(reprint of JLBWC 2015 article)
Prospective buyers are often daunted by the thought of successfully navigating the co-op board-approval process. However, the good news is that for the well-qualified buyer, the process, which can be somewhat time-consuming, will eventually meet with success. Further good news is that if the applicant can find a sponsor apartment, then no board approval is needed although the sponsor may impose his own requirements for purchase. Unfortunately, not many sponsor apartments remain in our area. (A sponsor apartment is the first sale from sponsor to purchaser of an apartment after a conversion to a co-op from a rental property; it is not a resale so the co-op board is not involved.) Here is a short primer on the purchase process of a resale co-op apartment.
When a co-op apartment is purchased, the buyer is not purchasing the physical premises (the apartment). Instead, s/he is buying stock shares in the co-op corporation that owns the physical premises—i.e., the apartment, the building and usually the underlying land. Thus, the purchaser becomes a tenant of the co-op corporation, receives a proprietary lease and a stock share certificate, and pays monthly maintenance (rent) to the co-op corporation.
Because the approval process is heavily dependent upon the financial bona fides of the applicant, I initially ask the buyers how they are going to pay for the stock shares. A few fortunate people will pay the entire amount in cash; in that case, I make certain that the amount of assets remaining after the purchase will probably be sufficient to satisfy the co-op board. (A loan bank will also have post-closing liquidity requirements.) This is a reasonable requirement because the board needs to know that, in the event of a financial setback (loss of employment, unplanned retirement, disability, etc.) the co-operator will continue to be able to pay his or her monthly maintenance and any assessments that may be voted by the co-op board. If the applicant needs a loan, I then ask if the applicant has consulted a lending institution and has preliminary approval for a co-op loan. I also inquire about the applicant’s income, sources of income, credit history and any outstanding debts. I also need to know that the prospective purchaser has the required cash down payment. Often, co-op boards are more demanding than the banks and it is useless to show apartments to people who cannot satisfy the co-op board’s requirements.
If the prospective purchaser cannot pay for the stock shares entirely in cash then the purchaser must secure a co-op loan and/or money in the form of a gift—sometimes the gift comes from parents, children or other relatives and a gift letter is required. However, most buyers apply to a lending institution such as a bank for the co-op loan. (The stock shares that they are purchasing are personal property so the money comes as a loan, not a mortgage.)
The amount the bank lends is determined by several requirements. First, almost all co-op boards determine the percentage of the purchase price that must be paid in cash. Many of the boards require that at least 20 percent of the purchase price be in cash but some boards, in my experience, demand 25 percent; rarely, 10 percent is required, and I knew of one board that did not impose any requirement save that the bank approve the loan. Second, the bank examines the applicant’s financial information (income, assets, debts, etc.) and credit history and determines the amount that it can lend to the applicant. Third, banks also will examine the financial condition of the co-op corporation and will sometimes reject loan approval for purchase in financially sub-standard co-op corporations.
Before the applicant formally applies for the loan, the price of the stock shares is negotiated. Contrary to some buyers’ trepidations, buyers are well-protected during this process, for the following reasons. First, most buyers ask for information about the sales records of comparable apartments. This information is now public and readily available. Second, if a bank loan is involved, then the bank will send an appraiser to examine the premises and the comparable sales. If the negotiated price of the co-op shares is too high then the bank will refuse to lend all of the money that has been requested and the prospective buyer will either have to put down more cash deposit or will ask the seller to reduce the selling price. One caveat: if, in the opinion of the co-op board, the selling price is too low then the board has veto power over the sale!
After the negotiations have been concluded regarding purchase price and other terms and conditions such as date of sale and fixtures remaining in the apartment, the contract is sent to the buyer’s attorney for signature and then to the seller’s attorney for signature. The buyer’s attorney is given the opportunity to examine the co-op’s offering plan and its amendments as well as the co-op’s yearly financial reports. Sometimes, the buyer’s attorney will read the minutes of the co-op board, if that is permitted. The attorneys for buyer and seller will discuss any proposed changes prior to contract signing. The buyer then takes the fully signed contract to the lending institution and fills out the loan application. The bank runs the credit report and verifies the information provided on the application (for example, current employment), and sends the appraiser to do the report. If all is satisfactory then the loan is approved and the applicant is ready to submit his/her application to the co-op board. Much of the information required by the co-op board is the same as what is required by the lending institution. The completed application goes to the co-op management company which arranges for the credit check, examines the application for completeness, and sends the application to the co-op board for its consideration.
A typical board application consists of the signed consent of the seller to the sale of the co-op shares; a copy of the sales contract; names and addresses of buyer, seller, attorneys, and brokers; buyer’s income tax returns for at least the past two years; letters of recommendation, both personal and professional; employment information; a detailed listing of all assets and debts (current and post-sale) of the buyers; information about any pets; and consent for the board’s agent to run a credit report. There may be other questions regarding citizenship, diplomatic status, bankruptcies, obligations to pay alimony and/or child support, and any other questions that are, in the board’s opinions, pertinent.
After reviewing the application, the co-op board may decide to interview the applicant. After the interview, I always ask the applicant how things went and what questions were asked. Most interviews are positive experiences for my customers—not the horror shows depicted in The New Yorker cartoons! Often, it is the board members who are trying to “sell” the co-op experience to the applicants!
In terms of time, the process for an all-cash sale probably takes about two months; for a sale in which a bank loan is involved, perhaps three months. These are average times and can be shorter or longer, depending upon contract negotiations, the loan approval process, how long it takes for the buyer to submit his/her application, how long it takes for the co-op’s management company to check out the details of the application and to perform the credit check, how long the board takes to schedule an interview, how long it takes for the board to approve the applicant, and how long after approval it takes for the closing to be arranged.
By Vivian Oleen
Vivian Oleen is an associate broker with Sopher Realty.