Sponsor sales don’t come around too often. But when they do, you should take a close look as they are super exciting and offer value perks. Just be aware of the hidden costs! If you don’t know what to look out for, you might find yourself at the closing table with no money left over to move. Think shutting down Congress will help you? Nope. Unless you’ve hired me, you’re on your own with this one.
First things first: The sponsor means the person who is either the original developer (in a condo) or the original owner of the corporation (in a coop). Typically, the sponsor will hold onto several units and rent them out. Perk Alert! as the key owner, the sponsor is exempt from many of the coops rules such as:
- They can rent out the unit indefinitely and unlimited and with no board approval.
- If they should ever choose to sell the unit, they don’t need board approval to do so. In turn, buyers benefit from this exemption too because the buyer will not have to go through the dreaded board package and approval process.
1) No Board Approval. This is yuge. This means, as long as you have the down payment and remainder of the purchase price at the closing table, you don’t have to be concerned with strict debt to income ratios (29% or lower) or post-closing cash in the bank (at least 2 years worth of expenses in liquid post-closing) as is the case with most coops.
2) Faster Closing. With no time being wasted waiting for the board, it will also be a much quicker transaction. Typically, you can expect to close 3-4 MONTHS after an accepted offer if you’re financing with board approval. In a sponsor sale, you eliminate the board so, aside from waiting on your bank commitment, that’s it! You’re looking at a 60-day close. If you are purchasing all cash with no bank financing even better. You can probably close within 30-45 days.
3) You’ll probably notice that the sponsor listing is newly renovated and has never been lived in since the renovation. Why? Remember that when a sponsor holds onto apartments, they rent them out. Once a sponsor decides to sell, because the units are severely dated, they will often do a fresh renovation upon listing for sale to capture the highest price possible.
4) And yet, you’ll notice the great pricing. The sale price is likely to be a fair market value or slightly below fair market even though it is totally renovated and offers no board approval. Another bonus for the buyer.
Wow! Sponsor sales are looking like a bargain, huh? You guessed it there’s always a catch.
Be Aware of the Hidden Costs! (There Might Be a Loophole)
Most buyers don’t know this fact and so, they get all excited when seeing a sponsor unit for sale. This is why it’s so important to work with your free buyer's broker who can accurately access the value of this apartment for you. You should not pay a comparable price for this apartment if you also have to assume the transfer taxes; you should pay at least 2% less. Make sense?
Remember that in sales, brokers are always paid by the seller and the commission is always set prior to the listing going on the market. If you go directly to the seller's broker, you’ll have no representation and the seller's broker will make a double commission. For more on how brokers get paid, see my article “The Vig.”.
You see, these transfer taxes are going to be a part of your closing costs which means you’re going to have to show up with this cash on hand at the closing table. (And I don’t mean a brown paper bag with $100 bills stuffed in there. I mean, liquid funds.).
Can One Get Around This, You Ask? Why, Yes. Yes, You Can
This structure bodes well for the sponsor and the building as it keeps a higher sales comp on record. This is why sponsors are willing to negotiate the transfer fees rather than negotiating a lower purchase price. But don't get cocky on me! If your broker can’t negotiate the price, you can’t flippantly roll costs into the purchase and simply inflate the price if you’re financing. The bank is going to conduct an appraisal and you will want to make sure that their assessed value isn’t less than the purchase price. Otherwise, you have to come up with the difference of the appraised value vs purchase price in your down payment. Then you’re just back to square one. (Insert Dog Chasing Tail Here.).
In a new construction condo, these new/first sale units are all “sponsor” units. Yup, all new construction condos come with you, the buyer, paying the high price tag plus transfer taxes and the sponsor’s attorney fees. And because the developer/sponsor has the entire building to sell out, he is far less likely to negotiate a price at all. Oftentimes new construction pricing is non-negotiable for the reason I just mentioned they want to keep the value high for future sales and comparables. But, they are almost always willing to negotiate the transfer & legal fees to compensate for a discount. For a further discount, the sponsor may be willing to make some alterations or perhaps include staged furniture just so that the price can remain competitive.
And while I’m on the subject of condos, don’t forget that if you are financing a condo, you are also required to pay a 1% mortgage recording tax at closing. There is no mortgage recording tax in a coop.
Purchasing over $1M? Oh, then don’t forget to also add the 1% mansion tax. But that’s across the board. I digress (See my article on closing costs for more details.).
Needle in a Haystack. “Found It!”
Unsold Shares are an extremely appealing opportunity as most investors who want to rent out an apartment unlimitedly and indefinitely will have to buy a condo. But in the case where there is a coop sponsor sale where the rights are transferable, the purchase price will be far cheaper since you’re technically buying a coop not a condo, making the rate of return on investment far greater. Remember, as a sponsor, not only is one exempt from board approval upon sale, but your tenant is exempt from having to go through a board approval to rent out the unit. Win-win!
These types of sponsor sales are fruitful and rare finds and often not publicly advertised. So, if you’re interested in them, you’ll have to search high and low for a seasoned, savvy broker who has a connection with sponsors who can present you with this kind of opportunity.
If only you knew someone like this If only you knew someone who’s currently negotiating on a 6 unit package for $2.4M generating an almost 5% rate of return with a buyer who’s paying no transfer or legal fees and still got a discount off the asking price. And, if only you had access to her knowledge, her ability, her drive.