December 29th 2011
The New York Times
EVEN as 2011 was a year of stable prices and steady sales in Manhattan real estate, it may go down in history as a banner year for co-op and condo board vetoes.
Real estate brokers, lawyers and property managers all said boards had significantly stepped up their financial scrutiny of prospective buyers in the last year. Condo boards technically cannot reject prospective buyers, but brokers say some condo and co-op boards now use delaying tactics and requests for further documentation as a strategy to drive away certain buyers.
It was a year in which many real estate rules seemed to have been turned on their heads. Condos behaved like co-ops. Buyers with mortgages were looked at more favorably than all-cash buyers. Why? The reasoning goes that since mortgages are so hard to come by, anyone who gets one has been thoroughly vetted by the bank.
It also became much more common for buildings — co-ops and condos alike — to ask buyers to put large sums of money in escrow as a way of guaranteeing that they would not default on their monthly carrying charges.
Many buildings asked buyers to put six months’ to two years’ worth of maintenance into escrow. But brokers also said that in these uncertain financial times, some buildings had asked for escrow of as much as 10 years’ worth of maintenance. “That sounds to me like a nice way of saying goodbye,” said Paul Gottsegen, the director of Halstead Management, which manages more than 200 buildings.
One such case was handled by Warburg Realty. Frederick Peters, Warburg’s president, said the amount requested for escrow, which was in the hundreds of thousands of dollars, “seemed crazy to me,” but the buyers agreed and the deal went through.
Mr. Peters said he did not know why the board had been so concerned about the buyers. “We don’t get to ask those questions,” he said, adding that the buyers were a young married couple with parental guarantors who were “very financially solid.”
Mr. Peters said Warburg used to see only a few such deals in a given year, but handled more than 20 in 2011. “That’s a lot of deals,” he said. “But if escrow is a way for a board to get comfortable with a buyer, I’d much rather have that than a board turndown.”
Steven D. Sladkus, a Manhattan co-op and condo lawyer, says most buyers who have the wherewithal will agree to escrow accounts, “because it’s still their money and in most cases, they’ll get it all back if they pay faithfully for a year or two years.” In some cases, though, buildings ask to maintain the escrow indefinitely.
But Jessica Cohen, an executive vice president of Prudential Douglas Elliman, says some buyers take offense when they get an escrow request. “They see it as the board considering them unfit to buy without an insurance policy,” she said.
Ms. Cohen estimated that about a third of her deals last year involved an escrow request, so she now routinely mentions the possibility to all her buyers. “It’s better to let them know it’s a possibility rather than have it come up as a surprise at the point of a board approval and risk having the deal fall apart,” she said.
Brokers and property managers said that these days, deals that used to take a month can take two to three months, as boards request a second or third year’s worth of tax returns and other financial documents or an escrow account. Boards have also become much more selective in other ways.
“People that would have passed boards two years ago, offering to pay all cash, aren’t passing now,” said Leslie Modell Rosenthal, a managing director at Warburg. Some condos now frown on investors, she said, even though that category of buyer has helped sustain condos for years. Other buildings that routinely approved purchases involving parental guarantors are no longer doing so.
“Even if there isn’t an outright rejection,” Ms. Modell Rosenthal said, “some boards will drag their feet to the point where the buyer gives up and goes away.” Boards are not required to give their reasons for turning down an applicant, but brokers say it is often because they feel he or she has too much debt, not enough liquidity or not enough of a job history.
Although some high-priced exclusive buildings have sought buyers with liquid assets of two to three times the purchase price of an apartment, buildings have typically expected them to have about two years’ worth of mortgage and maintenance in liquid assets, or $50,000 to $100,000, depending on the size of the apartment. But today, brokers say, many more buildings want buyers to have several hundred thousand dollars in liquid assets.
Ms. Modell Rosenthal said she worked with a 28-year-old buyer recently who had been turned down by an Upper East Side co-op board, she suspects because he was a single young man and his parents were paying all cash for the apartment.
“He was a truly lovely young man, and he had a three-year job history,” she said, “but he had no liquidity.” She decided to resubmit his board package after getting character references from his former neighbors, and the board eventually approved him. “I knew he was the right candidate for the building,” she said. “I just had to educate people that he was the right candidate. It shows that if you go back with enough ammunition, you can turn it around.”
Condos as a rule cannot reject buyers, though they can exercise a “right of first refusal,” which means the condo board can block the sale by opting to buy the property. But since many don’t have the financial reserves to buy apartments, they use stalling tactics more typically associated with co-ops.
“The way they flex their muscles is to ask for documentation,” said Dan Wurtzel, president of Cooper Square Realty, which manages about 450 buildings. He said more condos now had very specific lists of required information, similar to criteria in a co-op board package. “If a purchaser doesn’t complete that list,” Mr. Wurtzel said, “the application can be considered incomplete. And our instructions are: we don’t turn it over to the board until it’s complete and we have all the documentation.”
Property managers said that some co-ops and condos were turning down or holding off applicants not just on the substance of the application but on its presentation. Mr. Gottsegen, of Halstead, says some boards request colored dividers, numbered tabs and information placed in a specific order according to a table of contents. “If the package isn’t in the exact form they’ve asked for,” he said, “they’re rejecting it, or at the very least are not happy about it.”
Brokers said they had mixed feelings about the heightened scrutiny and tougher standards being enforced by building boards.
“There’s no question that the financial vigilance of co-op boards contributed to the stability of the Manhattan real estate market during the big economic downturn,” said Mr. Peters, of Warburg, pointing to much lower rates of foreclosures and defaults than elsewhere. But this level of vigilance is sometimes unnecessary, he said, “and in some cases, quite detrimental to the seller,” especially if a buyer is rejected and there are no guarantees that a second buyer would be willing to pay the same price.