It sounded too good to be true. So, of course, it was.
Back in the summer of 2009, a 50-unit co-op on Long Island was caught in a familiar bind. The building needed some major capital improvements, but given the dismal state of the economy the board was reluctant to raise monthly maintenance or impose an assessment. The obvious alternative was to refinance the mortgage, but the recession had caused loan sources to dry up.
It was time for a little deus ex machina.
And that, conveniently, was when the board heard about an outfit called Deftco Corp. The company claimed it could refinance the co-op’s mortgage and give it a new 15-year, $10 million mortgage with a six percent interest rate. The new mortgage would, supposedly, be backed by the U.S. government. It got better. By sending in $5,000 to cover “underwriting expenses,” the co-op board could avoid paying the fee Distinctive Management, its management company, would charge for doing the paperwork on the deal.
The board sent a check for $5,000 to Deftco Corp. and then...nothing. Weeks turned into months and repeated attempts to contact the company proved fruitless. Adam Manson, president of Distinctive, first learned of the $5,000 check when he was preparing the co-op’s year-end financial statement for 2009. The board explained the situation, then asked Manson to try and get the money back. Manson wrote two letters and then, he notes, “we started doing some research to see if they existed. I think it was a group of individuals who decided to open for 12 months, get as many deposits as possible, and then disappear.”
Not exactly. Speaking by telephone from his office in San Diego, Joe Dau, CEO of Deftco, claims the company has been in business for 49 years. He says the problem with refinancing the Long Island co-op’s mortgage revolves around the title. “With co-ops, it’s very difficult to guarantee the title,” Dau says. “What’s the asset? We spent a lot of time on this one, but at this point we can’t find a funder.” Asked about the co-op’s $5,000, he says: “That was an underwriting expense. We’re planning to return their $5,000, but right now I’m a little short-handed. It’s not worth getting into a pissing match over $5,000 – pardon my French.”
When the co-op board learned of three other Long Island co-ops that also claimed they were duped by Deftco, the board got a shareholder who is a lawyer to begin investigating the possibility of a class-action suit to recoup the money. Manson advised against it. “My advice was to not throw good money after bad,” Manson says. “Let’s write this off as a bad decision and not waste a lot of money on legal fees.”
But a question remains: how can your board avoid making such a bad decision? The simple answer is: by letting your professionals do their jobs. “The moral of this story,” says Manson, “is that a board should use its management company to run the building, run the property, and advise the board on what to do and how to do it. This board should have let me research this [mortgage offer] instead of jumping in. It’s so important for a co-op or condo board to have its management company do the research. We’re bonded and insured. The board doesn’t have any recourse when it makes a poor business decision.”
Even before the board heard about Deftco, Manson had advised the members that they needed to raise monthly maintenance in order to keep up with relentlessly rising expenses. The board rejected the advice and decided to try to refinance its mortgage instead. In hindsight, the board president admits that was a mistake.
“With no financing choices, we thought this was a great option,” says the board president, speaking on condition of anonymity because of possible litigation in the matter. “It was a fair rate, and the proceeds would have helped us not have to do an assessment. That was a mistake. We should have discussed it with Adam and his team. We tried to do it ourselves, but it backfired.” What would he do differently if he had to do it again? “I would do more homework,” he says, “and rely on the management company.”
Manson had a similar experience with a 30-unit co-op he manages in Montauk. In 2008, the board fired its management company, then undertook a $3 million capital-improvement project. The lack of coordination – and cost overruns – got so out of hand that the board broke down and hired Distinctive Management in January of this year to come in and straighten out the mess.
“The board might have saved a little money on the construction,” Manson says, “but they wound up creating new problems. The accountant paid the bills without visiting the site. There were wasted payments. The windows were installed before the brick work was done, and then the windows leaked. If we had been involved at the beginning, we would have hired an engineer to actively oversee and coordinate the project. Now, finally, most of the repairs have been repaired.”
Meanwhile, the Long Island board has done what Manson advised it to do more than a year ago. In the wake of the mortgage refinancing fiasco, it raised maintenance by six percent.