Quote of the Day
While home owners just need to keep their own heads above water to survive, in a co-op, one also has to worry about the corporation keeping up on its payments. If the corporation defaults on its underlying mortgage, the shares become worthless, but shareholders still have co-op loans to pay off. It is a bad…
While home owners just need to keep their own heads above water to survive, in a co-op, one also has to worry about the corporation keeping up on its payments. If the corporation defaults on its underlying mortgage, the shares become worthless, but shareholders still have co-op loans to pay off. It is a bad scenario. Particularly vulnerable are the small, three-and-four unit coops, or the ones with a large percentage of rent-control tenants. Defaults like this happened all over the City in the 1930’s and to a lesser extent, in the late 1980’s.
— by sam in Attendence Falls at Brooklyn Open Houses
I can’t understand why someone would become a co-op shareholder. It is a tremendously delicate legal structure with nearly certain conflict between shareholders. I would never put hundreds of thousands of dollars in an investment that could be decimated by one other investor losing their job. Also, co-op boards always feel a little like a soviet-style collective board. “Are you dedicated to ‘the people’ comrade? If not, we have ways of making your life miserable”
I only write about what I know. I lived through a co-op near-death experience. It was the scariest financial crisis of my life. The worst part was knowing that you would lose it all because other people could not pay their maintenance. We got through it and it’s ancient history for me. But sometimes history repeats itself. That is why I thought about mentioning it today. It is a real concern. In a co-op or condo you are in it together with your neighbors.
Fortunately, that usually translates to greater strength, not greater risk. I don’t want to be Mr. doom and gloom.
In my case, we got through it because of the incredible courage and know-how of my fellow shareholders, they were awesome, I will always be grateful to them.
sdrubbins: the buyers of the co-op, if rational, would only pay Z-W for the coop shares. — so the profit would be the same.
“Particularly vulnerable are the small, three-and-four unit coops”
Read browndos and brown-ops. Better do mark-to-market accounting on your fellow share-holders.
“Defaults like this happened all over the City in the 1930’s”
Quote of the quote of the day. 1930’s = The Great Depression. A true story very much in vogue right now.
Dave, Jean and Judy are the mild-mannered lesbian couple who buy the garden apartment in the brownstone, who consider it a long-term investment and like the neighborhood, and who are therefore comfortable buying even in this troubled market.
But oh they’ll reconsider when Jason and Jim, recent college grads who blast their stereo at all hours, rent the parlor floor from its buyer…
condos are much more vulnerable than co-ops. I sit on a co-op board in brooklyn and people just don’t get in unless they have very solid financials. You don’t have to sit on a board to know that. 20% down with plenty of liquid assets leftover (1-2 years of debt service + maint) is the min. reqiured. And a conventional mortgage. Also, not sure why rent-controlled units are vulnerable. Tenants not paying their rent is about the only way to get rent-controlled tenants out and is many an investors dream.
Where do Jean and Judy fit in??
Without having sat down and thought it all through, this strikes me as wrong.
I guess, if the building is collateral for the underlying mortgage, then in case of default the bank would take possession of the building, but not the corporation and its shares. Shareholders would still have leases granting them the right to occupy their units.
Right?
By the way, this double-leverage aspect of coops makes me wonder why any developer would make condos. Tell me where I’m going wrong with this thinking:
John buys a four-story brownstone for X dollars; he spruces it up into four condo units, renovations that cost Y dollars; he then sells the units for a total of Z dollars. Profit=Z-Y-X.
Jane forms a corporation which buys a four-story brownstone for X dollars; the purchase of financed by a balloon mortgage for W dollars. So the cost of incorporation plus the down payment on the building equals X-W. Jane spruces up the building into four coop units, renovations that cost Y dollars. Jane then sells all shares in the corporation for Z dollars. The shareholders take on mortgages to buy their shares, and collectively own a corporation that takes the W dollars of debt from Jane. Jane makes a profit of Z-Y-(X-W).
Since X is substantially greater than (X-W), Jane’s profit is W dollars greater than John’s.
So the question is, why does anyone make condos??