This is a Public Service Announcement
Buyer (and seller, and broker) beware:
CO-OP BOARD REJECTIONS ARE ON THE RISE.
No one wants to talk about this, but we have seen an unusual spike in co-op board rejections over the past year. It's embarrassing to the applicants when a group of peers deem them unworthy to be their neighbors, or more specifically, owners in their private club. Similarly, agents fear being stigmatized for their association with a Board turndown.
Well, I'm calling BULL! There is no shame in a Board rejection. There is frustration, confusion, uncertainty and anger. Instead of shame, we need to confront the issue of Board rejections head on, understand the problems associated with declined packages, recognize the consequences of a turndown and then arrive at a satisfactory solution to reduce the likelihood of rejections and protect all concerned parties. We can do this! But first we need to understand what it is that a co-op Board can do.
THE POWER OF CO-OP BOARDS
Co-ops boards are omnipotent. They can reject an application for almost any reason or no reason. Legitimate reasons for a Board rejection, include:
Finances: inadequate income, too much debt, insufficient assets, weak credit, uncertain employment prospects.
Structure of the deal: the buyer is a trust, parents buying for children, gifting, guarantees.
Primary residence issues: whether pied-à-terre’s are allowed.
Lifestyle concerns: pets, hobbies (drum playing, tap dancing, opera singing), history of litigation, fame (fear of parties, crowds, fans, paparazzi).
Ignore the demands of a co-op board at your own peril. They can literally determine your housing future.
OFFICIAL REASONS why we’re seeing more turndowns:
Yes, co-op boards wield power, but there are many things that buyers and sellers can do to increase their own odds of success. In today's environment, everyone must exercise extreme caution when preparing and submitting an application. To begin with, avoid these common problems:
Submission of incomplete packages
Buyers may be preparing and submitting their own packages online without the help of their agent. Some agents may also be sloppy in their preparation. Here are a few things to keep in mind:
Be certain to answer each and every question.
Answers must be truthful and complete.
Ask for help from a professional if you don’t know or can’t find the answer.
Submit all requested supporting documentation.
Dumb it down: make everything easy to follow and understand.
Be thorough and neat.
A board package is like a jigsaw puzzle: all the pieces need to fit together. And you can’t un-see gaping holes.
Buyers are stretching and sellers are dreaming
In a strong market, a potential buyer might be quickly dismissed by a seller as financially unworthy right off the bat. Why? There are always more qualified applicants in the wings.
Contrast that with 2019’s buyers’ market: buyers are few and far between. Borderline-qualifying buyers may be willing to pay a reasonable (or a premium) price, and sellers might think they’re worth the gamble. That is, until the Board quashes the deal. If the Board doesn’t believe that the buyer can afford it, then both the buyer and the seller can kiss that dream goodbye.
Believe-it-or-not, the price is too damn low
(This one kills me!) In a typical arms-length transaction, under what circumstances will a reasonable seller agree to sell below market value? Never! Yet Boards today turn down deals when they think the price too low. What are they thinking?!
Simply this: Boards believe it to be their responsibility to protect value in the building. A sale at a depressed price may devalue other properties in the building, including their own.
Really? Who are they to judge value? Do Board members know how frequently a property was shown, or how many buyer prospects felt the property needed too much work to justify a higher price?
Clearly, I disagree. But that has no leverage whatsoever over an omnipotent co-op board. So, here's my wish: May karma visit the Thumbs Down Board Members when they try to sell in a buyers’ market. Let them experience a Board rejection when the only buyers are offering lowball prices. Maybe then the practice will change.
THE OTHER REASONS: LEGAL and ILLEGAL DISCRIMINATION
We’ve just covered what a co-op Board can do and how you as a buyer or seller can strategize differently for a better outcome, but there is a caveat. (We did warn, “buyer beware!”) Boards can reject an applicant for almost any reason, but they cannot discriminate on the basis of race, creed, color, national origin, gender, sexual orientation, age, or disability. That is illegal. But if a Board is not required to provide a reason for a rejection, how can anyone know for sure whether the rejection was legal? And how can a seller ensure that the next package won't have a similar fatal flaw?
Imagine, for instance:
A package that is complete and unambiguously shows ample income and assets, and minimal debt.
The applicant has excellent credit, outstanding references, a great employment history, belongs to the ‘right clubs’ and lives an appropriate lifestyle.
The price is right.
There are no ‘red flags’ other than the applicant being born in the Middle East, having membership in a church known for its gay congregants, using a wheelchair and working as a litigator with a civil rights law firm.
What conclusions might be drawn from a formal rejection in such a scenario?
You don’t need to be a rocket scientist to figure that one out. Not only are seeing more of this type of blatant discrimination, there is no practical recourse. Remember: A Board does not have to supply a reason for a rejection, and well counseled Board never will. There may be smoke, but you’ll never find the fire, and that won’t hold up in a court of law. That is how Boards avoid any charge of illegal discrimination.
In addition, a tactic we’re seeing more frequently is a Board that simply sits on an application for an unreasonable time without processing it. What is a buyer or seller to do in this instance? A frustrated buyer may legally choose to withdraw the purchase application, cancel the contract and obtain a refund of the deposit. This achieves the same result as a formal Board rejection with less legal exposure. And Boards know it.
What can be done? Boards need to be held accountable. Westchester and Suffolk Counties have enacted legislation which addresses some or all of these issues. It is way past time for similar legislation in New York City. Welcome to 2019. In the meanwhile, do what you can: make sure your Board application is complete, accurate, professional, and neat.