to come down to let people in the door. If the building is paying off a portion of the underlying mortgage, that could also explain higher monthlies, but might be worth it in the long run.

Check to see if the building still gets market rate revenue from the retail space. Or if there is retail space at all. In my search, I found this to the the most common cause for high maintenance. Some co-ops gave out sweetheart leases to the sponsor for the retail space when they went co-op. If this is the case, see when the master lease expires (probably won't be for a while).

One of the reasons for higher maintenance is that the residential co-op is a subset of an underlying condo which comprises the Residential co-op, the commercial unit and the professional units. i.e. the retail units are not revenue producing assets of the co-op. Is this in itself a red-flag?

in and of itself, the fact that the co-op does not own the stores or have access to their income is a neutral fact, IMHO.

ali

It is certainly better to own the real estate than to not. The retail income tends to buffer the shareholders from the effects of inflation, and keep maintenance down over time. I wouldn't put it into the red flag territory like a land lease or bad management or huge mortgage to cover years of capital projects.

$1.92 may be high , but not by that much .
Hard to find anything below $1.50 any more

It is quite common, as Ali days, for a coop to not own retail space. This does not account at all for higher than average maintenance if indeed the maintenance is above average. In my area (GV) for example, maintenance of about $1.50-$2.00 sq/ft is the normal range. Certain laws in effect until recently made it difficult for coops to own retail space so most did not.

On the other hand, if a residential coop is part of a condominium building in which there are say 3 condos (i.e., the residential coop, the retail stores, the parking garage), there is a potential advantage to the coop insofar as building maintenance fees are often spread among all three condos by a percentage set in the documents that created the structure. So if a new roof is needed, rather than the coop pay all 100% of the cost, the stores may pay 17% and the garage may pay 3%. On the other hand, there are times the coop may be responsible for a portion of expenses related to these other areas. In my coop, which has such an arrangement, it has almost always been to the residents' advantage to have this set up insofar as the stores and garage have essentially subsidized many building upkeep/upgrade costs while the residential coop has never during my tenure had to pay for anything that only the garage or stores benefitted from.

Thanks Kyle. Very useful.

Like arguing over the price of the picture frame on a Monet. Hi Ho hilarious. Yes. Lets not look upon the 3% 30 yr mortgages, the massive credit bubble and RE as the linkage to said massive underground credit expansion. Let us argue the $1k month carry or lack of.

Hi Ho hilarious.

Hey. Should I sell my sprint position. It'll cost me $10. Wow that $10 gonna hurt. Is $10 a fair price? Is there a cheaper option? Pls help se community.

@ w67th.... crickets. I don't know why I bothered unhiding. Back to ignore.

hi ho...as in vonnegut?

I think W67 has a point, Oxy.

Up in the 3,000 square foot market, buyers are less sensitive to monthlies, especially if they are within the middle 2 quartiles, as a 1.92 ratio (whether based on quoted square feet or usable square feet) would indicate.

Not to say you shouldn't try to argue your point, especially if there are no other bidders, but the seller should say "I don't think these monthlies are out-of-line; I am striking the -320k line on your bid"

Ox,
I find myself in the same position. I did not read every post so I might be a repeat. What I would say is, not all monthlies are equal. It's what accounts for the monthlies that's important. In other words, what do I get for the money? Let's say the monthly on a two bedroom is $3800/mo. in a white glove building with a roof pool, 'real' gym, service attended elevators and all the fix'ins VS. same costs with a part time "Felix" the door man and an angry Super. This is where examining the financials of a building is so important.

I'm not even gonna talk about where the mkt is going. 3000 sq ft $2000/ per. $6mm.

If you took out $4mm mortgage at 3.5% and invested the rest in div stks returning 6%. That's a $100k in net returns or $8.33k/month. Why cry about $1k more a month in cc?

Abother way to look at your insane question. Lets make a decision on $12k/yr or .002% of the purchase price.

Go on. Call me a financial fktard. I double dog dare you.

>If you took out $4mm mortgage at 3.5% and invested the rest in div stks returning 6%. That's a $100k in net returns or $8.33k/month. Why cry about $1k more a month in cc?

Why would you invest in divident stocks returning 6% when you could buy Sprint?

Oxymoronic
about 13 hours ago
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@ w67th.... crickets. I don't know why I bothered unhiding. Back to ignore.

Oxyidiotic. Can't handle different points of view. Anyone else know any retards who can't handle other points of view? Jason006? Rangersfan?