Rejection from Co-op Boards
Buyer’s and seller’s real estate agents do everything they can to avoid rejection from co-op boards. Before accepting an offer, a seller’s broker will scrutinize the buyer’s profile. They will look at the buyer’s financial profile, including their debt to income ratio and their liquid assets after closing. The agents will consider where the down payment (in the case of a financed transaction) is coming from. They will ask whether the buyer is receiving a gift or loan for the purchase. The agents will also look at the building’s rules regarding a pied-à-terre and parents buying for children.
Agents also consider less tangible information. For example, they ask whether the buyer has large pets or children. They should ask whether the buyer plays musical instruments or has sued before (like in a slip and fall case).
In potentially borderline cases or where the co-op board is particularly strict, the broker will speak to members of the board or ask the seller to speak to the board for further insight. A buyer’s broker will also ask questions of the seller’s broker to confirm that their buyer is passable.
Co-op Board Rejection is Not in Any of the Players’ Best Interests
No buyer wants to be rejected by a co-op board, and no seller wants their buyer to be rejected. Nobody wants to start over at the beginning again. Getting to the board review stage is a very expensive and time consuming process. This makes a board rejection all the more painful for everyone involved. Even so, rejections happen more frequently than you would think. Rejections happen even when everyone has done their diligence and presented an otherwise qualified candidate with a professional and complete board package.
Rejections often have no plausible explanation, and the board never discloses the reason for the rejection. You are simply notified of the rejection with a cold matter-of-fact letter written by the managing agent. Brokers and sellers will do everything they can to get more information about why a deal was rejected. They will do what they can to bring it back to life. Unfortunately, though, this rarely happens. Once a co-op board rejects a buyer, it is highly unlikely they will consider your pleas to reconsider.
Possible Financial Reasons a Co-op Board May Reject a Buyer
- The buyer’s ratio of their gross debts to their gross income is too high;
- The buyer will not have enough liquid funds in their account after they close;
- The purchase price is low (or lower than comparable sales in the building);
- The buyer’s credit score is too low.
Ways to Avoid Co-op Board Rejection for Financial Reasons
- If the buyer has a borderline financial profile, he can offer to put money in escrow for a specified time period. This can get the building more comfortable. The building will know that the buyer will be able to pay his maintenance costs even if he loses his job;
- If the purchase price is low, the building may be concerned about the affect on future sales in the building. You may be able to structure the deal so that the buyer ultimately pays the same amount and the seller receives the same amount, but the purchase price looks larger. For example, the seller could pay the mansion tax or flip tax (if the buyer was otherwise going to pay it). In exchange, the buyer would pay that much more in the purchase price;
- Buildings do not always like to see 401k loans to fund the down payment because this amount is likely to be paid back pretty quickly out of the purchaser’s liquid assets after closing. This leaves the purchaser with less liquid assets than what is presented on the financial statement. It is difficult to hide this as most buildings ask for three months of financial statements. If the building considers the 401k as illiquid, try to find another source for the downpayment;
- A buyer who has a lot of debt, should consider paying off the debt. If this debt is from other homes, she should indicate in her board package that she will be renting those homes and the expected income stream. This will improve the buyer’s debt to income ratio and should get the board more comfortable.
Possible Non-Financial Reasons a Co-op Board May Reject a Buyer
- The buyer is a student;
- The owners in the apartment downstairs are particularly sensitive to noise;
- The buyer is not using the home as their primary residence;
- The buyer has sued others in the past;
- The board does not like the seller;
- The buyer is a musician and plays loud music;
Ways to Avoid Co-op Board Rejection for Non-Financial Reasons
- Many buildings do not want students living there (because they have a reputation for being loud and rowdy). In the board package, the buyer’s references should mention that the buyer is quiet and respectful. References should note that the buyer spends most of her time studying. If the reference is a former roommate, she should state this and indicate the type of roommate she was. The buyer should ask previous landlords to include similar information in their letters. If the buyer is a graduate student, you should emphasize this in the board package. If the buyer has a part-time job (even if it is unpaid), you should mention this as well;
- When I represented a buyer who was purchasing a pied-a-terre across the street from their son and grandchildren, the seller indicated that their downstairs neighbors were particularly sensitive to noise. The seller’s broker asked that we modify our letter to the board which had previously stated the buyers were excited to have their grandchildren visit;
- Some buildings do not look favorably upon pied-a-terre purchasers. If this is not permitted by the board, do not waste your time accepting the offer and putting together a board package;
- If your buyer is a musician, you should downplay the amount of time they spend practicing. You should also note in the board package that the buyer will only play his or her instrument during a reasonable timeframe that is unlikely to be problematic. You can indicate things you will do to prevent sound traveling and disturbing your neighbors. For example, like sound proofing a room, etc.
Working with Digs
When you work with Digs Realty, we cannot guarantee a buyer will be approved by a board, but we have a stellar track record and will do our best to present the best possible board package to give you the best possible chances of closing the deal. Of course, we will also give you a rebate at closing (if you are a buyer) and a discounted selling commission (if you are a seller).