BUYING or
selling a Manhattan co-op has long presented unexpected
pitfalls and moments of unique drama. But as real estate prices continue
relatively flat, one obstacle has become more prevalent: Co-op boards are
rejecting sales outright if they deem the price of the apartment to be too low.
BUYING or
selling a Manhattan co-op has long presented unexpected
pitfalls and moments of unique drama. But as real estate prices continue
relatively flat, one obstacle has become more prevalent: Co-op boards are
rejecting sales outright if they deem the price of the apartment to be too low.
Some boards
are so determined to hold the line on prices that they are unswayed by buyers’
offers to place years of maintenance fees in escrow, to increase the down
payment and even to pay in cash.
Co-op boards
aren’t required to disclose the reasons they reject applications, which makes
it difficult to determine just how often buyers are being turned down because
the offer isn’t as high as the board might like. But interviews with more than
a dozen Manhattan real estate experts, including brokers, board members and
real estate lawyers, suggest that boards are saying no more often as they seek
to maintain the value of the apartments in their buildings amid a sea of
price-conscious buyers.
“In the last
month,” said Aaron Shmulewitz, a real estate lawyer, “I must have had 5 to 10
questions about that from various boards that have turned down or have
contemplated turning down purchases for price, as well as various purchasers
who contacted us for being turned down.” Mr. Shmulewitz oversees the
co-op/condo practice at the Manhattan law firm Belkin Burden Wenig &
Goldman.
“I don’t
know if prices have gone down, or if boards are expecting the price to go up,”
he added. But the incidence of board rejections because of low sales prices has
been “markedly increasing.”
Outside of
New York, such impediments to homeownership are largely unheard of, because
co-ops are so rare. But they account for 75 percent of the housing stock for
sale in Manhattan, according to Jonathan J. Miller, the president of the Miller
Samuel appraisal firm. And although some condos now also ask buyers to submit
financial information when they apply, co-op boards subject potential
shareholders to more rigorous scrutiny, often requiring reams of financial and
personal information, right down to references for pets.
Many buyers
are willing to undergo the anxiety-inducing process to get into the Manhattan
market, where inventory has become particularly tight. But few are willing to
overpay. At the same time, some sellers who lack equity or the economic
stability to trade up to a new apartment have decided to cut their losses and
list their apartments for prices lower than they had hoped.
“If you’re
desperate to get out because you’ve been waiting for two years,” Mr. Miller
said, “you sell for what you think you can get.”
Evelyne
Luest hasn’t quite reached the desperation level, but her patience is running
thin. Ms. Luest, a professional pianist, listed the Hudson Heights one-bedroom
apartment that she uses as a practice studio for about $300,000 in 2009, just
as the market was beginning to plunge.
Earlier this
year, after repeatedly lowering the asking price, she was pleased to receive an
all-cash offer for $225,000 — slightly less than 6 percent below the asking
price of $239,000 —from a fellow musician, Thomas Bergeron of South Hadley,
Mass. They went into contract in the summer. Mr. Bergeron made plans to move.
Everything seemed to be falling into place until the board rejected his
application.
Ms. Luest
said she had spoken with two board members and the building’s sponsor, who all
confirmed that price had been a deciding factor. “It’s a business problem,” she
said. “It’s not good business for them to sell apartments for a low price.”
After he was
turned down, Mr. Bergeron, who recently began a two-year teaching fellowship,
offered to put a year’s worth of maintenance in escrow upfront and to have his
mother sign as a guarantor — even though he was paying the $225,000 in cash.
But he drew the line at paying a higher price, which was suggested by Ms. Luest
and her broker as well as Mr. Bergeron’s broker, Kelly Cole of the Corcoran
Group.
“In my
opinion,” Mr. Bergeron said, “the price we went into contract on was the market
price.”
In the end,
Ms. Luest decided not to pursue the offer. Mr. Bergeron is now renting, and she
has relisted her apartment at the slightly higher price of $259,000.
The board,
reached via the building’s management company, declined to discuss its
decision.
For all
anyone knows, there may have been other reasons Mr. Bergeron was turned down.
His profession as a trumpet player could have raised the issue of a potential
noise threat.
“I don’t
understand how it can be legal for them to deny people without giving any
reason,” he said. “It really surprised me that that was O.K. to do.”
As long as
it does not discriminate illegally, a co-op can turn down a sale for
practically any reason. And recent court decisions have held that a board’s
decision to reject apartment sales because of a low price falls within its
business judgment.
Compared
with just three years ago, “a board’s price-based rejection of an apartment
transfer is much more likely to be protected and insulated from challenge in
2012,” said Eva Talel, a partner at Stroock & Stroock & Lavan in charge
of the co-op/condominium board representation group. In January she co-wrote an
article in The New York Law Journal about co-op rejections based on pricing. “I
think courts began to feel a greater comfort level in addressing the issue of
the scope of the board’s business judgment to deal with what is a legitimate
concern for buildings,” she said. “If prices are not sustained at a certain
level, then it would likely have a negative impact on the values of other
apartments.”
If the only
thing holding up a sale is the price on paper, brokers say there are ways to
get around the problem. Earlier this summer June L. Gottlieb, a broker at
Warburg Realty, encountered a seller who would not accept her buyer’s $690,000
cash offer for a Midtown East pied-à-terre listed at $700,000 for fear the
board would consider it too low and not approve the sale. The buyer refused to
increase his offer because the apartment, which was part of an estate sale,
needed a total renovation.
“The only
way to get the deal done was to agree to split the flip tax,” Ms. Gottlieb
said. The buyer paid more for the apartment in the contract, but at the closing
the seller wrote him a check for part of the flip tax, “so the contract read at
a price that would be acceptable at the board,” she said.
Another
creative solution, brokers say, is to increase the purchase price on paper and
create an offsetting credit, or a “seller’s concession.” A buyer willing to
pay, say, $770,000 for an apartment listed at $800,000, would assent to the
$800,000 price, then at closing receive a credit of $30,000 in the form of a
check from the seller to be used for renovations or other improvements. That
way, the buyer would pay no more than previously agreed, the seller would be
able to sell the apartment, albeit at a cost, and the transaction would be
recorded at a price that pleased the co-op board.
Such deals
are completely legal, as long as the marked-up sales price is disclosed in the
transaction documents and all parties understand and agree to it, said Mr. Shmulewitz
of Belkin Burden Wenig & Goldman.
But Barry
Weidenbaum, a New York real estate lawyer, pointed out that some banks and
co-ops “may not view such an arrangement as proper.” Some banks, for example,
limit seller’s concessions or credits, often capping them at 6 percent, he
said.
While
secrecy is typical in cases of rejection involving price, some co-op boards are
taking a more direct approach. Steven R. Wagner, a real estate lawyer who is on
the board of Southgate, a five-building co-op complex in the East 50s near the
East River, said sales price had not been an issue there until earlier this
year. “Suddenly, there were three or four apartments that came up, all of which
were significantly lower than where the apartments had been previously selling for,”
he said.
But rather
than flat-out rejecting applicants who otherwise would have passed muster with
the board, he said, “we actually took a chance and raised the issue with the
broker and individuals and said, ‘Listen, before we say no to this application,
we want you to know it’s because of this, and if you wanted to submit a
different contract price, very likely no would be yes.’ And people did in fact
come back.”
Still, even
with the best intentions, boards that try to control sales prices may end up
hurting themselves. “The irony,” Mr. Miller said, is that “by being too
aggressive in policing transfers of property in your co-op, you can actually
make it worse.” When apartment deals are repeatedly turned down because the
board wants a higher price, the properties end up lingering on the market. The
inference, he pointed out, “is they are overpriced when they’re not.”
The board
unwilling to approve a lower price for an apartment may also be missing a
signal from a seller who is experiencing financial distress and could end up
defaulting on maintenance if unable to sell. And co-ops that repeatedly turn
down applicants for price reasons also run the risk of gaining a reputation as
a tough building — which could ultimately backfire.
“This always
says something to me about the board in the building,” said Ms. Cole, the
broker who represented Mr. Bergeron, the trumpet player, “and it sends a really
bad message. Now, when working with a buyer, I say: ‘By the way, just know
there was a board turndown here with a cash buyer, and they pulled the rug out
from everyone. So buyer beware.’ ”
published by nytimes.com
