Co-op Board Rejection Because Of Low Price

A co-op board retains certain powers, which also come with responsibilities. One co-op board’s powers include approving or rejecting sales and purchases. A co-op board can reject an applicant for any reason, providing; it complies with federal, state, and city fair housing laws. This likely means a co-op board can deem your offer too low, either cause the purchase to fall through or force you to reevaluate your purchase offer.

You may agree with the seller, but this does not mean you should celebrate.

Why a board does it

Board members have a fiduciary duty to shareholders. Therefore, they want to protect their financial interests. They also own co-op units in the building. In addition, co-op boards are concerned that a low price will skew prices, affecting comps and pressuring prices on future apartment sales.

Mitigating 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. Courts have generally upheld the board’s authority to reject a co-op sale based on a sales price substantially below the current market value. However, restrictions include the board setting an arbitrary minimum sales price not supported by the current market.

The board must balance its fiduciary duty to co-op shareholders fairly. Thus, accepting a single lowball offer might not necessarily impact the other units’ value.

First, a board should conduct its due diligence to determine the reason for the low price. Rather than rejecting the sale outright, a board can consider certain unique factors when deciding whether or not the offer is accepted. These include divorce, estate sales, going into foreclosure, or the bank has already foreclosed. The board might decide the acceptable price in these or other extenuating circumstances.

Does it impact value?

When measuring a unit’s fair market value, an appraisal firm looks at the comparables. There are reasons to believe a single sale, even if it is below the current market value, does not materially impact the sales price of other units. Still, it weighs certain factors more heavily, such as recent sales, particularly those similar to the co-op for sale within the building.

The current New York City housing market is humming, particularly below the $3 million threshold. Should the market turn, you may have to prove that your offer reflects the current market environment, which goes beyond comps.

A 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 other reasons.