Strict Co-op Boards and Softening Markets
Through the recent years of incredibly high demand, many co-op boards have become more discerning than ever. By weeding out many of those who'd like to buy shares in their buildings--often without clearly stated reasons--I believe co-op boards are contributing to thinning the pool of buyers, thereby softening the market and ultimately making their apartments worth less money. And I am speaking as recent member of a co-op board.
Tightening of financial requirements such as the amount that a purchaser may finance, the amount required in liquid assets after purchase, the types of mortgages allowed, and greater income requirements have all combined with already high prices to make it increasingly difficult for the average buyer to purchase a co-op.
Take the following scenario (names have been changed to protect the innocent): Mr. and Mrs. Buyer made more than $500,000 last year and have over $1.5M in cash in the bank. They wanted to purchase an apartment for slightly more than $1M, and they were rejected by the building's board of directors.
We can only speculate as to why they were rejected. Maybe it's because the purchasers' income was 70% bonus money--albeit a guaranteed bonus. Maybe it was because the buyers' average income in the prior two years was less than $100,000 (although they made in excess of $1M three years prior). Maybe it was something else entirely. We'll probably never know what the real reason was.
Co-op Boards do not have to give a reason for their rejections (legislation has been proposed recently to force co-ops to provide a reason for rejections) making it virtually impossible to address their concerns and negotiate a reversal.
Had I been a member of this particular board, I would have asked how likely it was that a couple with $1.5M in cash would default on their $1,000 maintenance... hmmmm... doesn't seem likely. Not to mention, this particular couple is a perfect match for this building as they are friendly, hard-working, and financially sound individuals.
Ultimately, the board's decision resulted in three months of lost marketing and the apartment for sale again in a softer market. This may result in less money for the seller and in turn, a decreased value for similar apartments in the building.
Call me naive but why isn't it possible for real estate agents to develop professional relationships with co-op boards, to determine specific financial formulas and criteria that boards seek? Surely that could make the market more efficient for all.
Perhaps our litigious environment won't allow it, or perhaps we are so deeply rooted in past precedent that no one wants to address the incredible inefficiency that is the co-op board process. As a real estate agent, I have mixed feelings about this process. Part of me is happy to particpate in such an inefficient process as it makes agents like me more essential. I think you can see from this post how the other part of me feels.
I can't agree with you more!! As potential buyers of a l bedroom on Park Ave., we realized right before contract signing that this would be a lousy deal indeed. Why? If it would be so hard to get into this white glove building requiring 100% down, how would we ever get out? Who would be willing to put up with this nonsense in the future? It seemed that the price was amazingly low because there had been so many board turn-downs and the sellers of course were eager. Then the whole issue of going through the x-ray scrutiny of the co-op board approval process was daunting. We have instead bought a condo and are looking forward to a less restrictive lifestyle...
Excellent post.
As an attorney, I have been an advocate for Board disclosure of the reason for rejection. While Board discretion is protected in case law by the "Business Judgment Rule" which says courts will not substitute their judgment for the business judgment of the Board, it does not allow rejection for illegal reasons (discrimination). Unfortunately, w/o a disclosed reason to question the legality of the Board decision, how does one argue discrimination?
Legislative change is required.
However, there is an option to those rejected by Boards, who believe (eg. based on questions asked)they were victims of discrimination, to FORCE the Board to disclose the reason.
For those who want to know how to do this read my post @
http://blog.sellsiusrealestate.com/?p=430
I'm on a co-op board in the lower east side and the only time we've ever rejected anyone it was because we were convinced they were lying to us. How do we disclose that?
JF: That's silly. The Boards will simply indicate a pro forma reason, such as "fails to meet corporation's financial requirements." What kind of Board is going to indicate an discriminatory reason. The legislation is useless.
Diana,
Totally think you are right in questioning someone based on your instinct that they were lying. That said, I think it would be beneficial for a Board to be able to ask specific questions to address potential untruths and if a candidate was deemed untrustworthy based on hard evidence, their application should be rejected.
The purchasers in my example were rejected based on application only with solid financials, excellent letters, and no obvious reason for a rejection. They were never interviewed.
Boggo,
What if the applicant meets all financial requirements? Perhaps their broker would know that their financials far exceeded someone else who had previously purchased in the building. In this instance, your "pro forma" response wouldn't fly. Of course, they wouldn't openly state discrimination as a reason for rejection but full disclosure would make rejection much more difficult. When an employer discriminates they don't disclose either but it becomes more clear when "made up" reasons are given that don't support past decisions of the employer. The same would hold true for a co-op Board.
