Did you ever run into your schoolteacher at the supermarket?  You stared at her, not ever having realized that she eats, cooks food, sleeps, goes home somewhere and generally does things when she wasn’t in your classroom with you.

As a real estate agent (technically an Associate Broker, though you can think of me as “Broker to the stars…”), what is happening when we’re not showing apartments?

Coop boards have a lot to say about who lives in their buildings.

We are previewing apartments.  We are assembling paperwork for cooperative purchases.  We are negotiating with different people, involved in different parts of the transaction.

Everything comes together with cooperatives in New York City.  They comprise about 70-75% of all the residential property that could be available for purchase/sale here.

When you’re trying to sell your apartment in a cooperative building, not only do you have to find someone to pay a price that you can live with, but that buyer has to pass muster with the coop’s board.  In many cases, this is fairly formulaic. Here is the strategy:

• Be a financially responsible person for an extended period of time
• Have the downpayment plus about 2 years’ worth of liquid assets (non-retirement) after closing to cover mortgage & monthly charge (aka maintenance)
• Be a decent person who can find a number of people to write nice things about you

That’s really it.  From the outside, this process may seem cumbersome, overwhelming, tedious, pointless, daunting, intimidating.  And perhaps there’s some truth to some or all of those descriptors.  For the most part, the engine runs, and deals get done.  But here are a few scenarios when the engine starts to knock:

• A building requires a buyer to put 50% or more down on the purchase
• A building requires a buyer to have more than the purchase price in liquid assets after closing
• A building also runs more like a country club than some
• Maintenance in a building starts to runaway, with well-heeled owners not realizing the optics of monthly charges in excess of $10,000/month (for instance)
• Buildings increase their transaction costs – known as a “flip tax”
• The real estate market is soft and sellers are accepting a sale price that is lower, sometimes much lower, than past sale prices in the building.  The NY Times wrote about it a little, and probably one of the most important articles I’d recommend for sellers.  And yet it runs right in the face of what coop boards want!

In buildings that have stricter requirements, buyers are balking.  This has always been true, and some might argue that’s fine.  This makes the audience for an apartment smaller, but it’s also more exclusive.  But…Add to that the typical situation where a larger apartment being sold is also in need of renovation.  So the pool of buyers shrinks further, and perhaps too small to even be thought of as exclusive.  Time on market increases, buyers wonder what’s wrong.

Layer on a building’s requirement that you may need to know some of the same people and have a sterling reputation in business or in social circles.  This isn’t impossible, but many people have people with whom they have had a run-in.  It happens.  This can also create an issue, even if you’ve gotten over the first two hurdles.  And when a seller finally finds a financially qualified buyer, boards have regularly turned down buyers because they just don’t like them that much personally.  If you’ve seen an apartment lose a million or two in value, imagine how that seller feels, when all that’s standing between them and what’s next is the board.  Hmm…

It’s that last hurdle, when the market softens, as we have seen over the last 3-4 years.  Cooperatives begin to act a bit too irrationally, and the wheels can come off entirely.  I’ve written about the adjustments to contract prices that are happening behind the scenes.  That’s not pretty at all, and I question not only the ethics of this practice, but its legality.

But what happens when an apartment is now sitting on the market for 2-3 years, has had board turndowns already, and the market value is far less than a cooperative board will permit?

This is creating some paralysis in the marketplace, a pileup of inventory, and a situation in which coop boards have pushed themselves in a corner.  Do they permit lower sale prices to be “printed?” Do they allow less qualified buyers to purchase in their building?  Do they allow for a higher % of the purchase price to be financed?

How are cooperative boards going to remain competitive going forward?  The longer they hold out for unobtainable prices, it creates a negative spiral, in which:

• Fewer sales happen in a particular building, causing buyers to ask why
• Brokers talk.  And spreading the word. They may then decide not to bring buyers to certain buildings, or advise against particular buildings for being too strict or unrealistic
• Properties sit on the market longer and longer
• Maintenance continues to go up and up
• Inventory Pileup

In a softer real estate climate in which the cost of purchasing has just gone up due to NY State tax increases, and the deductibility of monthly taxes has gone down, cooperatives will have to make accommodations to remain competitive.  To me, it’s an inevitability.  As a coop owner, I’m constantly marveling at well-intentioned decisions made by other cooperative boards that result in fewer sales.

Something will have to give.