The buyers were getting what today amounts to a steal: a 3,000-square-foot Soho co-op loft for $2 million. Their jobs were stable; income was more than adequate; references were excellent; their liquid savings equaled four years of maintenance. They had $1 million for a down payment. Yet they got turned down. The couple counteroffered, volunteering to place two years’ worth of maintenance in escrow. But the answer was “unequivocally no,” says their lawyer Sandor Krauss.
No one really knows what’s behind a board turndown—co-ops don’t have to reveal their logic—but experts say they’ve seen more than the usual share lately. “It has been a bad period for board turndowns,” Warburg Realty president Frederick Peters declared recently on his firm’s blog. Krauss says his office “has definitely seen an increase in board rejections of applicants that, only a year ago, would have been fully qualified.” Nobody keeps a count of board rejections, but StreetEasy.com data do show a remarkable year-over-year uptick in the number of broken contracts for co-op deals, many of which are likely to be board turndowns. In Manhattan, there were 53 in September, up 70 percent from August. It’s the highest monthly total this year, and the third-highest in two years. (By contrast, nineteen condominium contracts were annulled last month.)
Some of this is simply the result of a bad economy, which causes banks and boards to scrutinize buyers more closely than ever. Sometimes, though—and boards will rarely say so—they’re loath to approve sales at low prices, fearing that other apartments in the building will be devalued by association. “No board will ever confirm it, but I do believe that I’ve seen cases where deals were rejected because the price was not high enough,” says Barak Dunayer of Barak Realty. “If the price is too low, that becomes a comparable,” he says, using the industry term for a similar sale by which future asking prices are set. Indeed, as with Krauss’s Soho clients, the loft building hadn’t had a sale in years; it would’ve certainly influenced future valuations.
Can anyone really tell when price is the issue? After her buyers were rebuffed, lawyer Cheryl Dresner combed one co-op’s minutes and saw that at annual shareholders’ meetings, the board announced current “dollars per share” appraisals based on recent sales, suggesting a lot of attention paid to that number. Attorney Brian Tracz says one Queens client was candidly told that a price “floor” hadn’t been met; that buyer has since come back with a higher offer. Another applicant wasn’t interviewed until he offered to pay more than his initial offer had been. (He was approved.) “The implication was clear,” says Tracz.
Whatever fuels rejections, boards may nevertheless have to “face reality,” says Dresner. “Do they want the apartment sold or do they want unhappy shareholders [with unapproved sales] living there—and have the apartment not sell for more the next time, anyway?”