How Co-Op Boards Inflate Prices During Down Markets

When is the price of your home not the actual price of your home? In the new development world, for example, real estate agents in New York have grown accustomed to a few acts of financial legerdemain: since developers want (and often, because of their lenders, need) to keep recorded sales prices up even when markets are bad, they offer “concessions.” This can mean that they pay for transfer taxes, or lawyers’ fees, or removing or erecting a wall within the apartment. Anything they would not, in a better market, agree to do. Since such arrangements typically fall within the boundaries of real estate transactions nationwide, no one pays too much attention. It distorts the record slightly, but rarely in a way that truly undermines a genuine picture of prices in the marketplace.

However, in recent months, a new and far more troubling wrinkle in this behavior has become increasingly evident. In our pandemic environment, prices in Manhattan have fallen to their lowest levels in almost a decade. This fact disturbs the members of the Boards of Directors of many of the city’s co-operative apartment corporations, who want values in their buildings maintained. Brokers have spoken for years about the “price turndown,” when a deal made between a seller and an approvable buyer is rejected by the co-op board because they feel the price is too low and will thus devalue their own home. Never mind that the apartment has been on the market for months and no higher price is achievable. The boards of these buildings believe that they can defy economic realities if they push back hard enough.

Little by little, a solution pattern has developed. The board insists that, to motivate them to approve the deal, the buyer and seller agree to inflate the price, often by hundreds of thousands of dollars. To accommodate this insistence, the buyer and the seller typically agree to a “renovation credit,” regardless of the condition of the apartment. This credit, equaling the amount the price was artificially raised to satisfy the board, is returned by the seller to the buyer at closing as one of the adjustments. One top New York City agent recently said that she finds herself having to make these adjustments on almost half of her deals. And on some of those deals, a board member told her directly how much the price would need to be inflated to be deemed acceptable! As agents, we have only two alternatives: agree or let the deal die, knowing that the same problem will arise with the next one.

In addition to the simple fact of its dishonesty, this practice leads to real-world issues. The most serious of these is the distortion of the historical record. Buyers, sellers, agents, and appraisers – all depend on closed sales data to make determinations about the present value of properties in the marketplace. If the insistence of these co-op boards distorts the data on which accurate pricing depends by ten, fifteen, or even twenty percent, it can cause everyone involved in a transaction, including the banks, to make inappropriate decisions.

The vast majority of co-op board members selflessly devote their time to the public good of managing their buildings. But unchallenged authority devoid of oversight inevitably leads to abuses. Some boards have been guilty of egregious abuses, displaying racial and religious prejudice, discrimination based on gender and sexual orientation, and refusal to make accommodations for the disabled. Now, this latest example of price distortion can be added to the list. How will it end?

Frederick Peter is the CEO of Warburg Realty, a luxury residential real estate brokerage in New York City. Reprinted with permission from Frederick Peters’ Forbes column.