Sunday, December 21, 2008

Co-op Boards Get Tough and Tougher

December 21, 2008
Co-op Boards Get Tough and Tougher
By VIVIAN S. TOY
http://www.nytimes.com/2008/12/21/realestate/21cov.html

WITH sales of co-ops and condominiums in New York City slowing to a virtual trickle in recent weeks, many brokers suspect that would-be buyers are sitting back and hoping to time their apartment purchases to coincide with the exact moment that the real estate market finally hits bottom.

Some sellers, meanwhile, are considering renting their homes instead of selling them in hopes of avoiding that bottom. And if they are trying to sell co-ops, they are hoping that the co-op board will loosen the rules and help widen the buyer pool by allowing the purchase of pieds-à-terre or permitting parents to buy for children.

But brokers, lawyers, property managers and co-op board members agree that if anything, co-op boards are going in the opposite direction — more carefully scrutinizing potential buyers and establishing tougher financial requirements.

“No one is loosening their admissions policies,” said Stuart M. Saft, a lawyer and the chairman of the Council of New York Cooperatives and Condominiums. “What’s going on in the market has just reconfirmed their belief that they have to be watchful of who they let into the building.”

The rigorous financial review that most co-op boards have long required of buyers is precisely what has kept the foreclosure rate in New York City extremely low, Mr. Saft said.

“Boards feel that protecting all of the residents of the building through strict policies is the best thing they can do,” he said.

Frederick Warburg Peters, the president of Warburg Realty, says that boards are not likely anytime soon to relax rules on who can buy into their buildings. “A co-op board tends to see itself as a guardian of the shareholders who remain in a building,” Mr. Peters said, “not as a facilitator of sellers.”

With financial markets in crisis and unemployment rising by the hour, many co-op boards are looking very skeptically at buyers who have large stock portfolios or who earn much of their income in year-end bonuses that may not materialize.

To counter that and to satisfy the concerns of co-op boards, these buyers are finding that they must either increase their down payment to 50 percent of the sale price or more, or put six months’ to two years’ worth of maintenance into an escrow account.

Some boards have also made it clear that they prefer buyers with fixed-rate mortgages over those with adjustable-rate mortgages; buyers with interest-only mortgages need not apply. These are not the sorts of requirements that appear in the bylaws or the house rules, but in this market, word gets out quickly after a board rejection.

“If you get a board turndown, you can ask how to improve the application,” said Richard Grossman, the executive director of downtown sales for Halstead Property. “I’ve seen some approvals lately where the board tried to work with the buyer, either by asking for money in escrow for maintenance or for additional down payment to increase the equity in the apartment.”

Robert J. Rosa, an executive vice president at Century 21 NYC, said that’s exactly what happened in a recent deal. He represented a father buying an alcove studio for his daughter on East 21st Street. The father, an investment banker, planned to take out an interest-only mortgage even though he had about $10 million in liquid assets and could easily have paid cash for the studio.

Board members told Mr. Rosa that they wanted the father to get a fixed-rate mortgage. And because the daughter earns only about $50,000 a year, they also requested that a year’s worth of maintenance, about $10,000, be put in escrow. The buyer said he would agree to those terms, even though it would increase the mortgage rate and require a higher down payment, but he told Mr. Rosa to seek a 20 percent price reduction from the seller.

“I said: ‘You’re crazy, the owner won’t agree to that,’ ” Mr. Rosa recalled. But to his surprise, the owner agreed to about a 10 percent reduction.

“He was annoyed, but in this market, he didn’t want to lose the deal,” Mr. Rosa said. The apartment, which had been listed at $517,000, sold for $462,000.

These kinds of circumstances have inadvertently given co-op boards much more authority over deals than they had when they merely said yes or no to a potential buyer, according to Paul Gottsegen, the director of property management at Halstead.

He said he had seen several deals recently in which co-op boards had asked for a year’s maintenance in escrow and, rather than risk losing the buyers, the sellers had agreed to put the money into the account on behalf of the buyers. “Buyers are scarce and sellers are anxious,” he said. “So a board’s determination can give it a great deal of power over the actual contract between the buyer and the seller.”

Real estate agents say they have also heard of co-op boards that rejected applications because they believed the sale price was too low and would adversely affect the values of other apartments in the building.

Lisa Lippman, a senior vice president at Brown Harris Stevens, says such behavior is characteristic of transitional markets.

“Everything is going to be below 2007 prices, and it’s going to take awhile for boards to get used to those prices,” she said. “But the risk they run is: if they reject a contract for being too low, the next one could be even lower.”

A co-op board that believes it is protecting property values by rejecting low bids is being unrealistic, said Richard Siegler, a Manhattan lawyer who represents about 150 co-ops. “You can’t keep prices fixed forever,” he said. “And it affects everybody at some point, because eventually nobody can sell their apartments.”

If the market slowdown follows the pattern of previous ones, one area where co-ops may start to loosen up is subletting. Brokers and property managers said they expected to see that happen next summer, about nine months into the market’s decline.

“It’s only when shareholders have had their places on the market for nine months or longer that it’s clear there’s trouble, and they become clamorous for help,” said Mr. Peters of Warburg.

Mr. Siegler said that co-op boards had used subletting as a safety valve in previous downturns. If an owner has already moved out, renting the apartment might prevent that owner from going into default and could also ensure that the building continues to collect maintenance charges for the apartment. “Subletting would allow them to continue owning until prices go back up and the market is stabilized,” he said.

At Two Fifth Avenue, a 20-story building with more than 300 apartments, Adelaide Polsinelli, the co-op board president, said that several shareholders had already asked if they could rent their apartments as an alternative to selling.

The building previously allowed sublets for only one year in the entire ownership of a shareholder or two years if a shareholder could prove hardship. But the board decided this month to extend the limit to two years for all shareholders and up to three years in the event of hardship.

“It was in response to the times — a way to give people options and pre-empt them from having to struggle,” Ms. Polsinelli said. “I’ve been around a cycle or two, and I thought I’d try to get in front of the problem.”

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