A co-op board retains certain powers, which also comes with responsibilities. One of the co-op board’s powers includes approving or rejecting sales and purchases. A co-op board can reject an applicant for virtually any reason; providing it complies with federal, state, and city housing laws. This likely means a co-op board can deem your offer is too low; either cause the purchase to fall through or force you to reevaluate your offer.
You may have an agreement with the seller, but this does not mean you should celebrate.
Why a board does itWhy a board does it
Board members have a fiduciary duty to shareholders. They also own co-op units in the building. Therefore, they want to protect their financial interests. Co-op boards are concerned that a low price will skew prices; affecting comps, and potentially lowering prices on future apartment sales.
Mitigating factorsMitigating factors
A co-op board must follow the business judgment rule. Based on case law, courts cannot reverse a board decision, even a bad one, providing they made it in good faith. On this basis, courts have generally upheld the board’s authority to reject a co-op sale based on a sales price that was substantially below the current market value. There are restrictions, such as the board setting an arbitrary minimum sales price that is not supported by the current market.
The board has to balance its fiduciary duty to co-op owners with fairness to an individual shareholder. Accepting a single low-ball offer might not necessarily impact the other units’ value.
Rather than rejecting the sale outright, a board can consider certain unique factors when deciding whether or not the offer is accepted. A board should conduct its due diligence to determine the reason for the low price. These include divorce, estate sales, going into foreclosure, or the bank has already foreclosed. In these cases or other extenuating circumstances, the board might decide the price is acceptable.
Does it impact value?Does it impact value?
There are reasons to believe a single sale, even if it below the current market value, does not materially impact the sales price of other units. When trying to measure a unit’s fair market value, an appraisal firm looks at comps, but weighs certain factors more heavily, such as recent sales, particularly those similar to the unit for sale.
It means apartments in the same building, even on the same floor, with similar square footage, count more. However, a single below-market sale is not likely to affect the other building units’ different values since there could have been exceptional circumstances, such as those above.
The current New York City housing market, particularly below the $3 million thresholds, is humming along. Should the market turn, you may have to prove that your offer reflects the current market environment, which goes beyond comps.
A final decisionA final decision
Making the matter murkier, when a board rejects your application, they do not have to provide a reason. Aside from your offer price; the board can also decide to take a pass based on your interview; financials, letters of recommendation, employment history, or a host of other reasons.
