As this recession grinds along with no end in sight, many co-op boards are finding they have to adapt when it comes to admitting new shareholders. Some boards are opening the front door a bit wider, eager to facilitate apartment sales. Others are making it a bit harder for buyers to squeak through, wary of getting burned like the buildings they’ve read about in such foreclosure hells as Las Vegas and Miami.
“Boards, like banks, are more conservative today,” says Melissa Cohn, president of the Manhattan Mortgage Company. “They’re looking for strong buyers, they’re looking for people who can weather any storm. In general, we’re seeing that many boards today want buyers who are fiscally conservative – taking a fixed-rate mortgage, for example, or not having an interest-only loan. They’re also looking for bigger down payments.”
Some boards demand a down payment as high as 50 percent – or more – says Steven Shore, a partner in the law firm Ganfer & Shore, LLP, which represents more than 100 upscale co-ops and condos, mostly in Manhattan. He’s quick to add that money isn’t everything. Even a cash payment for the entire cost of an apartment doesn’t satisfy some co-op boards if other areas are not covered.
“Boards look at a whole bunch of criteria,” Shore says. “Is the buyer’s income sufficient? Does he have enough savings to carry himself for six months if he loses his job? Even if he can pay cash for the apartment but doesn’t have a job, it’s a no go. In most of our buildings the criteria seem to have remained constant since the recession hit.”
Even so, Shore advised one co-op board against publishing its tried-and-true admissions benchmarks on its website. To do so could tie the board’s hands, he says, and could even lead to litigation. “We believe you need to look at the total picture,” he says. “There are many factors, in addition to your criteria, that come into play when considering a buyer. For example, the applicant has strong financials and a good job – but he was convicted of molesting young girls. The board needs to look at the entire package and use its reason. We advise against an admissions policy that’s unbending. There can be exceptions that go both ways – the child molester on one hand, or a buyer who suffered an illness that skewed his average income for the last three years. You shouldn’t box yourself in.”
Money may not be everything, but it’s far from nothing when considering a potential buyer. And buyers who bank on sizable yearly bonuses are banking on the wrong kind of money. “Bonuses are not necessarily earnings,” Shore says.“If your salary is not sufficient to pay the maintenance – if you’re depending on a bonus from your employer or gifts from your father, such as a trust fund – a lot of co-op boards would not look favorably on such an applicant. The whole concept is to find someone who can afford the apartment.”
Even before the recession took its pound of flesh from Wall Street’s bonus-happy “masters of the universe,” the board at a 234-unit co-op in Washington Heights began to regard a fat bonus as a sign of potential danger in a buyer. “We started making a mental adjustment for bonuses before the recession hit,” says George Karpodinis, president of the co-op’s board. “If a potential buyer’s bonus exceeds his base salary, that’s a red alert. What happens when they hit some soft years? We made sure that if they didn’t get a bonus, they could still cover the monthly maintenance. Once those bonuses did start disappearing, a lot of people [in other co-ops] were in trouble because they’d bought on the basis of those bonuses.”
The proof, as Karpodinis sees it, is in the numbers. His building has suffered zero defaults, and only one shareholder has fallen a few months behind on his maintenance – an arrears rate of less than one percent.
That, in fact, points to the good news. New York City’s foreclosure rate is well below Las Vegas and other hard-hit cities, and the unique nature of New York co-ops, with their historically strong boards, has something to do with that. Even in those heady pre-recession days when banks were making the sorts of unwise mortgage loans that led to the financial meltdown, most co-op boards were giving close scrutiny to all aspects of every apartment sale, including the price, the type of mortgage and the fitness of the buyer. They still do.
“Co-op boards used to be the police,” says attorney Adam Leitman Bailey, a partner at Adam Leitman Bailey, a firm that represents more than 100 co-ops in the city. “In the past, banks might give crazy loans, but co-op boards wouldn’t accept them. Now the banks are doing their own due diligence – demanding to see a loan applicant’s tax returns, for instance – and co-op boards aren’t needed to act as police anymore.”
The one area where the recession has forced many co-op boards to relent is on price. “I don’t see any boards rejecting a deal now because the seller’s number is not high enough,” says Bailey. “They would like to keep a base minimum price – it helps keep up value throughout the building – but that’s not happening anymore. They’re realizing they have to help sellers get whatever price they can. The glory days are over for a long time. I think we’re back to way things were in the early 2000s, before things got crazy.”
In the end, the most valuable thing the city’s co-ops have going in their favor may be experience. The great wave of conversions from rentals to co-ops began in the 1980s, so many of today’s board members and shareholders remember the stock market crash of 1987 and the ensuing recession, which was also a brute.
“Many of these co-ops have been through recessions before,” says David Goodman, a senior executive at Tudor Realty Services. “They’ve seen how you get through it – you just sit tight and pay attention to your shareholders. You’re vigilant, but nobody’s panicking. They’ve come down in price, and apartments stay on the market longer in some cases. But desirable apartments are still desirable, and they still get snapped up.”