Killing deals to protect property values is risky business

We've always thought it sounded dubious for a co-op board to turn down a sale because the price was too low, and we've wondered whether it's legally defensible.

Apparently, it depends on who’s complaining.

According to an article in last week's New York Law Journal, courts generally put the kabosh on the practice when sellers sue, on the grounds that price-based turndowns are an unreasonable restraint on an owner's right to transfer shares.  But because co-op boards don’t owe a fiduciary duty to buyers, disgruntled buyers are out of luck.

The article’s authors—a pair of well-known condo & co-op attorneys from the law firm of Stroock & Stroock & Lavan—suggest some alternatives for boards concerned that the sales price that doesn’t reflect the value of a typical apartment and will depress future sales in the building. (A downloadable copy of the article is available here on Stroock's web site.)

One option is for a co-op board to peg the turndown on something else: Finances, credit rating, litigation history, personal impressions from an interview or application, and bad references are all legitimate reasons to kill a deal.

Another alternative is to green-light the sale but try to make sure that later buyers understand why the apartment sold below market:

“Presumably, if a subsequent purchaser knows the circumstances surrounding a below-market sale, that sale should not affect the price of a later sale, so long as the physical conditions of the units are different. Therefore, if a board develops a reliable mechanism to memorialize the reason for a below-market sale, it should not need to use floor price to disallow an apartment sale.” 

Curious about what form the ‘reliable mechanism’ might take, we asked Eva Talel, one of the article’s co-authors.

“Many buildings maintain a list of their sales for appraisers, and if they don’t, they should,” says Talel.

“You put an asterisk next to the apartment and explain that it was an atypical transaction because it was an estate sale or in very poor condition,” she explains, noting that it’s usually the managing agent’s responsibility to maintain a transfer history list.  

“This is also very, very critically important for refinancing mortgages—if an appraiser isn’t aware of the reasons 5C sold at very low price compared to 6C, they’re going to look at that number as the last transfer,” says Talel.

To get the brokerage community's perspective, we checked in with Frederick Peters, the president of Warburg Realty.

He notes that most buyers these days get price histories from StreetEasy.com and tend to assume that sales prices accurately reflect market values “no matter what you say” to the contrary.

But the bigger problem, he says, is price-related turndowns usually happen because the board is out of sync with reality, not because the price is out of sync with the market. 

“There have been a number of what we perceive as price-related turndowns since Jan. 1, but in fact the prices were market driven,” says Peters. “The board members were simply behind in their understanding of how great the drop in values had been.  Most boards, like most sellers, believe their building is ‘different.’”