Last August, I characterized 2016-2018 as “real estate’s great adjustment years” when four trends prevailed: rising inventory, slipping prices, more time on the market and multiple price reductions. We’re in for more of the same in 2019 as buyers and sellers come to terms with market changes and prices stabilize. In the current environment where uncertainty reigns, it behooves the real estate professional to be especially vigilant in the preparation of the all-important co-op board package and recognize the co-op’s obligation to protect the interests of shareholders as they evaluate a buyer’s qualifications and also seek to maintain property values.
Historically, in the challenging times of a soft market, co-op boards tighten their scrutiny of applications. When approvals to purchase have conditions, buyers have a contractual right to walk away from a deal and take back their 10% deposit, since contracts are contingent on the unconditional consent of the corporation. When I review an application before submission, and I have questions, I know the board will have questions also. When it’s clear to me that a prospective buyer’s income can’t be relied upon (be it bonus, trust or inheritance), or when a gyrating stock market diminishes post closing liquid assets, there are strategies to strengthen the presentation. Typically, I ask the buyer to prepare a cover letter to the package and offer to relieve misgivings by either presenting a third party guarantor for the maintenance or proposing to put one to two years of maintenance in escrow with the co-op. More often than not, this works to ally any unease from a concerned board.
Co-op board members evaluate not only a buyer’s background and financial condition as they look for income stability and post-closing liquidity, but they also seek to preserve values—which can get complicated and can also backfire. In a declining market, it’s important to recognize that a board might reject a sale because the price is deemed to be too low. In condos, a board can refuse to issue a waiver of the right of first refusal, usually within thirty days, but then it must purchase the property at the contract price. For the past two years, new condo developers have been routinely providing decorating concessions to buyers and paying transfer taxes and even multiple years of carrying charges in order to preserve higher recorded closing prices. For co-ops, including a property appraisal in the package could be a remedy. Another strategy is to execute a contract at a higher price with an agreed credit to the buyer at closing. The latter would involve calculations of taxes and fees, and if there is financing, the lender would need to get involved as typically banks cap concessions at 6%.
Turndowns because of price are problematic. Not only do they create financial hardship to the owner, but when the property lingers, it broadcasts an unrealistic value and labels a “tough board,” driving away brokers and other buyers. Attorneys have conflicting views as to whether a co-op board can control pricing and set a minimum price for a property. A survey of a handful of transactional counselors has half saying this falls under the business judgment rule, and the other half saying this borders on stock manipulation. Since it’s the buyer who ultimately determines value, is it in the co-op’s best interests to second-guess market fluctuations and set an artificial floor which can backfire and ultimately do a disservice to shareholders?
Co-op boards wield absolute power in their authority to approve or reject a prospective buyer. While federal, state and city fair housing laws prohibit discrimination, boards are not required to provide reasons for rejecting candidates. Years ago, both New York State and Westchester County were each separately considering legislation to make co-op boards accountable to those whose applications were rejected. The law would have required co-op boards to provide written responses for turning down potential candidates. Had this come to pass, it would probably be tough to get shareholders to serve in these unpaid volunteer positions. Nonetheless it might be time to reevaluate the system and put some guidelines in place. In the meantime, we’ll probably see more questionable turndowns this year along with more conditional approvals. I’ll continue to be super diligent with my buyers and sellers sidestepping the obstacles that are front and center in this market.