Judging If Buyers Are Fiscally Fit

The power to vet prospective buyers’ financial fitness gives co-op boards both their fiercest reputation and their biggest responsibility. It’s a power fraught with pitfalls. Be too strict, and you get labeled a “difficult” building, which can hurt sales. Be too lenient, and you risk allowing in shareholders who may go into arrears – to the detriment of the co-op’s overall financial health. 

Boards have a fiduciary duty to make sure an incoming shareholder is “financially viable” and able to pay the monthly maintenance charges, says attorney Geoffrey Mazel, a partner at Hankin & Mazel. 

But how do you do that? Is there some statistical formula a board can plug numbers into that will pop out the answer – whether or not to recommend approval? Sadly, no. There are no formulas, but there are guidelines, says Jesse Berger, an associate broker with Douglas Elliman Real Estate and the treasurer at his own co-op. Such guidelines differ from building to building, but they usually have room to be flexible. “It is rare for a co-op board to be absolute,” Berger says. Bruce Robertson, a broker with the Corcoran Group, suggests that boards take a holistic approach: “They should ask themselves, ‘What’s the big picture? How do we put the puzzle together?’” The answer is likely to vary from co-op to co-op. 

“Some co-ops don’t even have set rules of thumb,” observes Stanley Greenberg, president of the 32-building, 1,024-unit Le Havre co-op complex in Whitestone, Queens, and a professional accountant for other co-ops. “It’s not a free-for-all,” he notes, saying there are commonly used guidelines. But different co-ops apply them differently. “Some co-ops have leeway,” he says, “and with others, if you don’t make the number, you’re out.” 

Even if a buyer has qualified for a mortgage, it doesn’t mean he or she is automatically viable. “When I see they’ve been approved for a mortgage, that’s nice,” Greenberg says, “but we use our own criteria.” After all, the board and everybody else in the building have to live with the buyer. The bank doesn’t. 

How do you make sense of it all? What guidelines work? Are they purely mathematical, or do they also reflect a co-op’s culture? And how do you work up guidelines that make sense? It’s actually a lot simpler than it seems. And besides, says Mazel, boards usually have professional management, an accountant, and an attorney. “They’ll help with the process,” he notes. 

For the big three fiscal fitness tests – down payment, debt-to-income ratio, and liquidity – some boards make their numerical requirements known ahead of time to brokers and buyers, so as to avoid the time and trouble of vetting people with little chance of hitting those targets. Other boards might have no exact requirements, preferring to judge case by case. And others may have requirements but, to keep their flexibility in decision-making, decide not to make them known. 

In the end, all boards must decide what works best for their building.