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Protecting Against the Current Real Estate Market

BY Sylvia Shapiro
August 31, 2005

For the past several months there has been a steady drumbeat in the press about the overheated real estate market. Is it a case of modern-day tulip mania or merely a reflection of the laws of supply and demand? Will prices continue to surge or is there a crash looming? Although macro economic factors doubtless are at play, nevertheless there has been little discussion of what action, if any, individual co-op and condo boards, buyers and owners can or should take, as a matter of law or policy, to protect their respective interests and preserve the stability of their buildings in this environment.

What Co-op Boards Can Do

It is well established that absent discrimination, co-op boards can accept or reject buyers at will, and have the lesser included power of imposing financial criteria for admission. Past market cycles teach that exercise of this power tends to be self-regulating and elastic, with rejections rising as does the market, because these boards know there will be someone else waiting in the wings. The current market, however, presents unique challenges. There are plenty of buyers, but with prices soaring, many are stretching to make purchases beyond their means, lured by the prospect of cheap money offered by banks in the form of interest only, adjustable rate, even pay-what-you-will loans (that may result in negative amortization). As rates rise, these exotic products, if used in sufficient numbers, may come back to haunt not only affected owners, but the financial well-being of the building.

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