How Will Co-ops Handle The Downturn?

Our coop was able to keep maintenance flat for many years now through the introduction of a flip tax and keeping the real estate credits we've been getting every year. We also request escrow of up to 24 months worth of maintenance from buyers in some cases. 80/20 rule elimination was a huge relief. We have fortunately been able to undertake many significant renovations including a major lobby renovation (huge value), roof refinishing, subbasement and laundry room upgrades as well as storage while still maintaining a very healthy position.

lo888 - great points! My building has many buyers keep 24 months in escrow as well. Our flip tax is very modest and it appears that most residents want to keep it that way, but that is also a good way of generating revenue. Although, in this climate there are not a ton of sales.

Has your building done any studies on possbily investing some of the reserve funds?

Post your "no problems with my co-op" comment here.

How do you see your coop board's reaction to transactions coming in at a lower value than say, summer of 2007? How do they resolve the inherent conflict between protecting the value of current shareholders vs the few shareholders who need liquidity and forced to sell at what may be perceived as a 'discount'?

BaronArtz - That's a good question. There are only a couple of apartments for sale right now and they have been on the market for some time. We haven't had any situations yet where accepted prices have been much lower than previous sales, although that could certainly change. I think we had been averaging about 4-5 sales/year, which is not a ton of turnover. There also has not been anyone who has been forced to sell yet, although again, that could change. The closest to that was someone who sold last year after a break-up and she got a reasonable price for her studio, although it took her a long time to get any offers.

It would not surprise me to see neither of the apartments that are for sale get sold in 2009 if their prices aren't lowered (one of them significantly). If it gets to that situation I will let you know what happens to give that information. Perhaps someone in a buildings with more turnover will have had this occur? The only mention that I have heard about a turndown based on a low offer was on a thread on SE and it was hearsay from a broker, so I would take that with a grain of salt at this point unless there are better sources that can be trusted.

Our building is about 150 units and right now, there is not a whole lot of talk from any shareholder about selling their apartment in the near future. I think that would only happen right now out of necessity and, thankfully, we haven't had that yet. That could always change.

We're the same way. About 100 units and only a handful of transactions last year. A couple are on the market now and one will need a drastic reduction. Our layouts are all very different so I think it might be easier for the board to absorb a lower comp if necessary. Our comps are always all over the place because of how very different the apartments are.

Waverly - not sure how the funds are invested. I am sure it is nothing more creative than time deposits or money market funds. Glad they didn't go the way of my 401K...

lo888 - Yes, we are definitely looking at very conservative options.

Your a co-op, you can not "invest" your money. Only MM or interest bearing accounts

lo888: What triggers an escrow of up to 24 months worth of maintenance?

bubbler - You are right. I think I should have mentioned it in those terms (was working and typing...sorry).

this is the big dilemma in nyc...many coop owners maybe willing to accept lower prices but if the board is not ready to face the music....sellers are screwed...and so are buyers....

mhillqt - as said in yesterday's thread, there is no evidence of this actually occurring. I think it is more likely, at least right now, a broker tactic to get buyers to give higher bids. I have seen none of it in my building, no one else has mentioned it happening in theirs and the ONLY time it has been brought up it was hearsay from a broker. Until there is better evidence that can prove this is actually happening I think it must be taken with a grain of salt.

Could it happen? Absolutely. I just don't trust the sources at this point.

ali did mention on one of her listings that the price was just about as low as the coop board would tolerate. she's a broker, but...

i think it depends to some extent on the composition of your building: how long the average owner has lived there, size of apartments, and possibly most importantly, price point and price appreciation over the past 5 or so years. no proof, just a sense.

dwell - As to the 24 months of maintenance in escrow, our building started this practice in 2002. First off, we are a 20% down building and they do not allow any exotic mortgages. If you have less than 50% of the purchase price in liquid assets after the down payment you would be required to put 24 months of maintenance into escrow.

Maybe we need a coop board in charge of the stock market, if they can put a floor in prices for apts they certainly can do the same for the market. God know the pension funds and other retirement plans could use a boost.

Thanks, waverly. What would the bd do if someone put 50% down, but didn't have much liquid assets left after that?

in murray hill prices havent really come down...so either the buyers are stubborn or they know the boards wont accept a low offer...guess to early to tell.....but stocks drop 50% in a few months and this manhattan real estate is just sitting there.....flat.....

"they know the boards wont accept a low offer..."

This is is what I don't like about coops: if they don't approve your buyer (for whatever reason), you could be held hostage.

dwell - They do reserve the right to look at things on a case by case scenario. I would imagine if the purchaser put 50% down and was good to go on everything else (solid financials, stable employment history, good interview and they had a reasonable amount of money left over) they would probably be okay with that. But if putting 50% down left them with $10 to their names, probably not so much. You can also petition to have the escrow money returned if you can satisfy the 50% liquid requirement down the road.

When we bought we didn't have the 50%, but did put the 2 years in escrow. I wasn't thrilled with it, but I understood why and was okay with it.

My stupid coop made flip taxes an integral part of their financial planning. It drives me nuts that our monthly maintenance keeps going up%u2014while we spend a quarter million to plant flowers. (There are a lot of elderly women in the coop). I wish I lived in Waverly's building.

undecided - how much is the flip tax in your building?

Our escrow requirments are a little more arbitrary than I'd like. While I completely agree that reviewing each application on a case by case basis and trying to make deals work where there appears no real material risk to the coop is necessary, there were instances where we went too easy on people and others where we were unreasonable. It's usually dictated by who's most vocal at the meeting in question. Everyone else has to pick their battles so these things happen.

oh, you don't want to know. Or I hate to say. I was just reading the other discussion on flip taxes and didn't realize how high it was compared to regular places. (My coop is Mitchell Lama or something or other so that the people who got in, in the 1960s-1980s, paid maybe 4 figures--very low 5 figures--for a 3 br.) It's 20% of profit the first sale, 15% the second. (People used to buty small apts to get into the coop to get on the list for a bigger place.)

As you may have guessed, I'm not one of the people who got in before they raised to prices closer to market.

Wow....that is very high. But, doesn't that keep the maintenance lower? If you have the high flip tax and high maintenance, something isn't being run right.

You can say that again. Enter the blipping flowers!

I guess that could be a lesson/warning to people out there thinking of buying into a coop. If the majority of the board is *extremely* older than you, chances are you aren't going to have the same priorities and you're not going to be happy with their decisions.

Can you get them off the board and bring in a new group of people?

Waverly - now that's a project you DON'T want to undertake! Coop politics are a nightmare!

The problem is that the coop is mostly older folks--and they vote in a bloc for each other. It's more a waiting game--as in waiting for them to move to FL...or beyond.

lo888: no joke! This whole coop experience has made me think that maybe, possibly, potentially (but not really) I could live in a house in the burbs. Next apt. will definitely be a condo. 10-4 (Got to get off the Internet and do some work done now.)

As a coop owner and after having lived in several coops, I have to write that I haven't seen any issues or blocks when it comes to pricing that is deemed to low by a board. A broker or stubborn seller is more likely to turn down a low offer before it can even get into the hands of the coop board.

People are turned down in average to above-average (so I'm not referring to ultra premium old New York, high brow coops) coops because of lack of qualification of the potential buyer. Determining the qualification of a potential buyers is not too different from evaluating a renter, since income and credit history are taken into consideration. The additional qualifier for most coops is the liquidity component and the ability to make, at least, a 20-25% downpayment. Generally, 2 years' of mortgage and maintenance monthlies in liquid assets (money markets, savings, checking, CDs, and portfolio) documented is requested. So, if you have a mortgage of 4000 and a maintenance of 2000, you'd simply need to prove that you have 150 grand tucked away, after your downpayment.

The above formula, while simple, has proven well in ensuring that coop owners have some rainy day savings. I personally wish this was a standard upheld in all real estate markets and it would give people pause before they enter into such a huge financial transaction.

The coop board is there to judge you by the standards by which they were judged when they bought into the building, which is fair. Some of the times, the standards become stringent driven by market conditions. However, the extent of the stringency is tempered by a board's recognition that it can't prevent its shareholders from selling if there is a financial need for the sale. It's common sense that a board would rather have a new owner than a deadbeat neighbor. To think that coop boards only want a high sales price coupled with a potential buyer that is willing to pay that high figure but doesn't have the means of staying afloat based on the building's qualifications formula, is just not sensible to the building's finances because of the greater default risk on the maintenance payments.

Also, when a building has older residents, there is actually more flexibility in the pricing since they bought that much earlier and would be making multiples of someone who bought in more recently. I've been in buildings with predominatnly younger people and more mature ones. Both seem to want the same things: good management, maintenance stability, and safety.

coopownr98 - thanks for posting. I was wondering if your co-op has come up with any creative ways for keeping expenses down or perhaps for generating additional revenue in this environment, other than some of the main ones that have been thrown around already?

coopownr98: To your points in the last graph, that's absolutely what I would have assumed if I'd been worried about moving into a NORC (Naturally Occurring Retirement Home)! But it hasn't worked out that way. They are taking out mortgages up the wazoo to pay for necessary improvements, reasoning that it's future generations that will benefit the most from them. Okay, now I really have to sign off.

Very last thought and then I'm really going: I have learned firsthand that every person only does what it is in their best interest. And well they should. So the key to having a happy coop experience is to choose a coop where the majority of people have the same best interests as you. I didn't mean to dis anyone with my earlier comment about mature folks.

waverly - The coop has increased the maintenance slightly but, given how price-sticky service/utility costs are, I'm not surprised. Those high costs will always get passed to the shareholders. I did hear from the building staff that people were, unfortunately, less generous in their holiday gifts. Otherwise, the building has a healthy cash reserve.

Since we don't have a flip tax, I would have thought that there would be more sales activity but there hasn't been much. At any given time, the number of sales postings have been lower than 10% of the total number of coops.

undecided - My building has also toyed with improvements but thanks to good sense and management (apparently) the building has opted to put the improvements on hold. Those fall under a capital improvement which is good at sales time and is paid via a temporary assessment anyway. Also, not to stereotype, but the older folks that I've encountered tend to actually be a bit more conservative with the budget. Voting's kept very discreet. Is it possible that it's not the older ones that have caused you all this agita? :)

Yes, any experience, including a coop experience, partially stems to sound decision-making on a good fit. I've always viewed my board interview similar to a job interview. I'm at that meeting to assess the intelligence of management and have more to gain in learning from that meeting than they do about me. After all, my life has already been reduced to a board package for their review beforehand.

Good points coopownr98!

Don't know if this was already posted, but it relates:

Soaring charges hit condo, co-op owners
http://www.crainsnewyork.com/article/20090222/FREE/302229997

That posting, as with many other things considered newsworthy in the media, can be scary.

It would be best to not generalize or senationalize.

Best thing to do is to get yourself a GOOD lawyer who will be able to help you navigate through the process and your concerns.