A Guarantor Is Not a Guarantee

The situation. Driven from the city by the pandemic, many co-op shareholders are trying to sell their apartments. But when co-op boards vet potential buyers, it’s sometimes a challenge finding applicants who meet their building’s financial requirements. Many boards won’t approve sales backed by a guarantor. Given the pressures of the pandemic and the city’s soft real estate market, is it time to reconsider such a policy?

The bottom line. A third-party guarantor is a financial backstop. The guarantor signs an agreement with the co-op, usually after signing a contract with the purchaser, to step in if the buyer – who remains the sole shareholder – defaults on their financial obligations. Guarantors are often parents or close relatives of young buyers who lack an established credit history or substantial savings. Typically, guarantors must own their own property and present tax returns, pay stubs and bank statements to the co-op to prove their financial fitness.

Risky business. Even so, boards need to be aware that a guarantor isn’t an ironclad guarantee. “They may be solid financially today, but not tomorrow,” says Carl Cesarano, a principal at the accounting firm Cesarano & Khan. “If the guarantor can’t make the maintenance payments, the board may then have to start a lawsuit against the shareholder, which will cost time and money. In the meantime, they’re not getting their monthly payments.”

A safer bet. Cesarano says boards can protect themselves by setting a high bar for guarantors, such as requiring an income in excess of 40 times the monthly maintenance, the conventional bar for buyers. “Another option,” he adds, “is approving a purchase where a third-party guarantor company signs a contract with the buyer to cover the maintenance in case of default. But boards need to read the fine print before approving such a purchase, because that coverage may only last for a certain period of time.”