New York's Cooperative and Condominium Community
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Apartment foreclosures can lead to surprise owners.
What you should know about co-op foreclosures and co-op auctions.
It had all the trappings of a sherlock holmes mystery (or at least a Murder She Wrote without the murder). A mysterious man claiming to be the owner of an apartment he won at an auction. A shareholder insisting he had been given no notice that he was near foreclosure (and a bank equally insistent that he had known all along). A mystified group of board members wondering what its rights were.
“The co-op got a letter from a man who says he bought the apartment at auction and he wants to close on it as soon as possible,” says the president of the Manhattan building. “The shareholder [says he] hasn’t received notice from anyone, including his bank, that his apartment was sold, or what happens next. He needs a lawyer but can’t afford one. He called the city, legal aid, etc., but they said they can’t help him. Does the co-op have any rights to approve this buyer, like it would a regular buyer? What, if any, is the co-op’s involvement in this?” (According to the co-op auctioneer, Victor Marino, the apartment was purchased on May 29 for $302,000 by an investor named Adam Plotch.)
This unusual situation raises some questions. Is a shareholder’s bank obligated to notify the board before, during, or after a foreclosure proceeding? Boards sign “recognition agreements,” which many argue obligates the bank to inform the board. What about going to auction? If the bank had notified the board that it was taking the apartment to auction, the co-op could have purchased the apartment itself, flipped it, and made money for the building.
If a bank sends a shareholder a notice of default, the lender is required to notify the board or management company, says attorney Steve L. Einig, who represents lenders in co-op foreclosures. That’s because of the recognition agreement signed by the bank, shareholder, and co-op board at purchase time. At each step of the foreclosure process, the board or management company will get the same letters the shareholder receives, Einig says. If the shareholder cannot pay, work out a deal with the bank, or sell, the unit goes to auction. Here, that recognition agreement gives co-ops another edge. If a shareholder’s apartment is auctioned, the cooperative will be paid for back maintenance first before the bank is reimbursed.
At a bank auction, the lender sets the price, looking to get the best deal to cover the loan. If a minimum price to do that is not met, the bank will try to auction the property later. “The bank does not want to be the winning party,” says attorney Bruce Cholst, a partner at Rosen & Livingston, which represents about 175 co-ops and condos in the city.
An individual co-op board can decide to buy the apartment at the auction, and then re-sell it for a profit. Einig says that, in his experience, not many small co-ops do this because of the large amount of cash needed. Cholst says he often sees co-ops at least try to make a bid: “Co-ops will often send a representative to the auction, hoping to pick up a bargain.”
While a condo or home auction is a court proceeding, a co-op auction is simply a business transaction made under the Federal Uniform Commercial Code, says William Mannion, an auctioneer who has conducted New York City co-op auctions for 25 years.
Most co-op auctions in Manhattan are held, thanks to tradition, in the rotunda inside the New York County Courthouse. At the auction, a buyer must put down 10 percent of the purchase price and be able to close within 30 days, Mannion says. Most buyers at co-op auctions are investors, not potential residents.
Which brings us to one of the biggest question as far as a co-op board is concerned: what happens with that buyer? Is he allowed to move into the apartment? Can he turn around and sell it to anyone and does that person automatically get in? Almost all leases provide that if the apartment is purchased by an investor who sells, that potential resident has to go for a full financial review before the board like anyone else, says Cholst.
According to the lawyer, it also depends on the building’s proprietary lease. Some specifically require board approval in case of auction. Others treat successful bidders like holders of unsold shares – there is no right of board approval. Some leases say the management agent has control and cannot “unreasonably” withhold approval. In that case, says attorney Stuart Saft, a partner at Dewey & LeBoeuf, “I would imagine the managing agent would rely on what the board tells them to do.”
Banks are not the only ones that can initiate foreclosure. A board can take that path if a shareholder fails to pay maintenance. Mannion, the co-op auctioneer, says he usually schedules about five auctions a week. Recently, more are being initiated by co-ops.
“Years ago, it was only the bank selling,” he notes. “Now, it’s almost a 50-50 split between co-ops selling and lenders selling.”
So far this year, attorney Geoffrey Mazel, a partner in Hankin & Mazel, reports that he has initiated about a dozen foreclosures on behalf of boards looking to recoup back maintenance. Only a handful have gone to auction. Mazel says that a board will pursue a foreclosure only in cases of chronic non-payment and usually not before someone is at least six to nine months behind.
Before a co-op board initiates foreclosure for back maintenance, it must have some type of court judgment, either from landlord-tenant court or the state’s supreme court, says Cholst. That’s because state courts have ruled that the relationship between a shareholder and a co-op board is similar to that of a landlord-tenant. Withholding maintenance can be seen as a way to protest shoddy conditions, the way tenants are allowed to withhold rent.
Most times, initiating foreclosure is enough to convince the shareholder to pay up or to sell to an approved buyer who can cover back maintenance. When a co-op sets the auction price, it is often lower than a bank’s foreclosure figure because the co-op is looking to get maintenance paid back, not an entire home loan, Mannion says. The shareholder gets whatever money from the sale is left after all debts are paid.
If a foreclosure happens in a building, it’s often very awkward. Someone is losing his or her home and probably has other financial difficulties. If a successful bidder is approved and can make the financial demands, he or she is also responsible for evicting a shareholder, if the person has not already left.
Fortunately for New York City, the five boroughs have far fewer foreclosure filings than the rest of the country. According to RealtyTrac, a California-based company that tracks foreclosures, one in every 1,500 New York City homes received a foreclosure notice in June 2008. That’s three times less than the national average of one in every 500 homes.
“This is a completely [different type of] market from the rest of the country,” says Mazel. “A co-op board will say, ‘Who cares if the bank approves them?’ Co-ops are far more picky about financials than banks are.”
Still, when they do happen, foreclosures are thorny. At the Manhattan co-op coping with the shareholder foreclosure discussed earlier, the board president doesn’t even want her name or the building’s address used. The president says after the board was notified of the auction, it decided not to try to purchase the apartment because of the expense. And, too, the board members felt bad for a neighbor they’d all known for years.
“A co-op is a state business corporation and that should be a primary concern,” she says. “But you can’t eliminate the fact that these are your neighbors and we all live together.”
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