Is There Life After Death and Arrears Caused By Probate?

Simply put, a high percentage of arrears, like a high number of sublets, can affect your building's ability to refinance its mortgage — and can affect sales because your potential buyers may have difficulty getting financing.

From Beyond the Grave

Veteran New York mortgage broker Pat Niland, president of First Funding, says that he's seen no fewer than three buildings affected by probate issues just within the last year.

Niland notes there is a distinct difference between how arrears are treated by banks. Following the disposition of an estate, co-op buildings are first in line to collect. But with condos, the bank has first dibs; its mortgage takes precedence for repayment over all others. Thus, deceased residents can be an even greater concern for condo buildings.

A case Niland recently dealt with involved a co-op in Brooklyn with just under 300 units and a resident roll that included more than a few seniors. Between 10 and 12 units in the building were in probate. This drove up the percentage of the building's units in arrears.

"New York probate is time-consuming, and, in general, banks don't like it when more than five percent of your units are in arrears," he explains. Indeed, New York has one of the most notorious probate courts in the world.

There are some who will tell you that it's worse than the byzantine system Charles Dickens described in Bleak House — which alarms banks. The problem can be a particular issue for buildings with a high proportion of elderly tenants. "And they get very uncomfortable when you get above 10 percent," Niland says.

Mindy Goldstein, a senior vice president at National Cooperative Bank who specializes in lending, offers a ray of hope: "We look at everything — the overall picture. We can underwrite around a situation [with high levels of arrears caused by probate]."

But, she adds: "The co-op's attorney and its board have to be proactive and stay on top of it. They have to make the proper notices to lenders. And they have to have a detailed plan to deal with the protocols. They should even possibly create an escrow account until arrears go below a certain percentage."

Adapted from "The Dead Don't Pay" by Jonathan Leaf (Habitat, January 2015)

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