Cohousing-L Mailing List: Re: equity caps

[David L. Mandel (dlmandel]

In reply to Phil Bush at Cobb Hill, who asked about limited resale prices
for all owners:
        I'm not sure, but I believe the only way you would be able to make
this a binding matter would be to be to incorporate as a cooperative, as
opposed to a condominium. (Your query didn't mention which it is, but I
assume the latter.) And I wouldn't recommend you do it unless it could be
binding. Otherwise, if market prices in your area rise considerably, all it
would take is for one owner to renege on the agreement and sell for more
than the agreed amount for your trust to break down and a lot of anger and
hurt surface. And this person could even be not one of you who agree
initially but a later buyer who then resells.
        My understanding is that regular lenders will not agree to such
restrictions; it's counter to their interest (minimizing exposure) and
contrary to the prevailing "free market" system we purport to have. In legal
terms, it would be considered a "restraint on alienation" and thus may be
unenforceable in the legal system if you were to try that route against a
resistant lender -- though you'd probably never get to that point if lenders
choose not to loan in the first place. After all, in the bank's mind, if
your house comes with such restrictions, that lowers its initial market
value, which makes a loan more risky, etc. ...
        Such restrictions are allowable under special statutes and
regulations that allow them as part of a package that provides subsidies,
silent second loans or some such mechanism that creates affordability for
qualified low-income buyers; private lenders are still not required to go
along, and that may be a problem for you depending on how your subsidies are
structured. 
        My bottom line advice, pardon the expression: Be a limited equity
coop for everyone or forget about trying to regulate resales for units that
aren't going to low-income buyers -- unless it can be binding and permanent,
which I believe it can't. But do consider other issues about the subsidized,
restricted units. Here is some unsolicited advice from our experience:
        Our community had such a program for 11 of our 25 initial buyers,
and they are allowed to resell only to others in the same income category
(there were two different ones, moderate and low), with prices limited to
the original appraised value plus increases in median income in the country
since then. It was a great way to enable affordability, and the same program
(silent second loans) is availably to new purchasers of the same units, but
some unanticipated problems have arisen:
        -- It's hard to market the units, as low-income buyers tend to be
skeptical about their ability to really afford the purchase.
        -- The eligible income range for prospective buyers is rather
narrow: it must be high enough to qualify for a regular mortgage of at least
50 percent of the price but low enough to still remain in the right category.
        -- A used house typically needs some fixing up -- new carpet and a
complete paint job at the very least. It makes sense for the new buyer to do
this, but a qualified low-income person may well not have the assets or
income to make it possible.
        We're now working with the local housing authority that worked with
us to devise the program, hoping to revise it enough to make resales less
difficult.
        (And there is a 3-bedroom low-income house currently available.
Anyone want to come to Sacramento?)

        Good luck, and congratulations for including affordability as one of
your considerations.

David Mandel, Southside Park Cohousing, Sacramento