Buying August 23, 2013

Why You Can’t Steal a Co-op

While the real estate market here in Westchester and the Hudson Valley is certainly on the mend, one vestige of the old buyer’s market, the would be-buyer with the low ball offer, is still with us. Typically, the justification for the low offer is one of two things: the property is unsold, or the property needs work. In cases where the home is unsold, well, duh. If it were sold you wouldn’t be considering it for purchase. In cases where the place needs work, the agent population has done a poor job of educating the public on the adjustments for improvements needed. For example, while a new kitchen might certainly cost $20,000 or more, it is not always valid to make a $20,000 adjustment. Why? Because the current kitchen is not worth $0, that’s why.

Still, lowball offers do persist, mostly on the wishful thinking speculation of lookers playing the numbers game and hoping they can catch lightening in a bottle. One sector of the market where such a practice is more futile is the cooperative apartment. While a low offer might have a 1 in 50 or 1 in 100 shot in the case of a single family home or condo, with co-ops the odds are almost impossible, even if the seller were to agree. The reason is simple: the co-op board can reject the purchase on the grounds of the price.

From the New York Times last October:

Co-op boards are rejecting sales outright if they deem the price of the apartment to be too low.

Some boards are so determined to hold the line on prices that they are unswayed by buyers’ offers to place years of maintenance fees in escrow, to increase the down payment and even to pay in cash.

Co-op purchases are subject to co-op board approval. The board can reject a perfectly qualified buyer with no reason given, and they can also reject a sale for being too low. In technical terms, they are doing so to preserve the share prices of the complex. In a co-op transaction, the purchase is not really of real property, but of stock in a corporation, and instead of a deed, the new owner (still often referred to by many co-ops as a lessee) get a proprietary lease.

Now I certainly understand how someone from Ohio or Nebraska would read this and shake their head. I have often said that if co ops were introduced in 2013 as a new form of home ownership they would be dismissed as a scam.  They are whacked. But they are also very common in New York, and not just Manhattan. Westchester has long regarded co-ops as the “starter home of Westchester” because there really isn’t any other type of home you could commonly  buy -and live in- for under $150,000 and often under 100k. But low offers persist for a variety of reasons.

Co-op board have one mission: to preserve, protect and defend the share prices. They therefore evaluate the financial qualifications of the prospective buyer closely to ensure they can pay their common charges and be a responsible member of their cooperative with great scrutiny. But it doesn’t stop there. They can, and do, evaluate the purchase based on the price. many sales have died because of this, but many of those contracts should never have been submitted. Forewarned is forearmed. If you are in the market to buy a co-op, do understand this fact: many boards will not approve a price if it is too low.