Co-ops are a huge part of NYC’s real estate market, despite the fact that anything being built today is a condo. I’ve explained the differences in property types, mentioned how the unique mechanisms for approving buyers help keep the city’s real estate market stable, and outlined the process for purchasing one. But today I want to talk about one of the downsides of co-op purchasing, something that has become more common over the past two years in a challenging sales market: board rejections.
The Good
There is a reason that co-op boards have a right to reject someone for nearly any reason (minus racism/sexism/ageism/etc). When you buy into a building with other people you are buying into a community, and they want to . If you are extremely mean during the application process when you should be on your best behavior, they will probably imagine you’re only going to get worse once you move in. If you claim not to smoke and it’s a non-smoking building, but you show up at the interview reeking of cigarettes, you may not be the right fit. Yes, sometimes this turns sour with board members making a business decision too personal, but sometimes it’s for the benefit of all parties involved.
They also want to make sure that you are financially qualified. Bank lending standards vary wildly, even since the crackdown in sub-prime mortgages after the ’08 crisis. And the seller may not care that a buyer would only have $10 left over after closing. But allowing someone who can’t really afford to buy purchase a home puts the building at risk. This is a problem in condos that causes the apartments to go up and down in value whereas co-ops tend to fluctuate less.
The last positive rejection reason is to protect the building. If too many units in a building are owned by the same person or company, or if too many are rented out at one time, it can cause issues with banks’ ability to finance a building. Meaning you could be going to sell and the buyer can’t get a mortgage. And nothing drops the value of a home faster than it needing to be a cash deal. Yes, there are cash buyers, but any time you limit your buyer pool you are taking money out of your own pocket.
The Bad
Boards are made of human beings, meaning they are fallible and sometimes make poor choices. There are two common and incredibly stupid reasons that these boards reject buyers. I’m sure there are others, but these have come up a lot over the past couple years.
The first is a rejection because the buyer has “too much money” to purchase a home. This is usually because one person on the board, often who was a holdover tenant from when the co-op was still formed, or someone who bought decades ago for 45 cents and a cow, and thinks that the building needs to retain . It’s a bias against wealthy people that is often also bias against millennials. Sorry, guys, millennials with trust funds are the ones who can buy right now. It’s not their fault that they have money, and they aren’t inherently evil or lazy because they do. If they are buy8ing in a co-op that means they DO have their own source of income, so why don’t you welcome this influx of money rather than listen to the chip on your shoulder?
The second, which was INCREDIBLY common in 2019, is a rejection because the board doesn’t like the price. Since about 2015 the market has been in a correction, meaning that while it was going up and up each year from about ’08-’15, prices have been dropping since. In 2018 no one seemed to buy anything because sellers and buyers were so far apart with what each wanted. So then in 2019 sellers became more realistic and were able to meet buyers in the middle.
The Ugly
Co-op boards are allowed to reject someone for ANY reason, as long as it isn’t against fair housing laws. But again, boards are human. And it’s not like these people have taken legal training to be on a board. They just happened to own in the building. That’s the only qualification. So here are some real examples of completely bullshit reasons that shouldn’t be tolerated, but sometimes are.
The first example is a couple purchasing in a co-op where she mentioned in her letter to the board how excited she was to raise her baby in the new apartment. The board rejected her and the seller was told this was because the board decided she would probably stop working soon and they wouldn’t be able to afford a nanny or appropriate help on just the husband’s salary. This is speculative, sexist, and disgusting.
The second example is a co-op that has decided it wants to keep the “cultural integrity” of the building, i.e. only accept buyers of a certain race or nationality. It’s not always white; this can be a reaction to gentrification as well, where a building tries to keep “too many” white people from moving to an area. This is clearly racist and illegal, no matter the perpetrators.
The last example is ageism, where someone on the board doesn’t trust the new buyer at his/her word because of age. Yes, I’m a 35 year old professional, but that doesn’t mean I’m going to Airbnb this apartment! Yes, my money came from legal activities; I showed you all my documents and tax returns. Yes, I plan on living here and being part o the community. No, I’m not flighty and irresponsible just because I’m younger than you. There are few things more frustrating than following the rules and doing everything right only to be told by someone that you’re clearly lying and actually breaking the law. Again, this isn’t legal, and it shouldn’t be tolerated.
So overall, I love co-ops. Not every co-op is for everyone, and you need to shop around to find the size, amenity level, and vibe that works for you. Really, the only reason to avoid co-ops is if you want to buy the property to rent out for passive income. If you want to live there, it’s an amazing way to buy into a stable community and pay far lower closing costs/75 cents on the dollar compared to a condo.
And I think as co-op boards are slowly dragged into the 21st century, the process will just become less painful. As much as they fight it, we need oversight to make sure that racism, sexism, ageism, and other illegal reasons for turning someone away are eliminated. Because right now it’s just another example of the smallest amount of power potentially turning someone from a homeowner into a control freak who wants to keep anyone he doesn’t like out of the building.
If you do buy in a co-op, I also highly recommend you get on the board. Because if you’re reading this, you’re clearly better educated about real estate than most of the public, and will ideally be good at following all the laws. They exist for a good reason!
xo
Anna