Co-ops That Demand All-Cash Purchases Could Be Hiding Problems

The rise in interest rates has pushed a record number of co-op buyers to make all-cash offers, especially at the high end of the market. Some co-op boards have begun demanding all-cash purchases exclusively — a tactic for ensuring the financial solidity of buyers while enhancing the building's aura of exclusivity. But there are downsides.

One is the the effect cash-only policies have on the pool of potential buyers. "The question for the prospective purchaser is whether the advantage of such a board policy outweighs the disadvantage," Kevin Mcconnell, of counsel at the law firm Himmelstein, McConnell, Gribben & Joseph, tells Brick Underground. "The advantage is that the other tenant-shareholders are not burdened by the obligation to pay monthly maintenance and mortgage; only the former. The disadvantage is that it narrows the potential buyer market and drives down the price."

Adds Deanna Kory, a broker at Corcoran: "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. 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."

Another downside is that a cash-only policy could actually be a way of masking unseen, and unpleasant, financial problems. Is the reserve fund running dry? Are costly repairs overdue? Have monthly maintenance fees been rising?

To find answers, potential buyers and their brokers should take a close look at the co-op's documents — past board meetings minutes, bylaws, offering plan, maintenance trends, repair history, scheduled repairs and upgrades, and so forth. Such investigations can reveal that things are not as they appear.

For example, Curbed stumbled upon a $99,900 studio apartment in a middle-class co-op located on Billionaire’s Row, a luxe stretch of developments in Midtown Manhattan. Seems like a great deal right?

Not so fast. That co-op at 100 West 57th St. sits on land the building doesn’t own, and the long-term land lease is set to expire next year, which could expose shareholders to a sharp rise in rent. If it's sharp enough, residents fear the co-op could dissolve and its shareholders would turn into tenants. Not the kind of building you want to buy into, especially with an all-cash offer.

In a footnote, a bill in the state Legislature sought to cap the amount landowners could raise rent on their land. The bill, opposed by the Real Estate Board of New York among others, failed to gain traction and died a quiet death. A group advocating for the bill, the Ground Lease Co-op Coalition, said that it will keep pushing for the legislation to protect middle-income shareholders in the city's 100 land-lease co-ops from exorbitant increases.