Category — Co-op vs. Condo
The spectacular fall of Bear Stearns’ stock price, following the revelation of the firm’s incredible financial losses in mortgage-backed securities, highlights the yin-yang effect of economic cycles on real estate in general, by not necessarily on cooperative apartment prices.
Unlike buying a condo, owning a co-op in New York requires you to jump through an extra set of hoops and hurdles — a Co-op Board interview — before you can even think about owning the apartment. Not only do you have to convince a set of strangers that you will be a good neighbor, but even more importantly, you must prove that your net worth, current income, and future earning capacity make you a financially stable neighbor.
The debate over buying co-ops vs. condos usually centers around flexibility and lifestyle issues related to home ownership in New York City. Are you comfortable following a strict set of rules like being required to carpet 80% of your floors, not being allowed to have a dog, or not being able to sublet your apartment whenever you need to do so? These are the kinds of trade-offs that can come with owning a co-op.
But the financial stability that this living arrangement can provide can offer far greater security for NYC homeowners’ investment.
Now let’s compare that to the price of Bear Stearns stock.
If you bought 1,000 shares of Bear Stearns stock (NYSE: BSC) at approximately $7 per share when it first came on the New York Stock Exchange in December 1985, your $7,000 investment would have increased roughly 2,696% (no, that’s not a typo) through January 1, 2007 when the stock climbed above $163 per share. Moreover, that calculation accounts for 3 stock splits (each calculated at 1.05 shares for every 1.0 share held), but that doesn’t include the steady stream of dividend income during that 21 year period. That would have turned a $7,000 investment into more than $200,000 at the beginning of last year.
But if you sold Bear Stearns stock last week, that incredible two-decade-long ROI would have vanished into thin air. Poof!
Does that mean co-op apartments are going to be selling at fire sale prices? No, it doesn’t. Co-op Boards have a fiduciary duty — a financial responsibility — to protect the financial interests of other shareholders (i.e., their neighbors) in the building. They can legally reject prospective apartment owners if they believe that a low sales price of an apartment would seriously reduce the value of other apartments in the building.
It’s a delicate matter, but one that makes prudent financial sense. Since you can never predict the rise or fall of the financial markets with certainty, investors need to accept a reasonable level of risk that they can tolerate.
Co-op apartment owners and their Boards must do the same thing: are they willing to let their neighbors sell apartments at rock-bottom prices when doing so could hurt the financial investment of the remaining homeowners? For more than ninety-nine percent of all co-ops, the answer is probably a resounding ‘no.’
March 23, 2008 No Comments