Creating Phantom Co-op Prices To Distort Public Record Is Unethical

Co-op Board Power Over Sales Damages Market Value
Creating Phantom Prices By Co-op Boards Distorts Public Record
Co-op Boards Are Reason Co-ops Sell For Ten Percent Less Than Condos

Co-ops are a dominant form of residential housing in Manhattan, and their infamous boards have a lot more power over a sale than a condo association does. They outnumber condos three to one. In a study I co-authored with the NYU/Furman Center about twenty years ago, we proved that the board’s power over a sale damages the value by almost ten percent versus the identical condo. Co-op board members often do things they think will protect shareholder value, but in this case, they are damaging it.

There was a great article in the newsletter by the law firm Coopersmith & Coopersmith PLLC that said, “Co-Ops Should be Wary of an Arbitrary Price Floor,” where boards set minimum sales prices to “protect their shareholders.” They refer to a 2022 sale of a co-op apartment known as Stromberg v. East River Housing Corporation.

A home seller setting a price that is “what they need,” even though it has nothing to do with current market conditions, actually damages the value in the marketplace. Real estate agents and buyers will view the seller as disconnected. I touched on this issue recently with “The Housing Market Doesn’t Care What You Want. 21 Years On The Market Is Proof.“

In simplified form, the sellers (plaintiffs) of the apartment went to contract for $520,000, and an appraisal was completed, valuing the co-op at $525,000. The appraiser used sales in the area ranging from $514,000 to $528,000. The co-op board rejected the sale because the price was below their minimum price expected of $600,000. The buyers and plaintiffs got together and presented another contract for $540,000, but the board rejected it as being too low. The buyer walked away. The sellers sued their co-op and won.

Coopersmith writes:

“While the business judgment rule often protects and upholds a Co-Op board’s decisions, boards should be wary of making a decision based on an arbitrary price floor. Stromberg v. East River Housing Corporation is a case that has the ability to provide clarity on issues related to board rejections based on price.”

In other words, business rules that the board created to protect themselves can’t be based on an arbitrary number like their $600,000 price threshold represented. The board wants that price but the market doesn’t care what the board wants.

We run into co-op boards trying to manipulate prices in their building by forcing the use of “phantom” concessions and rebates to fake the purchase price higher on paper. The Real Deal had a great piece on this a few years ago: That co-op sale price may be fake: Scheme emerges as market cools.

“It works like this: The board makes its expected sale price known, and if buyers are not willing to pay it, the seller offers various credits to make up the difference. Aside from the lender, if there is one, nobody outside the deal knows concessions were given, let alone what they were worth.”

Final Phantom Thoughts

This practice is fundamentally unethical because public records become distorted. The sale at the inflated price goes into the public record and is subsequently used as a comp in the marketplace, perpetuating the false value. The buyer will pay transfer taxes and capital gains taxes on the phantom price, which will adversely affect the buyer in other ways.

These co-op boards think they are protecting their values when, in reality, the brokerage community talks about bad board behavior among themselves, which reduces buyer traffic in these particular buildings, ultimately damaging the market value. This gives buyers another reason to leave co-ops in favor of condos.