When a prospective buyer asks about buying a co-op apartment, the first order of business is to inform the buyer that there will be no purchase of co-op stock shares unless the buyer meets the financial requirements set by the board of the cooperative to which he/she is applying for purchase.
Due to these requirements, many people ask if there are sponsor apartments for sale. These apartments are desirable because the purchaser is not required to apply to the co-op board for approval—that is, the buyer deals directly with the sponsor and buys previously unsold co-op stock shares. Thus, theoretically, buyers who cannot meet the board’s financial requirements can still manage to purchase if they can pay the price. Another reason for the desirability of purchasing sponsor shares is that even financially qualified buyers may want to avoid having a group of strangers (the board) delve into the buyers’ personal finances. This tactic for avoiding board involvement is valid if the deal is all cash or only requires a lending institution’s co-op loan approval to provide the funds for purchase. However, if the sponsor demands financial information as a condition of the sale then the buyer avoids the board but still has to divulge financial information to the sponsor. Why would the sponsor be interested in the purchaser’s financial condition? Many sponsors still own other apartments in these buildings so they want to preserve the financial viability of the co-op corporation; therefore, they want proof that the buyer is financially qualified. As these additional sponsor apartments become vacant (for example, as tenants who were not subject to eviction when the rental building converted to co-op vacate), the sponsor may choose to sell the apartments and he needs to make them attractive to purchasers and to lending institutions who approve co-op loans.
Each co-op board establishes its own financial requirements. Most boards do not want to divulge their specific requirements, although, in the interest of preventing clearly unqualified applicants from applying, the boards may publish some guidelines. For example, on the co-op application, one board explicitly states the maximum permissible debt-to-income ratio.
Co-op boards almost always require a fixed percentage of the purchase price as a minimum down payment. Often this percentage is 20 percent of the purchase price but some local boards demand 25 percent; I have heard of 10 percent. When my husband and I purchased our co-op, the purchase had to be entirely in cash—no co-op loans allowed. Lending institutions set their own minimum percentages for co-op loans; these may be more or less than what the co-op board demands. Co-op loans are usually at a slightly higher interest rate than are condo and home mortgage rates. And, when the purchaser signs the contract of sale, the seller also wants a down payment along with the contract: usually, that is 10 percent of the purchase price, but I have seen other amounts. So, for example, if the co-op demands 20 percent down, and the seller wants 10 percent with the contract, then at closing the buyer must give the seller at least 10 percent of the purchase price in cash.
Clearly, the larger the apartment, the more the applicant must show in terms of income and assets. Yet, all income and assets are not created equal nor are all types of assets admissible as qualifications. For example, some boards exclude retirement accounts and alimony as components of acceptable net worth. Furthermore, certain types of property can be regarded as either assets or liabilities. For example, if the applicant owns a rental building and the apartments are vacant and there is a mortgage on the building and the owner pays other expenses such as insurance and property taxes and therefore operates at a loss, then that is a drag on income; if the building returns a profit then that is a plus!
On a co-op application, the board typically asks for information about the applicant’s monthly expenses and income and requires proof of income (pay stubs, employment letters, employment contracts, income tax returns, W-2 forms, Social Security and pension statements etc.). There is also a detailed list of assets on one application page and on another page there is a list of the applicant’s liabilities. Assets minus liabilities equals net worth. Why does the board want assurance that you have assets in excess of your down payment and monthly expenses? If you become disabled, lose your job, etc., the board needs to know that you can continue to pay your monthly co-op maintenance, any co-op assessments, and your co-op loan payments if applicable. The board may also cast a more critical eye on non-salary income—for example, a real estate broker cannot usually predict yearly income so perhaps the board will want to see more liquid assets.
Some boards are less demanding than others. One unusual local co-op board asked only that the applicants show lending institution approval of their co-op loan—the board figured that the bank would have performed the same financial and credit history checking that the board would have performed.
Boards and lending institutions typically require an excellent credit history and if there is debt that it be for a manageable amount as a proportion of income. Excessive credit card debt seems to be a no-no but student loans and car loans with sufficiently low monthly payments are normal. The board wants to see your income tax returns, usually for the past two years, a letter from your landlord stating that you paid your rent on time and did not cause trouble, a bank and/or brokerage reference letter, letters of reference (personal and job-related), a credit check and perhaps a criminal background check. Usually, there are application questions such as whether you have ever declared bankruptcy. All claims of financial assets must be documented. For example, the board wants to see your bank statements for the past three months, your most recent brokerage statements etc. The board also needs a copy of your contract of sale and of your co-op loan approval and loan application if it is not an all-cash sale. Some boards also require statements of your projected assets, liabilities and monthly expenses post-closing. If you are selling your currently owned house, condo or co-op, then the board wants to see your signed contract of sale—especially if you are using the sale proceeds to pay for your new co-op. And, if your sale falls through, the board would like to know that you can carry the new co-op and your current property until it is sold.
The good news is that sometimes the boards will make exceptions for deserving applicants who do not meet the usual requirements. Years ago, a recently married young man with a good job told me that his once-stellar credit history took a nosedive but that his wife’s history was excellent. When I discovered that young man, now in good health, had been ill for a protracted period of time during which he could not pay many bills and had accumulated excessive credit card debt, I obtained a letter from his physician which I presented to the board. The application was approved.
Special arrangements can sometimes be made for young couples just starting out in life. Typically, they will be beginning good jobs—I think of a young lawyer and his wife, just beginning as a public school teacher—but do not have much in the way of savings. But they have employment contracts and bright financial futures. Often, they have parents who will give the gift of a down payment and/or act as guarantors. The guarantors must also submit applications to demonstrate that they can cover their own and the applicants’ expenses if necessary. I have also had cases in which adult children act as guarantors for their elderly parents who are retired and cannot show sufficient income and/or assets. Also, sometimes if retired applicants have very high net worth, excellent credit histories, and sufficient but variable income (usually dependent upon Social Security, pensions and investments), they have also been accepted by the boards as buyers.
By Vivian J. Oleen
Vivian J. Oleen is an associate broker with Sopher Realty.