March 17, 2006

Co-op Board Package Red Flags

A: When preparing a Co-op board package, either on your own or having the broker do it, there are a few things that you should know that are considered 'red flags' in the eyes of most Co-op boards.

NOTE: Every Co-op board sets unique policy's for their building's stance on board approval, subletting, pied-a-terre's, pets, renovations, and re-selling. Before a buyer's offer is accepted, either the seller or the seller's broker should pre-qualify the buyer based on information that is gathered from the building's Managing Agent regarding what the board looks for in accepting the prospective purchaser.

There are certain items that are cause for concern as they could possibly raise a red flag when the board meets to review the prospective purchaser. Here is a discussion on each of them.

1. Debt/Income Ratio Over 30%: Your debt to income ratio (DTI) is a key indicator of your true financial picture. It is definitely the lending industry's measure of fiscal health. Your debt to income ratio is calculated by dividing monthly minimum debt payments (excluding utilities, food, entertainment) by monthly gross income. The higher this ratio, the more burden there is on the individual to make payments on his or her debts. If the ratio is too high, the individual will have a hard time accessing other forms of financing. A Debt/Income Ratio above 30% starts to raise a red flag in the eyes of board members because it increases the risk that the buyer will default on payments (especially Maintenence payments) in the future.

2. Declining Income Reported on Tax Returns: Most board packages will request the past 2 years of Tax Returns be submitted by the prospective buyer. It's always good to have successively increasing reported income on these tax returns as it shows that you have a stable job with a rising salary. Basically it tells the board that you are in good financial shape. However, if you had a SHARP decline in reported income over the past 2 years (i.e. Reported Income of $75,000 in 2004 but $50,000 in 2005) it will raise a red flag to board members reviewing your application. Declining income tells a story of a worsening financial situation and may cause the board to ask more questions or dig deeper into your financial history before considering accepting your application.

3. Hard Copies Do NOT Match Financial Anaylsis Form: When submitting the board package ALL #'s provided in the financial analysis form should MATCH UP PERFECTLY with the hard copies that are usually requested to be submitted. For example, if you state that you have $123,456.14 in your checking account and $23,498.46 in stocks than you better have the hard copies to back that up TO THE PENNY! As the board reviews your financial analysis form they will look to the hard copies provided as proof that you really have what you state you have in liquid assets. UrbanDigs Tip - Do it in reverse! Collect your hard copies first that you intend to submit with the board package and then take the statement balance and copy that into the appropriate section on the financial analysis form (this way you know for sure that all data you enter about your liquid assets has the exact amount on the hard copies to back it up).

4. Incomplete/Missing/Poorly Written Reference Letters: You may think that the personal and professional letters of reference are the easy part of the board package, so be careful NOT to discount the importance of these letters (Read my post on Reference Letters Layout). If the board asks for 5 Personal Letters & 3 Professional Letters of reference than make sure you hand in ALL OF THEM! Not only that, but make sure you tell your friends and work associates to type up the letter and include a good 3-4 paragraphs of information describing their relationship with you, why you would be perfect for this building, and contact information so that the board may follow up if needed. Don't skimp on the reference letters as I know for a fact that some boards weigh this aspect of the board package very heavily!

If you are selling a Co-op apartment be sure to know every detail of what the board will look for BEFORE accepting anyone's offer. Now that you know what the board wants and some of the RED FLAGS that boards look out for, you should be able to assess whether a particular buyer is in good shape to be accepted. Although a Co-op board may reject a buyer for any reason they wish, this is a good set of guidelines to follow to put the prospective buyer in the best possible light for passing the board! Good Luck!

Posted by urbandigs at March 17, 2006 11:23 AM

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