when a condo board sues a developer, must resales die?

the cat may already have left the bag
The Christine Haughney Appraisal story in today’s New York Times touches (again) on the consequences to owners who would like to sell when there is a dispute about the condition of the building. In this case, there is a case: the condo board of a six-year old (former) new development in Brooklyn has sued their developer over $4.7 million in needed repairs to a (formerly, not very long ago) new building. One specific seller profiled by Haughney is caught up in the fall-out.

Attentive readers of Manhattan Loft Guy will recall that I have previously talked about the sometimes hard choices that a coop or condo board have to make in escalating a dispute into a lawsuit. I touched on this almost as an aside in my March 16, can a condo board remove a member??, about a Manhattan condo owner who sued her board (and who has been sued by her downstairs neighbor), in which I cited two earlier posts on this To Sue, Or Not To Sue … dilemma.  

Of course, by the time a building is actually faced with a choice about suing or not, the problem that such a dispute causes for prospective sellers has already occurred. Further publicity should not add (much) to that problem. In fact, I will suggest at the bottom, that the additional publicity might actually help. Haughney’s unfortunate seller illustrates the point and the possibilities.

laundry can be dirty enough to hurt, whether it is fully aired out or not
The Haughney piece, How a Building Dispute Can Sink a Sale, profiles the pain of one unit owner in a Brooklyn condo described as “one of the first condominiums finished in the building boom”. (That’s a nice touch, rattling anyone who bought a new development in the last six years with the example of this building in which post-closing kinks have not been worked out even six years later.) The condo board at Boulevard East (at 53 Boerum Place in downtown Brooklyn) chose to sue the developer over (what looks now like) up to $4.7mm in repairs that the board believes the developer should pay for, just before the statute of limitations on such a claim would have expired.

Haughney’s unfortunate seller is a researcher-by-day, bass-player-by-night who has been trying to sell for a year. The listing history shows that she started at $775,000 and dropped twice (to $669,000) before accepting the offer for $632,500 in December that Haughney notes. (Any number not ending in $xxx,000 implies an already difficult [protracted] negotiation; it got worse ….) Unknown to the seller (!), the condo board was then on the verge of suing the developer, after a series of unit owner complaints, two engineering reports, negotiations with the developer, the board’s complaint to the New York State Attorney General’s office, and (obviously) a lack of resolution.

The sequence is a little odd. The offer was accepted in December, so attorney due diligence to review the condo board minutes should have discovered an extensive history not later than very early 2011, but the seller did not offer to reduce the price (by $30,000) until “[a]fter the board filed its lawsuit” (which was February 23). Not good enough: the bidder countered with $550,000, which the seller rejected. After having been on the market since March 2010, that unit is now off the market, to await developments from the board and/or the lawsuit. She paid $735,000 in October 2007 … not quite The Peak quarter for the overall residential real estate market (in Manhattan, at least), but close. Her agent’s opinion is that the dispute is “killing all the owners as far as selling”.

As this seller’s experience makes clear, it was not the lawsuit that changed her ability to sell near where she thinks her apartment is worth, but that the underlying facts as revealed in the board minutes were discovered by the prospective buyer’s counsel. In other words, the additional publicity of the lawsuit (and a New York Times interview!) don’t change the fact that any buyer with competent counsel would have found the dirty laundry since whenever these problems got sufficient notice in the board’s minutes.

I would guess that this was at least by the first engineer’s report, if not earlier, when owners were reporting problems such as “mud spurting from their bathtubs”.

Here is an awkward thought: I wonder if this October-2007-buyer-now-would-be-seller has had a conversation with the lawyer who did her front-end due diligence about what was in board minutes before she paid $735,000 for an apartment she can’t now sell for around $600,000. When did the board talk about retaining those first engineers? (Who were retained before she bought.)

More awkward still: have any of the six 2010 buyers here talked to their lawyers about what was (or was not) discovered in dues diligence before they bought? Each of them paid at least 90% of the price-per-foot last offered by Haughney’s October-2007-buyer-now-would-be-seller, and some paid a premium to her last ask.

to sell in this market, call Rumsfeld
This seller seems to be hopeful that the dynamic may change shortly (she will “re-evaluate her options after the next board meeting, on March 30”), but it is always hard to negotiate with a very large Known Unknown. It is obvious that some repairs are needed (the engineers estiamte $4.7mm) but until any needed repairs are made even the scope of the problem is not precisely known, let alone paid for.

Unless there is insurance involved, it is doubtful that the board would take this on until there is a settlement with the developer and/or an assessment from unit owners. This seller was on the right track, by offering to drop her price $30,000 from the accepted offer last month, but the negotiating dynamic was probably too dramatically shifted by the surprises in due dilgence. The lawsuit (and the publicity in the New York Times) might actually serve to make it easier to sell during this uncetainty, by educating potential buyers about the uncertainty. That is, if the buyers can be made (reasonably) comfortable about the dollars at stake. (I.e., the Known Unknown becomes a Known But Reasonably Estimated.)

The seller’s unit has a 1.1417455% interest in the condo. If the worst case scenario is that the developer pays nothing and the condo assesses unit owners to make $4.7mm in repairs, this unit’s share is under $54,000. So long as the facts are stable and known about the scale of the problem, buyers and sellers can negotiate comfortably about the likelihood that the developer will ultimately contribute a non-trivial amount (net of the costs of the lawsuit) and what that contribution might be.

Were I a seller, I might propose an escrow instead of a price reduction, such that I would get some money back (in 3 years?) if there is no assessment for this problem up to the amount of the escrow. If I were the buyer here, I might prefer the price drop method, but then I might reasonably have to accept a smaller discount than I might get the seller to agree to escrow.

Again, emotionally and in terms of practical negotiation dynamics, the negotiation Haughney presented was probably doomed by the surprise. With that cat out of that bag, even this publicity might not kill the market in the building so much as re-set it.

Emphasis on might….

© Sandy Mattingly 2011