Co-Op Boards are getting stricter, based on unemployment uncertainties and rising carrying costs

It’s an interesting time out there for co-op boards, to be sure.  While some are loosening their standards to attract more suitors, others are tightening them … the topic of this post.   

What does tightening actually look like?

Some are discounting buyer liquid assets based on market volatility and uncertainty.  This translates into shaving an existing equity portfolio down by 20-30%, and a bond portfolio by 10-15%.  For many Boards, cash has never been more important, with special attention being paid to income and truly liquid assets.   

In addition, if Boards are in any way uncomfortable with the financial profile of an applicant, some are now asking for up to 1 year of maintenance costs as a security deposit (versus merely in the bank).  Two years ago, these same applicants would have been accepted without this request. 

Why would co-ops tighten their acceptance criteria at this time?

1.      Many Boards are looking to their condo brethren who have had their share of troubles with people losing their jobs then becoming unable to pay their common charges.  They are seeking to avoid this fate.

2.      Carrying costs are increasing at a significant clip.  These are made up of real estate taxes, operating costs, mortgage interest and capital improvements.  Let’s see what’s happening to each:

a.      Due to N.Y. City revenue shortfalls, real estate taxes have gone up significantly for the 2009-2010 year, to the tune of 8-12%. 

b.      Operating costs are made of up labor, building maintenance/repairs, fuel, and insurance costs.  The latter two were skyrocketing in 2008 and 2009, and are now slightly lower.  That said, labor costs are anticipated to more than make up for that good news, based on current  early union negotiations.  The existing      4-year labor contract is coming up for termination this April 21st, city-wide for all co-ops and condos.  (Interesting fact:  the current union contract is valued at $70k per  union worker and the contract price per union worker goes up a preset amount each of the contract’s four years, which includes healthcare, salary and pension expenses.)  Boards are therefore “pricing in” a 4-5% increase in their labor budget, accordingly. (In anticipation of  year one of the expected new  four year contract.)

c.       Mortgage interest and capital improvements vary on a building by building basis, so there are no overarching trends to cite here. 

What should you take away from these trends? 

First, know what you’re getting into.  This means understanding that no two co-op Boards are alike.  While one might be getting stricter, another may be loosening its reins.   

Second, talk to your broker and make sure you have more than a “checklist conversation”.  Particularly when dealing with co-ops, it helps to have an agent who is adept with financials and can portray you in the best possible  financial light.  Does (s)he know what a front-end versus a back-end ratio is?*  Has (s)he asked more open ended question about your financial situation to fully understand it and potentially uncover non-obvious assets?  Lastly, now is not the time to get coy or tight-lipped.  Your agent is your partner and, as such, it is in your best interest to leverage this relationship to your advantage.    

If you walk in with your eyes wide open, realistic expectations and a good agent partnership, you should be able to navigate these ever-changing waters successfully.  Now let’s focus on the more fun question:  “china white or lily cream for the walls?”. 

*Front end ratio:  (maintenance + mortgage)/monthly income; 28% threshold.  Back end ratio:  (maintenance + mortgage + long term debt (s) )/monthly income; 35%% threshold.