Attorneys work gavel for co-op auctions.

Attorneys work gavel for co-op auctions

Newspapers contain ad after ad for the auction of foreclosed apartment units. Some are occupied units owned by sponsors who can no longer pay lenders for units where rents do not meet maintenance charges; other were taken over from sponsors or individuals by co-op boards when maintenance payments fell behind; and others are sold by lenders when the individual mortgages have gone our.

Attorneys say they are now raising the gavel and conducting these curbside auctions frequently in the hopes of getting the units into paying hands. Are these units, many of which are occupied, selling to lively bidders or are the legal notices attracting nary an offer? REW spoke to some of the area's leading attorneys who have been conducting curbside knockdowns to see how this end of the market is faring.

Harold A. Lubell, partner Robinson Silverman Pearce Aronsohn & Berman said the auctions are not attracting crowds. "There are people that come to bid, but it's not been my experience that they come in large numbers."

James G. Samson, a partner, with the co-op firm Haas Greenstein, Sampson, Cohen & Gerstein, P.C., said his firm had a lot of fun with a recent auction at a typical West End Avenue building. It was a successful auction, he said, and while only two units were vacant, two were bought by tenants and 11 were sold to outsiders. The co-op, he said, bought 14 and is reoffering them to tenants.

The units, which were sold to outsiders covered the back maintenance. "Three went for about $23,000 and some didn't get as much," Sampson noted.

Everyone involved in the co-op made sure there were plenty of bidders, he said. Residents told other people in the neighborhood while Sampson said he contacted known investors and even the managing agent came to bid. "(The occupied units) wouldn't be an appropriate investment for most people," Sampson added.

Richard M. Liebman, a Rockville Centre partner in Liebman & Liebman, wasn't so lucky with one auction in Rego Park to which no one showed up to bid. He said the co-op will end up renting the unit for the time being because while the maintenance is $737, the rental value is $1,200.

The regular minimum bids on auctioned units, Liebman noted, are less than 50 cents on the dollar.

Richard S. Fries, a partner with Bachner, Tally, Polevoy & Misher, which represents lenders said, "A lot depends on location, location, location." If certain apartments are more desirable, he said, there is more interest. "While the price is not optimum" he said, "there is activity from people who are seeking to buy in good neighborhoods and capitalizing on the misfortunes of others."

Lubell does not see any substantial market for occupied units. The bank may take them over, he said, but there are also some instances where sponsors default and there is no bank involved and maintenance charges are higher than the rents.

There are increases in foreclosures throughout the Northeast, said Ronald A. Sher, a partner in Rothschild, Himmelfarb, Sher, Pearl & Giacomo, a White Plains firm which represents lenders. "I don't see them getting better," he added.

Sher has seen an increase in all kinds of foreclosures as well as those of individual shareholder who occupy their units. "People have hit hard times and cannot afford to pay their bills, let alone their loans," he said. "You have to proceed with obtaining possession."

There are times at these auctions, Sher said, when both prospective purchasers and investors show up. "There are numerous amounts of these properties that are purchased by the secured party," he said. When the secured party purchases the unit, he said, it is turned over to the property management division and sometimes given to a broker to sell. "But many of them are held and the banks continue to cover the shortfall," he said. Some units are rented, while some have protected tenants who cannot be removed as a matter of law, he added.

The co-op itself has remedies, Lubell noted, and it can foreclose on its liens. He cautioned that the co-op's remedies are not as clearcut as the remedies of a lender who has made a loan and filed financing statements and foreclosures under the Uniform Commercial Code. "The co-op is certainly not powerless; it's just that their remedies are different and more cumbersome."

Having the rentals paid directly to the co-op or the bank makes it easier, Lubell said. "They also might want the opportunity to offer the apartments to the tenants at a reduced price so the tenants would be paying the full maintenance but getting a bargain on the price," he said.

The New York State Attorney General has also made it easier for the sponsors to turn the units over to the co-ops and for the co-ops to reoffer them to the tenants.

Lubell believes it's better psychologically to sell the unit to the neighbors, event at a lower price, and feels that peer pressure comes into play. The co-op's primary interest, he said, is to get the full maintenance restored.

Several co-ops have also worked out deals to sell to occupied tenants for prices ranging as low as $1 per share, Sampson said, but with the understanding that if and when the unit is re-sold, a percentage would come back to the co-op or the sponsor.

Eventually, the unit will be empty and there is a market for vacant apartments, Lubell said. The market price for those is substantially more than the market price for an occupied unit.

Fries agreed that where the bank forecloses, there is virtually no market for tenanted apartments. "Once upon a time, people would buy from the old investors because of natural appreciation," he said. But the tax benefits disappeared, he said, and there is no appreciation. "There is no incentive to buy where the income is $400, plus maintenance is $500, plus you have to pay for the mortgage," Fries said. "That's very difficult."

The bank, Fries said, has to decide whether to bid at the auction and acquire the unit as an investment. "The bank is preserving its loan by acquiring the collateral pledged for the loan," he noted.

Increasingly, banks are likely to try to work out something with the owner of a unit who also lives in it, Fries said. While walking away from a unit would be bad for a person's credit rating if formal legal proceedings were required, these foreclosures, he said, are "extrajudicial" so there is no judgement entered with the court.

Even so, the owner would still owe the bank the mortgage amount, over what was obtained in a sale, although it might be difficult for the bank to "chase" them. But Fries added, "Banks have required us to commence deficiency judgement proceedings to give the message they will not walk away."

Liebman is also in the unforseen position of holding some $20,000 in an escrow account for owners who abandoned their unit and disappeared. The money is the amount over the loan which was obtained when the unit was auctioned.

In many cases, it is the individuals and not sponsors or investors who are having problems. "I represent 14 co-ops in which people paid all cash and we're foreclosing on maintenance," Liebman said.

Liebman, who is also a bankruptcy attorney, said those filings are also rising. "The list keeps expanding and expanding," he said. "There is no one to sell the assets to and the banks will not always step in."

The only investors left in the market are those who have sat it out for the last several years, did not overleverage and are not starting to buy with accumulated cash. Liebman said he also represents a Korean group that is buying mixed-use properties, and buying the mortgages with cash. "There is no financing for this stuff," he added. The whole perception of real estate investing has changed, Liebman noted. "The word |real estate' is a dirty word and it's going to take another couple of years to shake things out."