DEALING WITH FORECLOSURES, P.2

The next step is to publish auction listings. "There's no central place for this," says Mannion, but real estate regulars know where to look. "A lot of these listings are placed in the New York Post, which is the least expensive of the major dailies," he says. Make sure the legal notice specifies the sale is "contingent on outstanding charges," says Davis of Profiles Publications, "meaning that the successful bidder would have to pick up any unpaid arrears."

Flipping for Closure

Once foreclosure is a given, your building faces some rare opportunities. The biggest comes from buying the apartment and flipping it for profit, to beef up the reserve fund.

"Let's say a condo that was bought for $200,000 is now in foreclosure by the bank," says attorney James Samson, a partner at Samson Fink & Dubow. "You have three ways to attack it. One, buy the loan from the bank. … It'll maybe cost you $50,000. Now, you're the one foreclosing. Two, go to the foreclosure auction and bid. You'll maybe get it for $80,000 to $90,000."

In either scenario, if the ostensibly $200,000 apartment goes for even as little as $125,000 or $150,000, the building makes money. "And number three," Samson says, "is you exercise your right of first refusal. No matter who is buying, match the offer if it's a good, low offer." If it's low enough, you can sell the place at a profit. If it's a little higher than that, the building can rent the apartment until the market improves.

Ryan Slack, CEO of the real estate information site PropertyShark.com, describes something similar called a "short sale." This is when "an arrangement is made with the lender to give them less money than they're owed on the property."

And why would the lender accept that? "In order to facilitate transfer to an owner who could make payments," says Slack. A bank doesn't want to be in the real-estate business, after all. "So, say an apartment is worth $1 million, and the owner owes $1.2 million" because he or she had taken a home-equity loan and then the market got depressed. "A savvy investor will say [to the owner], 'We'll negotiate with your bank,' and the bank would reduce [the amount owed] to 82 to 88 percent of the value, so in this case $820,000 to $880,000. This gives a new buyer an incentive" — since he or she can get a million-dollar apartment for less — "and the bank has an incentive to keep the property out of foreclosure," where the bank risks getting less at auction.

A board can even bypass the bank entirely, says Samson. "Let's say it's a co-op loan for $100,000 on an apartment worth $190,000. You can go to the shareholder and say, 'You're about to get closed out, but we'll buy it for $110,000.' The shareholder – who won't get anything if the apartment goes to auction — makes $10,000, and the building gets an apartment worth $190,000." None of these hypothetical numbers figure in attorney costs, filing fees, and so forth, but you get the idea. "Half the auctions I schedule never occur," Mannion says.

Head 'Em Off at the Passbook

The best offense, however, is a good defense, to invert the old phrase. Watch for warning signs. An arrears report should be part of every board meeting, and boards should be ready to raise revenue if a unit goes into arrears. "If a condo [unit] goes into default and stops paying common charges," says attorney Stuart Saft, a partner at Dewey & LeBoeuf and chair of the Council of New York Cooperatives & Condominums, "then the other owners have to pay more. If five percent of the budget isn't being paid, you can't discontinue five percent of the lights and electricity, five percent of the building staff."

The most important preventive step a board can take, Saft suggests, "is to examine its bylaws in the case of condos and the proprietary lease in the case of co-ops" and make sure they include a right of first refusal in case of foreclosure, as well as a provision to recover foreclosure-related legal fees and expenses. "Most of these documents were written years ago when sponsors weren't thinking of default. That's something they should do today."

Otherwise, just keep doing what co-ops especially are famous for doing. "Co-ops, in general, are very, very strict as far as financials are concerned," says Davis, "and even if a bank were to say, 'We've approved so-and-so for a mortgage,' that doesn't necessarily mean a co-op would approve that person's finances.

Some would-be buyers may get teed-off, but any way you slice it, that kind of approach will help minimize your building's risks. For the sake of the many, it's the fair way.

Illustration by Jane Sanders

Adapted from Habitat March 2008. For the complete article and more, join our Archive >>