The Total Package
The Buyer's Application Process is Changing
In the best of circumstances, qualifying an applicant for a co-op or condominium purchase can be a challenging process. Market conditions play a part in a board's consideration of applicants, and recent fluctuations have changed the way both buyers and lenders are looking at real estate acquisitions.
In January, Manhattan-based appraiser Miller Samuel Inc. and brokerage firm Prudential Douglas Elliman released a joint fourth quarter 2011 sales report, and the news was mixed. The report noted that as a result of the European debt crisis, New York City sales fell 12 percent in the fourth quarter from the previous year. The report also stated that purchases of condominiums and co-ops declined to 2,011 from 2,295 in the fourth quarter of 2010. However, there was some good news as well, as the median price of units climbed 1.2 percent from the first quarter to $855,000.
When buyers are interested in purchasing, it’s usually the co-op board that holds the cards. They investigate prospective buyers and eventually either bet on the applicant or pass. Condominium boards don’t have as much power, but many are slowly moving toward the co-op board model in hopes of securing the best-financed owners. As a result, the approval process for each is different, from time tables to legal issues.
“From a theoretical starting point, the processes are completely different,” says Manhattan-based real estate attorney Ronald H. Gitter. “With a co-op, the board of directors has the ability to turn down a buyer, but a condo board can only either issue a waiver of its right of first refusal to purchase the unit, or purchase the apartment on the same terms provided in the contract of sale.” Needless to say, the latter scenario doesn't happen often.
Years ago, when it came to a condominium purchase, there was very little board oversight during the application process. Due to market shifts and the ongoing recession however, the approach is slowly changing—although Gitter notes that, “Even today, with new construction sales from a sponsor, there is no application; just the ability to close. Over time, a number of condo boards have tried to act more like co-ops by requiring extensive applications. If the buyers resist submitting all the documentation, the application can be deemed incomplete.” He jokingly refers to this strategy as a case of “co-op envy,” but warns that buyers should expect a comprehensive evaluation of their finances and references, regardless of what type of unit they're trying to purchase.
What Do You Want From Me?
Boards often have difficulty communicating their expectations and requirements clearly and effectively to the brokers who handle the sales for their building. As a result, the application process can often be cumbersome and lead to a lot of second-guessing and procedural headaches. Therefore, it is recommended that brokers meet regularly with the managing agents of buildings they do business in so expectations reflect the building's current reality.
“Co-ops [and condos] should communicate their expectations and requirements through their managing agent, and they should also list their expectations and requirements in their board package/application instructions,” says Mitchell Hall, an associate broker with the Corcoran Group.
Manhattan-based residential and commercial real estate attorney Adam Leitman Bailey agrees, and notes that a board should do its best to secure the most favorable price on sales units, as this improves the value of the building for current and future sellers. “Good boards are accommodating to the brokerage community and supply building information readily,” he says. “If a building has certain financial requirements, this should not be kept secret. In New York City where very few brokerages control the market, this information can easily be passed with a few phone calls or emails by the managing agent.”
Educate to Understand
As is the case with all board-related transactions, there is a learning curve when it comes to buyer applications. Variables such as new legislation or changes in the market must be taken into consideration. As a result, due diligence and a working understanding of all aspects of a building’s profile is essential to making sales transactions go as smooth as possible.
To keep the wind in the proverbial sails, during every application process, boards should be equipped with the information they need to make an informed decision about a prospective purchaser. First and foremost, they need to verify that the applicant can afford the unit and related fees.
“Boards need to know whether the applicant can afford the unit and the mortgage,” says Bailey. “They need a list of assets and liabilities and proof of every line...certified tax returns, employment documents independently verified by the employer, bank account statements, trust agreements, verified loan documentation, mortgage and verification of any other debt. Also, I would want to see two months bank account statements, references, housing and state Supreme Court searches to see if the applicant has been in litigation before concerning their home.”
Obtaining the aforementioned information is easiest when a board is comprised of members who have prior experience reviewing applications, or who were recent applicants themselves. Additionally, board members need to know who to turn to for answers such as brokers, counsel or the building’s managing agent.
“Brokers become educated in the process by successfully representing both buyers and sellers,” says Hall. “They should know their buyer client’s finances and qualifications before showing them apartments. They should discuss the documentation and financial requirements early in the process. Prior to the interview they can coach their clients and offer tips to help them pass the board interview. They can have their manager review the board package before submitting it,” he continues. “When representing co-op sellers, it is important for the listing broker to discuss the buyer’s qualifications and likelihood of passing the co-op board with the seller rather than advising the seller to only consider the highest offer.”
Avoiding Common Errors
Bailey’s firm, which handles hundreds of residential closings annually, says there are common protocol mistakes made on each side of the table. “I always tell my clients that if they have any questions about an applicant, make sure those questions are not asked at the interview. [The buyer] is at the interview to be approved, and any questions the board has should be determined from another source such as the broker, managing agent or seller,” he says. “The only function of the buyer at the interview is to convince the board that they will be good neighbors. Less talking usually leads to an acceptance while loose lips sink ships—and deals.”
“A few years ago, my office would see rejections because the sales price was not high enough,” says Bailey. “We would realize why the applicant got rejected, and in some cases we got the offer increased to get the client approved and the deal closed. Boards served as the housing police during the housing boom, keeping out buyers who could not afford to pay their maintenance, common charges or mortgages. This has led to very few cooperative foreclosures compared to the rest of the market.”
While a stringent board can be a good thing when it comes to defending and preserving the financial stability and market cache of a co-op, too many rejections can flag a building as unattractive or unapproachable. And while it is imperative for boards to review an applicant’s financial standing thoroughly, there are lines of inquiry that are considered infringements, explains Gitter. “Boards can’t discriminate based upon age, race, religion or sexual preference,” he says. “Other than that, the Business Judgment Rule gives co-op boards’ great leeway in requiring information.” Whereas a board can ask for employment records and salary history, it cannot discriminate due to an applicant’s specific occupation.
In an effort to streamline the application process, new software has been introduced into the marketplace, and while industry professionals feel it a progressive step forward, adoption rates are slow.
“I think the use of software and electronic applications is the way to go,” says Hall. “REBNY and the brokerage community have been advocating this for years along with a standardized co-op and condo application. Unfortunately, I have yet to see any co-op that accepts an application and board package online. Some co-ops and managing agents have websites where the application can be downloaded and typed on to but they still require it printed on paper along with copies and collated sets of copied documents.”
New Government Rules and Regulations
Even a “bulldog” board is only as strong as regulations and legislation which have changed in light of the foundering economy. “This is one of the biggest issues facing co-ops and condos right now,” says Gitter. “It’s not just FHA, but Fannie Mae and other lending guidelines that particular banks are imposing.”
“This has impacted the approval process tremendously, he continues. “There are many situations where the buyer signs a contract, puts in his or her loan application, a loan commitment is issued, then maybe two to three weeks later the bank might come back and raise an objection about the co-op or condo such as insufficient reserves, insufficient insurance, serious litigation issues or other variables.” As a result, Gitter says many co-op and condominiums boards do not want to deal with addressing the issues and will not complete the transaction, which is fundamentally changing the application and approval process. This is a “post-Lehman Brothers” market reality, he says.
Hall explains that most New York City co-ops require a 20 percent minimum down payment. As a result of this ‘restrictive covenant’—as well as others such as board approval and flip taxes—the FHA does not loan to co-ops. However, there are a handful of condominiums in Manhattan that have been approved for FHA loans. “They are primarily in new construction condos in fringe neighborhoods that have had problems selling, so they applied for FHA approval. Most New York City condos are not eligible for FHA loans because the right of first refusal is also considered a restrictive covenant.”
“Many banks,” continues Hall, “have their own guidelines but the new Fannie Mae requirements have had some adverse effects on the co-op and condo application and approval process here in New York. It is no longer just a matter of the borrower being qualified for a loan, the co-op and condo must qualify, too.”