Cash-Only Co-ops: Exclusive Clubs or Red Flags?

Q: Is it legal for a co-op board to allow only all-cash purchases of apartments? 

A: "Financing restrictions in cooperatives are legal," Jeffrey Reich, a partner at the law firm Schwartz Sladkus Reich Greenberg Atlas, tells Brick Underground. "Some super high-end cooperatives maintain a 'no financing' policy in order to maintain the exclusivity of their building and to provide assurances as to the financial wherewithal of the shareholders." 

Co-op boards in these buildings are also likely to be very particular in looking at a prospective buyer's financial and employment history. Purchasing in such an exclusive co-op may deliver a greater sense of security to shareholders, but it also presents challenges when it comes time to sell. 

"The only downside is that there’s a limited number of people who can truly afford to pay all cash and have the financial requirements that are required," says Deanna Kory, a broker with Corcoran. "Just remember when you go to sell, your buyer pool will be far more restricted, so it may take longer to sell and find the right type of buyer who can pass the board."

There are pro's and con's to buying into such co-ops. "The advantage is that the other tenant-shareholders are not burdened by the obligation to pay monthly maintenance and mortgage; only the former," says Kevin McConnell, a partner at the law firm Himmelstein, McConnell, Gribben, Donoghue & Joseph. "The disadvantage is that it narrows the potential buyer market and drives down the price." 

However, in some co-ops, an all-cash requirement could be a warning sign of money trouble. If the building you're considering is not particularly high-end, the board may be resorting to a "no-financing" policy because there are major cash-flow issues. If this strikes you as a possibility, you'll want to take a closer look at the building's documents—another reason working with a good broker and attorney is so important. 

"It could mean that the apartments are not financeable, due to the level of underlying debt, high levels of shareholder defaults, or existing litigation, among other possibilities," Reich says. These might include a low level of owner-occupancy, something banks frown on. "A review of the board meeting minutes or questions directed to the management team could provide an explanation of the reason for the policy." This is a time to do due diligence and to remember two timeless words: caveat emptor.