If a FOR SALE Sign Gets Rusty in This Market, Something's Wrong

The market for apartments is currently very strong, so if apartments in your cooperative or condominium are not selling quickly or are selling below market, then that is a warning sign.

If this happens once or twice, it might not be a cause for alarm. But if it happens more frequently, you should examine possible reasons.

Some brokers think that if a board is perceived as “difficult” by the brokerage community – that is, tough on potential buyers – that will affect sales. Over the years I have found this is rarely the case. In a city with a paucity of adequate housing, a difficult board is unlikely to prevent apartments from selling.

Usually the brokers’ complaint about the building being difficult has to do with how thorough the board is in examining applications. But one person’s “difficult” is another’s “just doing my job” – the board simply making certain that the applicants can afford their apartments and will not be a burden to other residents. Apartments may also be selling for less than market value because the broker is more interested in a quick sale than in maximum profits. This frequently happens when the broker lives in the building, has an insider’s advantage, and wants to close the deal before competing brokers arrive on the scene.

Below-market or lack of sales in a seller’s market could also be caused by:

• maintenance increases that are too frequent or too large.
• a ground lease that is within a decade or two of expiring.
• a reset on the ground lease that will triple the ground rent.
• a low-interest mortgage that is maturing with a large balloon payment due in a high-interest rate environment.
• a co-op or condo with a financial statement indicating a great many lawsuits or troubling footnotes.
• worst of all, an auditor’s letter containing “going concern” language indicating that the co-op or condo might not be able to survive.
• a building with a reputation of having leaks all the time.
• a major development being constructed adjacent to a building with lot line windows.

What are other things that low prices and lack of sales could indicate? First, it could be a well-run building in a good location that has been the source of newspaper stories because someone notorious lives there or it has been the site of a heavily publicized crime.

Another major reason could be a virtually permanent sidewalk shed. Even the collapse and repair of part of a building is not as damaging to a building’s reputation as a sidewalk shed that that stays up for years. That demonstrates that either the problem cannot be solved, or the board doesn’t have the financial wherewithal to solve it, or the board doesn’t care how the property looks.

The failure of apartments to sell near the fair market value in today’s market is a warning sign. As with all warning signs, those listed above must be examined closely to determine if they’re a sign of more serious problems or just a fluke.

(Stuart Saft is a partner in the law firm Holland & Knight.)