Co-Op Board Turn Down: Sales Price Too Low?

Before I start, know that is me, Christine Toes that is writing this, not Noah!

I recently encountered a situation where a buyer whom I thought was qualified, my sales manager thought was qualified, and the seller thought was qualified was turned down by a co-op board.

A board turn down is frustrating for everyone involved. Buyers may have already given notice to their landlord that they are moving & may suddenly find themselves scrambling to find another apartment. Sellers may have moved out in anticipation of the sale and now have their apartment sitting vacant. Mortgage and maintenance payments may be flying out of the seller's pockets while they start the lengthy co-op process (a three month minimum "to do" unless the buyer pays all cash) over again. The brokers who negotiated the deal and put together the lengthy co-op board package start all over again. The mortgage brokers/bankers get nothing, the attorneys get only a portion of their fee. Basically everyone loses.

With this particular board rejection, there were a few issues at hand:

1. A New Management Company: The building had recently hired a new management company & they were unable to give insight about what this particular board was looking for as far as financial requirements. My buyer had the qualifications co-op boards generally look for: 20% down, 2 years of mortgage + maintenance payments in reserve in liquid assets, a 25% debt to income ratio (although a large part of her income was bonus, which I will get to in a minute), and a 770 credit score. Often, we can feel out the managing agent for what the board has/has not approved in the past, but since this was the first board package this M.A. had submitted to this board, the M.A. didn't know what to expect. We were going in blind, which is a real estate agent's nightmare.

2. My Buyer Was In Finance / Nervous About Future Bonuses: Although my buyer was at one of the very few companies not hit by the credit crisis, I think the board may have been nervous about bonuses. I suspect that they were probably harder on my buyer because of what is happening on Wall Street now. Even though my buyer was in a "Future Leaders" program at the company, perhaps they also feared the projected layoffs. In short, if it had been last year, my buyer might have soared through with flying colors.

3. Sale Prices Too Low: After the board turn-down, I brought a new buyer for the apartment. This time, the managing agent was willing to run the new buyer's profile by the board (this rarely happens). The response we received regarding the new buyer was that the "board liked the new buyer's financial profile better than the previous buyer's profile...And they liked the sale price better as well."

Then it dawned on me.

The first transaction happened when I brought the buyer for an apt that was For Sale By Owner. Since the owner was selling it, the apt was really not getting the exposure it would have gotten on the open market. My buyer and I knew we were getting a great price on the apartment.

After the co-op board turned my customer down, luckily for me, the seller still really liked me and she gave me the exclusive on the property. Within a week of the apt being officially on the market, I sold the apartment for over $35K more than what the first deal was for in a bidding war. (Even after adding in the additional commission she ended up paying me, the seller made $20K more using a broker).

I don't want to give exact numbers, but basically it was a difference in the sale price of about 770K and 810K. Although I never really thought about it before, I think there is another issue to consider when looking at why co-ops turn buyers down: the board wasn't happy with the sale price. Particularly in a smaller building, every sale counts because every sale is going to be scrutinized as a comparable when current owners sell their apartments in the future. Makes you wonder.

Toes Says:

1. Steer buyers with low income and high bonuses towards condos whenever possible even if you (and they!) think it is crystal clear that they can afford the apartment. You never know when a co-op board is just not going to be comfortable with people who make so much of their income in bonus.

2. If you are getting a fabulous price on an apartment, don't rule out the possibility that the board might turn down the buyer, not because they aren't qualified to buy the apartment, but because they are afraid that a sale at a low price will hurt future sale prices in their building.

3. Never rule out the possibility that just because a buyer of a certain financial profile passed a board last year, that a similar buyer might not pass this year because of what is going on in the economy and/or news media.

4. The strict financial requirements of co-op buildings in Manhattan have helped keep NYC's housing market healthy and prices stable despite the loose lending standards of the past few years. We are certainly being saved from the high foreclosure rate affecting other cities. However, in some cases, I think boards have become too strict. I highly recommend that if you have an opportunity, get on your co-op board so that you can make sure your building is not keeping perfectly qualified buyers out. When you go to sell, you'll be very happy that your board doesn't have a reputation for being the most difficult board in the neighborhood!

Links: Co-op Board Ratings via WallFly.com!
The Attorney General speaks out on problems with co-op boards

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