Co-op Sales Manipulated to Appease Boards

1 in 10 co-op sales is manipulated to maintain property values.

The post-Lehman real estate market is giving rise to new and previously rare selling practices. Brick Underground pulled the curtain back on how some co-op sales are recorded at misleadingly high prices to keep boards happy and maintain property values, using “givebacks” to buyers to keep real prices low. It’s estimated that 1 in 10 co-op sales contain some kind of “giveback” that keeps the official sale price tens of thousands of dollars higher than the buyer is actually paying.

Here’s the deal:

1. The sales contract price is acceptable to the board, but is more than the buyer will pay.
2. The seller then agrees to refund tens of thousands of dollars to the buyer after closing (typically with full disclosure to the mortgage bank and the board).  The giveback can go by many names, such as concessions, credits or “decorator’s allowances.”
3. In a bank-financed transaction, the refund amount is capped at 6%. In an all cash exchange it could be multiples of that.
4. The contract price “before givebacks” is then recorded by the city as the amount of the sale.

The practice is legal as long as both the board and the lender know about the agreement, and according to real estate lawyer Jeffrey Reich: “If handled correctly, credits and allowances provide a win-win alternative for the seller, purchaser, board and shareholders, whose apartment values are protected.”

While legal, banks don’t like the practice because it doesn’t reflect the true economic value of the sale. Jerry Feeny, a Manhattan real estate lawyer cautions: “If it exceeds 6 percent of the purchase price, [banks] will reject it, and they are often reducing valuations on the property according to the amount of the seller’s concession.”

One “giveback” technique that banks are happier with is “renovation escrows.” Feeny explains that, “Banks look at it as a seller’s obligation to make repairs secured by an escrow rather than a credit that goes back into the buyer’s pocket.”

Problems could come when future buyers and appraisers look for comparables to determine how much a property is worth and see the inflated sale price as the true cost of the property.

While brokers say exaggerating 10% of the sales won’t alter the overall resale market significantly, because the practice is much more common in new construction since 2007 it is skewing the market for new construction. Developers are aggressive in “giveback” concessions, from closing costs and common charges to decorating allowances and health club memberships.

According to Feeney, “sales prices are wildly overstated in new construction. You can’t tell just from the reported price what it really sold for.”

Photo Credit: rutio

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