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Our coop board is considering setting minimum sales prices for apartments in our building. Has any other coop done it or considered it and decided not to? Is it legal? Do you have to have something in the proprietary lease or bylaws permitting such a thing? Under what circumstances is it desirable/justifiable? How do you go about setting minimum prices? What do you do if the shareholder can't find a buyer willing to pay as much as the minimum price?
I agree with the two others -- let the market decide.
That said, if an offer comes in that seems awfully low, the board can buy the apartment instead, at the same price, and then put it on the market for what the board believes is a fair price.
This doesn't prevent the sale (so the buyer doesn't have to wait for her money), and keeps the average apartment price in your building high.
Of course, you'd better be darned sure you can make a decent profit on the re-sale. An issue of Habitat a couple of months ago addressed this very topic (also called Right of First Refusal). The recommendation in the article (as I recall) was to make sure you could make 20% profit on the re-sale.
Of course, check with your lawyer and your accountant before taking this road.
We have 550 units. On average, 30 units change hands each year, including studio, one bedroom, two bedroom, two bedroom large and three bedroom. Some are improved, e.g.: upgraded while pothers are quite “old” in tone.
Some are as neat as can be while others have seen some mileage.
Some are on the 1st floor while others are on the 25th floor.
We track every sale and can show the average price per share for all units as well as the average price per share for each type of unit.
Basically in our building, there is a 20% spread in each year between the high and low of each type of unit, without taking into account the location of the unit, e.g.: height in building. facing east, west, north, south.
So who decides the price?
If an average unit turns over for $450,000. how much does the co-op have in its reserve funds?
Does fiduciary responsibility allow investing the funds in the risky real estate market?
And to what purpose?
Does your co-op charge monthly maintenance based on the value of the unit or the shares? Me thinks it’s based on share ownership.
Does the board have spare time to evaluate offers?
By now, you must come to the conclusion that I feel it isn’t a worthwhile pursuit for a board that is underpaid and has other issues to face.
Excellent questions all, Ben. My co-op has only about 15% of the number of units as yours, so it's much easier for the board to stay on top of sales. I'll aim to answer your questions.
>So who decides the price?
See answer to your last next-to-last question, below ...
> If an average unit turns over for $450,000, how much does the co-op have in its reserve funds?
That's an apples and oranges question, Ben. One guideline to the minimum amount of reserves is the dollar figure three months' maintenance. It has nothing to do with the price apartments are selling for.
> Does fiduciary responsibility allow investing the funds in the risky real estate market?
Risk -- that's the big question. A wise gambler never bets more than he can lose. And certainly the market is less stable today than a year ago.
However, if a sale price is so undervalued that the board essentially gives up the change to make $40,000 (that's buying an apartment for $160,000 from a shareholder who wants to move asap and then selling it for $200,000), is the board wise to abandon an opportunity enrich the corporate coffers? There's no right or wrong answer.
> And to what purpose?
There are two. First, the real estate comps (those are the comparative sales prices that sellers and buyers research to determine a fair price for an apartment). Let's say the apartment above mine -- same layout, in roughly the same condition -- goes on the market for $500,000. The seller wants to start a new job in Boston in two months. She gets no offers until two weeks before starting her job, and it's for $385,000. Having bought years ago for less than half that price, she accepts the offer -- she'll make a nice profit and have cash to close on her new Back Bay home.
Then I go to sell three months later. Believing my apartment worth at least $490,000, I'm piqued to find out that my neighbor sold hers at such a low price because it undermines my negotiations. As a shareholder, I can reasonably be annoyed at the board for allowing the corporation's shares to have traded at such a low price. But I'm stuck.
(The corollary in the world of publicly-traded stocks is essentially the same: A company buys back its stock when it feels the share price is too low, then holds on until the price goes up and sells them again. At a profit.)
The second reason is to do what businesses do: Make money.
> Does your co-op charge monthly maintenance based on the value of the unit or the shares? Me thinks it’s based on share ownership.
Exactly. On shares. And that's one of two ways we determine the value of an apartment: the share price of the sale. The other way is by comparing apartments in a line. If by both of those checks the sale price looks far too low, the board can choose to step in.
Then by using those two pricing methods (share price and line value), the board sets a selling price. Since the board is in no hurry to sell (it's out only the maintenance it's not collecting), it can wait until someone meets the price it asks. (In my building, the highest prices tend to go to the sponsor, who waits until someone meets his price.)
> Does the board have spare time to evaluate offers?
Again, yes, because our building is much smaller than yours.
To wrap up, there's no absolute answer on this. For a corporation with plenty of reserves and a healthy operating fund, there is little need to make money on the side. But even if the corporate accounts are a little shallow, the board has to take into account the tolerance of shareholders for such a risk.
The financial sophistication of shareholders varies greatly from building to building, and even within buildings, not to mention the sophistication of the board members themselves! That's why it's key to get the corporate counsel, outside accountant, property manager or managing agent, and other professionals involved in any decision of this sort.
As noted, it’s a free market that enters equilibrium when buyers and sellers agree on a price.
If you wish to thwart the mechanics of a free market are you prepared to underwrite the costs of those who wish to sell regardless? Will you create hardship waivers, e.g.: family death, divorce, etc.? Will your co-op corporation buy the apartment of those who wish to depart?
Who will set the target price? Who will evaluate the target price? Will it be based on price per share per type of units or price per share regardless?
What if someone asserts that the unit did not sell or could not see at a target price because the board of directors failed to maintain the building in suitable physical condition?
Quite frankly, the board has enough to do without setting or meddling in the market price equation.
In our building, the units are free to sell at whatever the market can negotiate.
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This is an old topic that you should be able to find prior opinions.
My personal opinion is prices should be dictated by the market. Many will disagree with this point of view. However, you need to be realistic and allow shareholders continue their lives. Additionally, all circumstances are different and some people will be willing to lower their price according to their own interest. A co-op only needs worthy potential shareholders who are able to pay the maintenance, share mortgages, and any assessments when applied and who are willing to live according to the PL and house rules. Yes, you may say that a lower price will have an adverse effect on the co-op, the quality of life and all the wonderful things you want to say. But the buttom line is MARKET and ECONOMICS dictate the price.
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