The Price Isn’t Right

Loree Lash was sitting on the figurative fence. As president of the board at a 16-unit co-op in lower Manhattan, she couldn’t decide how to vote on the so-called “lowball issue”: should the board let a divorced couple sell an apartment well below the average selling price of the building’s other units?

The topic was a big issue in the early ’90s when prices of co-op and condos were going down, down, down. And now, with prices dropping once again, are the fire sales coming back? And should boards be considering options?

Theresa Racht, an attorney and partner at Racht & Taffae, is concerned enough to dust off her mid-’90s clip file of old cases pertaining to an issue directly related to the topic at hand: “floor prices,” or minimum sale prices set by boards on the resale of apartments in their buildings.

The concern is simple: one lowballer can ruin it for the rest of the residents by bringing down the average sales price in the building. “It’s all comparables,” Racht notes, “because the comparables are used by the brokers. If you want to sell your apartment you get a list of the most recent sale prices at your co-op. That’s going to affect what you list your apartment at. And if your building doesn’t have comps because you don’t have similar apartments that have sold in the last year or so, they’re going to go to the adjacent buildings. Now if the adjacent buildings are all selling higher than yours, you’ve got a problem. The building next door commands higher prices so obviously it’s got to be a better building. That’s part of the concept.”

“It’s a complex issue,” Lash says with a sigh. “If you look at it from the seller’s perspective, [you must consider] the idea that everyone should have the right to do what they want with their home. But then you do have an obligation to protect the property value for the rest of the people.”

Lash’s situation was typical of the new reality: for years, the board had only seen prices going up. When a divorced couple offered to sell the apartment at a lower price than the building average – simply because they wanted to be done with the apartment – the board split into two camps. Three were for the sale (the buyers are impeccable) and three were opposed (the price is too low). Lash was undecided and abstained while she sought out more information.

She asked, “Legally, can boards even set minimums?” In Manhattan and the Bronx, the courts have said, “Yes, you can.” In Westchester, Queens, and Staten Island, it’s been, “No, you can’t.”

The logic in each case was contradictory. “In the Westchester decision in 1995,” says attorney Bruce Cholst, a partner at Rosen, Livingston & Cholst, “the court said that to turn somebody down because his price is too low is an unreasonable interference with a shareholder’s ability to sell his apartment. But then a Manhattan case said that it’s not unreasonable because a board was within its rights in making decisions in the best interests of the building, and so they upheld it.” No higher court has ever reviewed the conflicting rulings.

The law aside, is it a good idea? Probably not. Steve Nardoni, president of Nardoni Management, recalls a recent situation in one of his buildings: “We had an apartment that had been on the market for a while and the price was certainly substantially less than could have been demanded a year ago. And there was discussion that the board not approve this because of the low price. They eventually approved it. I think that’s the right way to go. It’s dangerous for boards to try to protect themselves like this because they can’t control the market.”

“It’s not a good idea because if a seller is looking to get out that badly then they are weak financially and you’re going to end up with an arrears situation,” Cholst adds. “I would much prefer having a solvent purchaser than a seller who’s looking to bail out at a low price because he can’t afford the carrying charges.”

Miriam Sirota, a broker at Brown Harris Stevens, argues that price floors are in no one’s best interest: “In this market, if they deny the sale they might be getting a new sale that’s even lower than the previous sale was. The market should determine the price; if the value has dropped since the price minimum was set, it’s hard for them to apply that previous standard.”

Sirota suggests that boards educate themselves: “They should know what apartments that are similar to the apartments in their building are selling for. There’s plenty of information out there about real estate, about financials, and about the economy. A board can sit in denial of what’s happening just because they want to maintain a certain price point. They have to give with the market.”

And so, what of Loree Lash’s board and its dilemma? In the end, she broke the tie and voted to let the divorced couple sell their unit at the lower price. “It was four to three in favor,” she recalls. “What swayed it for me was that no one knows how bad the market is and the majority felt that we really didn’t have the right. You know, we just felt like it was just too much control to say to somebody, ‘You don’t have the right to sell your apartment.’ The lower price could potentially be just the new reality.”

“In the early ’90s there was discussion, ‘Are these apartments going for too little?’” notes Jeff Weber, president of Weber Farhat Realty, and manager of Lash’s building. “But again, as the market works, boards relent to the market. They’re unhappy that the values are going down but they end up accepting it. Especially when the owners are crying that they can’t afford the units anymore, they’ve moved, or they must sell.”

For Lash, that was the decisive factor. “There really was a dilemma because you would be hanging the apartment around the necks of these nice people who had a legitimate reason to want to leave. Ultimately, when we looked at the people that wanted to buy it, there was nothing [against them]. When we said, ‘You have to look at everything about these people. They’re lovely, they have strong financials, there’s no reason not to approve them.’ The only glitch here is approving something at that price just makes everybody else’s apartment seem to be worth less money. It was very, very stressful.”