If you’re selling a co-op in NYC, it’s important to remember that the risk of a co-op board rejection is very real. While some co-op board rejections are inexplicable (and perhaps discriminatory), it’s far too common to encounter scenarios where a board rejection was predictable and entirely preventable.
Therefore, it’s essential as a seller (or listing agent) to thoroughly vet the financials and purchasing structure of an offer before accepting it and moving towards the contract stage. Following the steps in this article when vetting an offer will maximize the chances of receiving board approval.
To reiterate, do not not accept an offer on a co-op apartment in NYC as a seller or listing agent until you read this article and follow every step!
Any purchaser who is financing must present you with a valid (and non-expired) pre-approval letter. Make sure to check the following when reviewing any pre-approval letter:
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When was it issued? Is it still valid, or is there an expiration date?
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Is a property type listed, such as condo or co-op? Make sure it says co-op, if applicable.
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Does the purchase price in the pre-approval letter meet or exceed the offer price?
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Does the % down stated in the pre-approval letter match the offer terms?
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Have you heard of the lender before?
Please also keep in mind that pre-approval and pre-approval letters are not all made equal. Some lenders might offer both pre-qualification and pre-approval letters, in which case the pre-approval is a stronger demonstration of a buyer’s credit worthiness.
Other lenders might only issue one type of letter and call it either a prequalification letter, preapproval letter or perhaps some other term unique to that institution.
In addition, there are bankers and brokers out there who might literally issue a pre-approval letter by taking a buyer’s word for it when it comes to income, expenses, assets, etc.
If you’ve never heard of the lender/institution on the pre-approval letter, you may want to call the banker who is listed on the preapproval. Bankers obviously aren’t allowed to disclose the private financial information of a buyer without consent of the purchaser, but they might still be able to offer you some general assurances as to the buyer’s creditworthiness.
With respect to proof of funds, we recommend asking the purchaser to provide a bank statement or online banking screenshot showing that the purchaser has at least 10% of the offer price in liquid assets.
Why 10%? Well, this is the customary size of the contract deposit in NYC.
Once a buyer signs a contract, it is not official until she or he makes a contract deposit into the escrow account maintained by the seller’s attorney.
Sometimes a buyer might think they have the cash, but in reality it could take weeks to convert whatever assets they have into cold hard cash. Think of the overseas buyer who encounters cross-border restrictions, or perhaps the purchaser’s monies are not liquid yet: i.e. tied up in the equity of a property, they haven’t received a settlement payment, etc.
Seeing proof of funds will give you confidence that the contract can be signed quickly, assuming you and the purchaser come to a meeting of the minds on the offer terms.
Analyze Debt-to-Income Ratio
Having a high debt-to-income ratio (DTI) above the building’s guidelines is the easiest way to guarantee a board rejection. Fortunately, calculating a purchaser’s DTI is very easy, and you can even use this online calculator. For a highly detailed overview of co-op debt-to-income ratios, check out this article.
First, be sure to read the purchase application instructions and see if a specific DTI requirement is listed. Some co-ops will list an exact number (i.e. 25% or 33%), whereas others might not.
In the case of the latter, we recommend emailing your building’s transfer agent (at the managing agent) and asking for guidance.
If a co-op doesn’t provide any guidance, it’s best to assume that the minimum acceptable DTI is ~25%.
Please also check to ensure that the buyer plans on using a 30 year fixed rate mortgage. Some co-ops do not allow adjustable rate mortgages (ARM), and the ones that do may require you to ‘stress test’ the DTI based on the highest possible floating interest rate for the ARM.
Adjustable rate mortgages typically have caps north of 6%. Therefore, the theoretical mortgage payment under the maximum rate would likely double the monthly mortgage payment and have a huge negative impact on DTI, possibly guaranteeing a board rejection. Please be sure to check this before accepting any offer!
Finally, make sure to factor in any ongoing assessment when calculating a purchaser’s debt-to-income ratio.
If, for example, there is a monthly assessment of $150, this must be added to the purchaser’s mortgage and maintenance payment to calculate monthly expenses.
You must also add any other recurring monthly debt-related payments, such as a car payment, car lease or student loan payment.
Extra caution must be exercised if the purchaser owns other real estate, as these additional monthly expenses will elevate DTI, even if the buyer intends on disposing of an existing real estate asset after closing on a new purchase. Be sure to check with building management as to how the board will treat any income and expenses associated with other real estate holdings.
Calculate Post Closing Liquidity
Most co-ops are looking for applicants to have at least two years of post-closing liquidity. Post-closing liquidity is essentially how many months/years of co-op mortgage & maintenance payments the purchaser has in liquid assets after closing (and making the down payment).
For example, let’s say a buyer has $100k in cash post-closing and the combined monthly mortgage and maintenance payment is $5k. Therefore, the buyer has ($100k/$5k) = 20 months of post-closing liquidity.
When calculating post-closing liquidity, be sure to verify that the monthly maintenance figure being used is correct, as buyers often forget to update this number on the financial statement when submitting multiple offers.
Please also make sure that the mortgage payment is based on the down payment % indicated in the offer.
You should also confirm that the interest rate assumption is reasonable.
Similar to our DTI analysis above, post-closing liquidity must factor in any extra monthly payments associated with other real estate holdings, car loan or lease payments, other loan payments, etc.
Please note that the rules for what assets qualify as ‘liquid’ vary by co-op. Most buildings will not count 401k/IRA balances as part of liquid assets. If the math is borderline, be sure to confirm with management as to which assets may qualify as being liquid. To reiterate, never assume that retirement funds or life insurance assets are considered ‘liquid’.
Evaluate the Proposed Purchasing Structure
Is the purchaser utilizing any non-standard purchasing structure, extra caution is warranted. Non-standard purchasing structures include:
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Guarantors
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Co-Purchasing
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Parents Buying for Children
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Children Buying for Parents
Rules for these scenarios vary by building, so you should not assume that the purchasing structure is okay before confirming, in writing, with building management.
Check for Pied-a-Terre Usage & Gifts
Co-ops are primarily intended for use as primary residences, so if the buyer plans on using the apartment as a pied-a-terre, extra caution is warranted. Even if a building’s purchase application says that pied-a-terres are allowed, please confirm in writing with building management.
Co-ops often change their policies on pied-a-terres, and building documentation might not reflect any recent policy changes. Similarly, if you buyer is receiving a gift, extra caution is warranted.
While most co-ops allow small gifts, anything more than 50% of the purchase price may be an issue.
Some conservative co-op boards view large gifts as being akin to a ‘parents buying for children’ scenario.
Again, do not leave any of this to chance. Be sure to contact management in writing and confirm whether or not gifting is allowed and whether or not there is a maximum permitted gift size.
Please also be sure to ask the purchaser the following questions:
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Are the gift funds already in your account?
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If not, are the funds located in the US or overseas?
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How quickly can the gift proceeds be deposited into your account?
