When buying a co-op, many people are concerned with paying a fair price and then turn their anxiety towards passing the board’s rigorous financial and personal interview tests.
However, it would help if you gave equal weight towards whether a board’s stiff tests overly restrict buyers, with an eye towards when you want to sell. Under these circumstances, they can turn your selling process into a long, drawn-out affair that risks overly limiting potential buyers and making your co-op illiquid.
We intend to clarify the sales process to understand better why a board can turn down a buyer.
Why a buyer cannot get turned awayWhy a buyer cannot get turned away
It is easier to start with why a co-op board cannot reject a buyer since it is a shorter list. For example, a board cannot turn you down by race, color, creed, age, national origin, citizenship status, gender, sexual orientation, disability, and marital/family status.
For instance, if you have kids, the board cannot reject your application solely on that basis. However, that makes everything else fair game.
Typical reasons for rejectionTypical reasons for rejection
Buyers not having strong enough financials are a top reason for boards to reject applicants. This includes erratic employment history and insufficient post-closing liquidity reserves. Typically, boards seek one to two years of mortgage and maintenance payments.
The board can also decide the price you are paying is not adequate. The co-op board wants to keep comps as high as possible since the members are also unitholders, and it is in their best financial interests to do so. Some sellers are providing various credits at the board’s urging at closing to keep comps artificially high.
Boards typically like full-time residents. Therefore, if you plan on using your apartment as a Pied-à-Terre, you will likely have a tougher time passing muster.
Co-op boards also reject applicants based on lifestyle concerns, a poorly constructed board package, and a lousy board interview. For instance, if the co-op board hears that you are planning extensive renovations, they could reject you. Historically, 3%-5% of applicants do not receive board approval, based on brokers’ and lawyers’ estimates. Even more frustrating, co-op boards are not required to explain their rejection.
You can mitigate your risk by going over the purchase application with your exclusive buyer’s agent to understand the board’s requirements. You are typically asked to submit a Real Estate Board of New York (REBNY) Financial Disclosure Statement with your offer. This provides the seller with your income, expenses, assets, and debt. If the seller accepts your offer, you know you pass muster with them and the listing agent.
When it’s time to sellWhen it’s time to sell
Restricting buyers can backfire when you are ready to sell your unit. While maintaining prices and ensuring strong liquidity seeks to protect the owners’ financial interests, being too picky can overly restrict the buyer pool. Naturally, this hurts your co-op’s liquidity and can cause your unit to remain on the market longer than you would like.
Therefore, you want to find out the board’s policies ahead of time, even before submitting your offer. While financial requirements are typical, you want to find out how strict the board has been in the past. Boards are not necessarily forthcoming with this information, but your agent should have some insight.