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I inherited a co-op that I want to sell, but the building has substantial debt from its underlying mortgage, and banks are skittish about lending to buyers. What can I do?
If your co-op building's financials are scaring off mortgage lenders, your best bet may be to find an all-cash buyer—or lower your asking price, our experts say.
All co-ops are not created equal, and some come with more financial baggage than others, depending on the circumstances under which they were converted from rentals to co-ops.
“The amount of a co-op corporation’s mortgage debt is determined by its board of directors, but usually has its historical roots in how, when, and by whom the building was converted to a co-op," says Aaron Shmulewitz, attorney with Belkin Burden Wenig & Goldman. "Many conversion sponsors saddled co-ops with higher-than-average mortgage debt, as a means to increase the purchase price that the sponsor would receive for the conversion."
Buyers must consider the ratio of the mortgage to the number of units in the building and their value. Beyond deterring lenders, substantial mortgage debt will drive up monthly maintenance payments, so buyers should also compare those costs to those of similar co-ops in the neighborhood.
It can also be difficult for co-ops to reduce debt once they take it on, Shmulewitz notes, since many mortgages don't allow for amortization. A worst-case scenario for a co-op with too much debt would be a mortgage default and foreclosure.
If you see that kind of trouble on the horizon for your building, it will be quite the challenge to sell.
"Shareholders in co-ops with excessive debt could find it somewhat more difficult to attract buyers for their apartments, but there is effectively nothing they can do about it other than lowering their asking prices or offering some other financial inducements to purchasers,” Shmulewitz says.
Working with an experienced broker can help you decide if this is the right course to take. You could also try to find buyers who don't need to finance their purchase.
"If the issue is the cooperative’s underlying mortgage, concentrate on identifying cash purchasers," says Jeffrey Reich, a partner at Schwartz Sladkus Reich Greenberg Atlas. "There are a number of purchasers in the market that are opposed to mortgage financing and may be willing to purchase the apartment at the right price."
And for those looking to purchase a co-op, do your due diligence and investigate the building's financials before making a commitment. Hire an attorney and have them review at least two years of the building's statements, as well as board meeting minutes, to get the full picture of the co-op's status.
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