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Keeping up appearances: Co-op boards are using this trick to beef up comps

Closing credits are on the rise

When a co-op on the 34th floor of a ritzy Upper East Side building sold last year, the price was recorded as $3 million. But it actually cost closer to $2.8 million.

At closing, the buyer of the three-bedroom co-op at 425 East 58th Street received a credit of $150,000. The buyer and seller, at the behest of the co-op board, cut a deal to keep the technical sale price in line with the expected value of similar units in the building. Though the contract detailed this arrangement, public records only reflect the higher price.

This trick is particularly rampant in the new development sphere — where buyers have their pick of price cuts and concessions. In new projects, such perks are often offered building-wide as a way to maintain high prices per-square-foot. For older co-op buildings, the practice is a bit more nuanced: Some units aren’t as well maintained as others, making it difficult to fetch a pleasing enough price for a comp-obsessed board. And now, as listing inventory climbs, selling these apartments can become even more challenging.

“Whenever the market shifts, the co-op boards don’t catch up to it right away, and no one likes the idea of decreasing prices,” said Petro Zinkovetsky, a real estate attorney and founder of Zinkovetsky Law Firm. “Considering that the market went down a little bit, it most likely increased the number of deals like this.”

Jonathan Miller, CEO of appraisal firm Miller Samuel, noted that such resale concessions tend to spike when more units are on the market. Co-op listing inventory in Manhattan increased 6.4 percent year-over-year in the first quarter of 2018, and jumped 18.4 percent from the last quarter of 2017, according to Douglas Elliman’s latest sales report.

“When you see supply edge higher, it’s reasonable to see more concessions by sellers,” Miller said. “It’s not like what we’re seeing in the rental market, but it is something that’s expanding.”

Douglas Elliman’s Michael Graves said he hasn’t encountered such concessions in resale, but said it was a “creative solution” to a problem that many co-op boards face. Many boards are unwilling to accept a sale below a certain threshold, but the market isn’t cooperating with those parameters.

“I think it’s a necessary evil, especially in new development,” he said. He noted, however, that he prefers price transparency and such deals could negatively impact how buyers approach deals.

There are a few different euphemisms used for fudging the price of a co-op, like “decorating allowance” or “closing credit.” Some feel such window dressing is not only a bad look for the co-op board but it also creates a distorted portrait of the market.

“This is a problem because the market is what the market is. I feel like [the boards] are sort of overstepping,” said one transactional attorney, who has worked on such deals. “It creates a false basis for the buyer.”

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Not to mention the fact that even with the discount, the seller is still on the hook for transfer taxes based on the higher price, and the buyer is still paying a mansion tax based on the recorded value. Such manipulated sales can also impact estate and capital gains taxes, and must be disclosed to banks in order to avoid mortgage fraud. Craig Price, a partner at Belkin Burden Wenig & Goldman, said that he’s seen three to four of sales in the past year where the price was artificially inflated at closing.

“We would wholeheartedly advise buildings against doing that,” he said. “It’s not a good practice.”

Attorney Adam Leitman Bailey said his firm has represented lenders on two of these cases recently.
“In my humble opinion, this fraud is disgusting and should be illegal,” he said. “It artificially is making consumers believe that housing prices are higher than the market actually indicates.”
He added that banks should stick to the terms laid out in sale contracts, without getting  “involved in any chicanery or fake pricing.”
These pricing arrangements are particularly common with estate sales, where the executor is often trying to sell the apartment as quickly as possible. Generally speaking, though, boards want to keep outliers — say a $2.5 million apartment in a building where apartments tend to sell for $4 million-plus — from disrupting the building’s appraisals.

“It happens all the time, irrespective of market,” said broker Frances Katzen of Douglas Elliman. “You see it more now, but I’ve seen it in strong markets too when they didn’t get a sale that they loved.”

Correction: An earlier version of this story misstated the value of the closing credit of a unit at the Sovereign based on information from a person who worked on the deal. It was $125,000.