Application Red Flags

Reviewing potential buyers can be stressful for a co-op board. Concerns about whether a particular person will fit in with the community can be easily assuaged by an interview, but before you get to that point, beware of red flags in the financial application. For example, imagine a buyer with enough money to buy a unit with cash. It may sound like a great opportunity for the building, but is there a hidden risk?

“If someone says, ‘I own my own business, and I really don’t show a lot of money on my taxes, but I have a bag full of money and I’m buying with cash,’ we have a dilemma,” says Carl Cesarano, a certified public accountant at Cesarano & Khan. “We don’t have hard data to analyze whether or not this person is going to be a problem.”

Without tax returns, pay stubs or other financial documentation, the board has no way of knowing if the purchaser can make monthly payments. Using the threat of foreclosure as a cudgel to ensure timely payments won’t matter when the building’s cash flow is interrupted.

Additionally, some buyers are getting what’s called a no-documentation mortgage. These loans are made with no evidence of a borrower’s income. “Instead,” says Cesarano, “the loan is based on a declaration confirming the borrower can afford the loan payments. The assessment of the loan is based mainly on the resale potential of the secured property and the repayment structure of the mortgage.”

He adds: “Some boards used to make buyers in this situation put a year’s maintenance in escrow, but with the new tenant protections, you can’t demand more than a month.” While the question of how the Housing Stability and Tenant Protection Act of 2019 applies to co-ops is still up in the air, many co-op boards are following the new rules out of an abundance of caution, which restricts this kind of protection.

What can a board do when presented with an all-cash buyer? The unfortunate reality is that there are no hard-and-fast rules. It’s up to each board to decide if a buyer is worth the potential headache down the road.

According to Cesarano, the board has “to make that hard decision or find an alternative to minimizing the risk. Or, if they end up in arrears, we could try and foreclose and wind up in Housing Court, which in New York is another nightmare.”