Hi, Fred--Yup, this is a pre-war building. According to the board president (communicated through the seller's agent) the board is 'working hard' to raise that reserve, though they didn't give any idea as to just how they were planning to do that... It would be frustrating to get into a building only to find major increases/assessments suddenly on the horizon.

We love the apartment itself, and are sorely disappointed not to have been able to get it, but we may just have dodged a bullet here.

The only reason for failing to have sufficient reserves is that the board failed to convince the owners of the merits of a prudent reserve (or fears another confrontation around the issue). Co-ops are all about the personalities so treat the data point as an indication that the building is not managed well. Furthermore, if it is an older building, you can be rest assured that you will see special assessments. The lack of reserves indicates a resistance or an inability to cover periodic CAPEX. did you request a list of delinquent owners? this is a huge and growing problem with manhattan real estate - particularly in newer, less occupied buildings.

Hello again, Joanna and Michael--

I appreciate your comments. Just to clear up a few things--we absolutely DID have an agent working on our behalf in this negotiation, and there was a seller's agent involved as well. I actually believe the agents (and the seller's agent in particular) may have made things worse, as they appeared to let their own emotions get in the way of the negotiations--yelling, phone hang-ups, etc.

When we decided to revise down our original offer to a price I still believe is more than fair for this apartment (and based on information we didn't yet have when we put in our original offer), we did it it in a polite, respectful way, fully explaining our reasoning. Never did we issue any 'here-today-gone-tomorrow' ultimatum--that came from the other side. We'd have been happy to try to work something out, but weren't comfortable dropping the contingency. So, as far as I am concerned, there was absolutely no reason for any drama at whatsoever.

With regards to my perception of the reserve fund being extremely low--this is something I have direct experience with having been an NYC co-op owner for nearly 20 years. I purchased a studio while still in college and was (and am still) extremely grateful that the building has always been financially strong--there have been myriad planned and unplanned capital improvements and repairs (some major) over the years but virtually no special assessments that I can remember, and only standard maintenance increases. So as a buyer with previous experience as an owner, I do get a bit nervous seeing a $100,000 reserve for a 114-unit building. Is it a deal-breaker? Probably not. But it is a big concern.

We've communicated via our agent that our offer for the apartment is still on the table. By the way, as of now, the asking price has dropped to below our original offer.

Tils,
You said: "Any other potential buyer will come across the same issues with the building's financials that we have found. Those aren't going away, and could cause future deals to fall through, in my opinion. "

My advice: Don't count on it. You would be amazed how many purchasers write the check without doing the due diligence you would think is obvious.

Michael is right.. the seller is counting on another offer and don't be surprised when they get it. They perceive you as "difficult", so couldn't care less about your "here-today-gone-tomorrow" offer right now, and would rather take their chances elsewhere. Based on what you're telling us, IMHO, your withdrawing the original offer was the catalyst, it sent the wrong message and was absolutely the wrong move unless you wanted to walk away completely. You took the ultimate step, when it would have been entirely possible to achieve the same result without the drama. Now the seller is taking a position of "once bitten, twice shy", and you have a lot of bridge building to do to overcome that, which you are never going to be able to accomplish by yourself. So you're right, the deal is dead unless you get out of the way and bring someone else in to represent your best interests. It's the good cop, bad cop routine and you're the bad cop.

This is a text book example of why people need agents. Sorry, but it's true.

Tils,

Whether buyers and sellers recognize it or not, residential real estate transactions are always filled with emotions. You are reacting to to the dollar amount in the reserve fund as being "extremely low" but never said what the standard is you are using to judge it as so and how that standard was arrived at. My guess from experience in more than 2,000 coop transactions is that your attorney told you it was low but did not offer any further explanation. You accepted it as a reason to renegotiate the price. The seller is counting on another buyer not having a problem with the reserve fund and getting a higher price than you are now willing to pay.

Hi, Mitchell--

Thanks for your kind reply. It now appears the deal is completely dead, and I believe emotions have come into play, judging by the most recent caustic response from the listing broker. We do indeed have assurances from our bank that we're more than viable for this loan, but we simply are not comfortable with the risk that the building or apartment might in some way fall short for a full loan (a low appraisal, for example, or a concern over the fact that the building has an extremely low reserve fund).

To answer your question, yes, we submitted all our financials to the seller. What amazes me about this debacle is that when we first began negotiating with the seller (several weeks ago) they insisted on a mortgage contingency because they did not want to risk losing time only to have the deal fall through before it was able to close. We got them to remove that contingency, after much tooth-pulling, but when we had to lower our offer because of the potentially shaky building financials (which we learned about during due diligence), they insisted on removing the contingency. By killing our deal outright, they have effectively pushed their timeframe further back, as they'll have to start over with another buyer (we were ready to deliver checks and a signed contract several days ago). Any other potential buyer will come across the same issues with the building's financials that we have found. Those aren't going away, and could cause future deals to fall through, in my opinion.

I can only imagine the reason they are stubbornly refusing to allow the contingency is that they are afraid the apartment won't appraise.

Anyway, you are correct that we have learned some valuable lessons here (perhaps one being that I was TOO aggressive in my negotiations). I do agree with you that something else will work out.

Thanks again!

Hi Tils,

Keep in mind buying a coop is different than buying a house or a condo. Don't second guess yourself, your gut instincts are correct. I would not advise a buyer to wave a financing contingency unless they already had an appraisal and a loan commitment and are very secure in their finances and comfortable with the risk.

The reason a seller wants a non contingent contract is so they can keep your deposit if anything goes wrong. Most lenders give a loan of 80% of the appraised property value. If the property doesn't appraise for the contract amount you will most likely still be offered a loan however it will be 80% of the appraised value not the sale price. You can either come up with the difference, re-negotiate or walk if you have a mortgage contingency. It is not in the sellers best interest for you to have an out and to get your deposit back or even re-negotiate the price. It is very likely they have another offer. It is possible the other offer is less than yours but they prefer the terms so they want you to waive the financing contingency.

It is possible the seller sent contracts out to more than 1 buyer. The best offer in the eyes of a seller might not be the best offer to pass a coop board. Have you submitted a financial statement with your offer? A good experienced coop listing agent will make sure the buyer can pass the coop board.

You are also correct about being concerned about the economy. I don't know your personal financial situation but buyers have lost their jobs or have had financial hardships after they sign a contract but prior to the closing.

In a coop, unless you are buying unsold shares from a sponsor board approval is required. If for some reason you can't secure financing and you cooperated with the board your purchase will be rejected. Buyers rejected by a coop board usually get their deposit back. I can not give legal advise but your lawyer can determine in the contract if a board turn down supersedes a non contingent contract. A board turn down can make the non contingent contract moot. Your lawyer can and should protect you and your down payment.

I live and work on the Upper West Side. I'm a long time Upper West Sider and coop shareholder. I am familiar with most coops on the UWS. Feel free to contact me direct regarding this apartment or if you need help with any other.

You can't lose something you never had. In real estate it is never a done deal until it closes. Anything can happen. You will be a better, smarter more aggressive buyer with the next one.There are many fabulous apartments on the Upper West Side. Good luck!

Tils,
I hear you and I love my personal attorney and trust him with my life, but I wouldn't use him to negotiate a sale. Typically, if something is already agreed and with the attorneys, then needs some aspect renegotiating, it would be sent back to the agents to resolve. I am dealing with a good example of this as i write. A house is in contract and with a provisional closing date of today. Buyer is ready to close, but it has been postponed indefinitely because one of tenants has not vacated, and the buyer has contract that requires seller to give vacant possession. That situation was entirely predictable when it went into contract because tenant is paying less than market rent, so no incentive to move. Attorneys have been at loggerheads over this for two weeks now, one insisting the tenant move, the other insisting the tenant is a good tenant who pays rent on time and should be allowed to stay. Attorneys may not even realize tenant is not paying market rent , but the buyer knows it and is not accepting less. Tenant cannot afford (or does not want to pay) market rent. The matter was referred back to agents to resolve. That was Friday. Tenant moved herself out yesterday, Monday, with the exception of a few personal possessions, which will be gone by weekend. How did we do it? Not telling. That's why we get paid the big bucks.... :-)

I appreciate that to you, your problem is very real and serious, but to an experienced agent, it's actually fairly routine and I'm sure can be resolved amicably and quickly. You love the apartment, so why lose it for no good reason? I can't go any further with this without knowing more personal information, which would not be appropriate for this public forum, so you would need to call me on 631-734-8176, or send me your contact details by clicking my profile, then "contact me".

Whatever you decide, I wish you lots of luck!

Hi, Joanna--

Thanks for your reply. I agree that it appears emotion has gotten into the picture, though I also feel it is important for us to not get pressured into making a deal we are not comfortable with, ie: a non-contin agreement. What is frustrating is that I've been second-guessing my stance, wondering whether I'm being too stubborn on this. Our attorney says it is possible he could speak with the seller's lawyer, with whom he has been in communication during the contract period, and try to explain our position directly to him.

What is particularly frustrating for me here is that we love the apartment, but there is no way of knowing whether the building's low reserve could have a future effect on it as an investment, so it's hard to tell whether this is something to go to the mat over or just let go. Doing any deal non-contingent would make me nervous, especially in the current economic climate. Our bank is ready and willing to approve us for a loan, but there is always the chance that the apartment won't appraise out, or that something goes drastically awry with the economy which could hurt our ability to get financing. With a non-contin, we'd be shouldering the full risk, and that is something that doesn't sit well right now.

Tils,
I am impressed by your knowledge and understanding of real property and that you have done your due diligence with respect to this apartment. However, (and you're not going to like what I am going to say, but I'm going to say it anyway), the one thing you seem to have missed, and possibly the reason why you are now in a standoff situation is because you are head to head with this seller. Emotion is now clouding the issue, at least the seller's side, and that's one good reason to use an agent.

It could be that the seller is now working with a better offer, and doesn't care to deal with you anymore, or it could be pride getting in the way. Either way, they have lost patience. So you now need to decide whether you want this apartment or not. If not, then carry on as you are. If so, you can best help yourself by removing yourself completely from negotiations and hire an experienced negotiator. Once the emotion is out of it, you may find you are not too far apart to get this deal closed for you on the terms that you want. the problem is that the seller doesn't see it that way right now, so it needs someone to work on that aspect who unfortunately for you isn't the buyer. Not all agents will work on an hourly arrangement, but some do. You know where to find any of us.

Update--

We have not met the seller's insistence on a signed, non-contin contract by 4pm today or 'no deal', in fact, we have not even responded. I agree with Joanna's point about the appraisal concern. The seller's continued bluster during this entire process has, frankly, become tiresome, and they have damaged their credibility with us, having insisted earlier on that there were 'other offers' on the table that now may or may not actually be in the picture after all.

So, we're sticking to our guns and have not even responded since they demanded we not get back to them unless we were ready to complete the deal under their terms. So, perhaps we're calling their bluff, or perhaps the deal is dead. We just don't know at this point.

A mortgage contingency is not a get out clause for the buyer. By signing the contract, you are asserting that you have the financial standing to obtain the loan. It is there is case the property does not qualify for the loan, not the borrower.

This new requirement tells me that you now have the upper hand. I would go back to the seller and ask them exactly why they now want the previously agreed mortgage contingency removed. There are only two answers. Either they don't think you qualify, in which case they are insulting you and risk making you angry and walking away completely, which they don't want to do. Or, they will have to say that the property may not appraise at the agreed selling price, in which case you can lower your offer even more. They have now boxed themselves into a corner that is between a rock and a hard place.

Depending on your financial situation, confidence levels and relationship with your bank, I would be tempted to go back to them and agree to remove the mortgage contingency, but only if they will agree to lower the purchase price even more. You reason is that you now have no confidence in the value of the property to appraise, otherwise why would they be asking you to remove the mortgage contingency. Their only answer to that is that they don't trust you, and they are not going to say that and risk losing you altogether unless they have a cash buyer in the wings to take your place.

This property is yours for the taking. Stand your ground.

Tils,
Here's a way to get around the impasse with the mortgage contingency which I am doing right now in one of my current sales deals. I am representing the buyer. We have asked his lender to go ahead and do the appraisal without the signed contract so that they can give him the commitment letter. They agreed and sent the appraiser Friday. Even though I am the buyer's agent, and it's usually the seller's agent who meets the appraiser, I made sure I was there with many good comps. Once the appraisal is in the bank will be issuing the the commitment. Then my buyer will sign the contract and give the 10% deposit. The mortgage contingency then becomes a non-issue. My buyer knows he will not lose his downpayment and the seller has his signed contract. Perfect solution.
See if your bank will do that. It has been a seller's market for a number of years now and sellers could get away with refusing to allow any contingencies. While we are not yet in a buyer's market - that's not what the statistics show - there's still not nearly enough inventory to make that premature statement - there is a subtle shift going on and sellers will have to become more flexible. But see what your bank says about what I suggested. It's working in our case.

Hi, Joseph--

Thanks for your reply. We are not aware of any planned special assessments or maintenance hikes, though we do know the mortgage is coming due in 2010, and is currently at a rate of 7.25% or so. So I imagine it might be possible they'd choose to refinance at a lower rate, if one is available then.

We have now negotiated a lower sales price with them, but they are insisting we remove our mortgage contingency, which I am not comfortable with, given the current volatile economic climate. So we appear to be at a stalemate.

No, you are not overreacting. A 100K reserve for a 114 unit co-op is low IMO. You should review the corporation minutes from Board of Directors and Shareholder meetings to learn the reasons why and what the Board intends to do about it. Will there be a special assessment(s) or a permanent increase to maintenance? When is the underlying mortgage coming due? Maybe the building will refinance at a lower rate and increase reserves without raising maintenance or voting a special assessment?
One way or another, that reserve has to be increased.
If you have any questions, call me at 646-714-2720 I am an attorney.

Hi Tils,

The flip tax usually serves as a buffer to build the reserve so they can rely less on assessments and maintenance increases. However it sounds like the coop doesn't have many apartments turn over each year. That might not be so good for the building as a revenue source but it is good for "quality of life" for residents. As long as the maintenance is on par with neighboring buildings it is what it is. It's the cost of living in a pre-war Upper West Side coop.

It sounds like a great apartment and you really like it. We are in more of a buyers market right now. I don't know how it was priced originally. Depending on the sellers motivation -- usually heirs of an estate are motivated to sell. If you're the only bidder maybe they will counter. Hopefully negotiations will lead to a deal.

Good Luck

Thanks, everyone, for your comments. To answer Mitchell's questions, yes, it does appear the maintenance is on par with other neighborhood co-ops. I understand the maintenance was increased twice in the past two years; 1% the first year and 3% this year. We haven't gone back farther than that. There is a flip tax.

We are currently negotiating a lower offer, which, if it works out, would bring the offer in roughly 12% below the asking price. We do plan to retain a mortgage contingency in case the bank has issues with the building for any reason.

That's actually not an extremely low reserve. If you are getting a mortgage, the bank will decide 3 things - if the building qualifies, if you qualify financially, and if the apartment appraises. If the building passes, I wouldn't worry too much. Especially if you love it. If your offer is too low it won't be accepted. That is if it is priced right for the market.

Hi Tils,

Some thoughts regarding your concern. Is the maintenance in line with other similar pre-war buildings in the neighborhood? How often and how much have they already increased maintenance? Is the current assessment very high? Is there a flip tax?

At some point all buildings have maintenance increases and or assessments. A low reserve can signal some financial problems but If the maintenance and the assessment is not already higher than other similar buildings I don't think it that serious. If the maintenance is already very high than it is more of a concern and the property value may be diminished compared to similar apartments in a building with a much lower maintenance.

A view is subjective but an "amazing view" will always get a premium. A view of the park or river can be worth 50% more than the same apartment facing the back of the building. A renovated apartment with an amazing view will be worth even more. It is also a rarely available apartment since the same line hasn't sold since 2002.

While buying a home is certainly a major financial commitment it is also an emotional buy. Do you think you will be happy living in this apartment? Will you still be happy and enjoy it if the maintenance is raised $200 per month? Do you like it more than other apartments you've seen? Perhaps your attorney can negotiate the current assessment with the seller. Maybe you can split it

Just so you are clear, the reserve fund of a coop is supposed to be used for capital improvements to the property. Monthly maintenance charges go into an operating account to pay the regular bills of the corporation such as mortgage payments, real estate taxes, insurance, the salaries of employees. fuel costs and all the other various and sundry expenses that occur. As these costs rise, so will maintenance regardless of the size of the reserve fund. The reserve fund may be at a low level because major repairs were recently made. If so, then a low reserve fund should not be a problem if the coop is well run and builds in a budget surplus every year to be transfered to the reserve fund at the end of the year if the surplus is not needed in the current year. However, if the reserve fund was never sufficiently funded and repairs are needed in the near future, then maintenance increases or assessments could be necessary. You should ask your attorney who did the due diligence if they were able to discern any more specifics from the coop's records or managing agent regarding this situation.

Tils,
Do you have a Buyer's Agent representing you in the transaction? If so, ask them for a Broker's Price Opinion. A good one should be within 5%+/- accuracy. They have access to more data (and more accurate data), than you can see online. If not, then you might want to hire an independent Real Estate Appraiser who can advise value.

Properties here with amazing views always command more than properties without those views, so views add value.

Paul and Cameron--

Thanks very much for your replies. To speak to some of your points: The building is a pre-war co-op, built in the early 1920's or so. They recently replaced their boiler, and there is an assessment in place for the next couple of years for that. The cash reserve was greater in 2005 and 2006, $268,000 and $244,000 respectively. I imagine the new boiler may have eaten into those reserves. The building is also due for mortgage refinancing in 2010.

As for building comps, this particular line (which is the largest and has amazing views on the higher floors) has not sold recently. The last sales record I can find for this line (on a higher floor than the apartment we are considering) was in 2002 for, amazingly, less than half of the asking price of the current listing. Other apartments in the building have sold (though not many) for considerably less per approx. sq. ft, though they are a bit smaller (5's rather than 6's). So it is very hard for me to get a good feel for the true market worth. I will say this--the apartment gets absolutely amazing views, and in my opinion is it is a rare find, given that all windows get these views (there are no 'back' rooms).

I do think, though, that the price we offered may be somewhat on the high side (though roughly 7% lower than the ask), considering the amount of work necessary for this estate property. We'd basically be paying a premium for the views.

Financials are important, but more important is the last assements and what were the for. You may be buying into a well maintained building with little to be done and the low cash reserve may be because of this. Age of the building will should also be taken into consideration.

Tils,

You are only overreacting a little. You are wise to consider the financials of the complex and you are dead on with your assessment of how that could impact you in the future. That said, the value of the unit will be determined by a willing buyer and seller. If they are willing to take less then by all means go for it. However, they may have considered the financials of the building into their original asking price. Have your realtor pull some comps for you so that you can feel better about your decision. Based on the sale of other units in the building (which are all in the same shape) what is the unit worth? I hope that this helps.

Cameron Piper