Yet another saga to report on the absolutely ridiculous behavior that some co-op boards exhibit. In May of last year, my team and I brought a property on the market that wasn’t without it’s challenges as far as procuring a buyer. Some of those challenges were directly related to current Board policies:
- NO SUBLETTING ALLOWED under any circumstance (a bit unusual for this type of building)
- NO PIED A TERRE ALLOWED (also unusual for this particular building)
- FLIP TAX (10% of profit and not uncommon these days)
These three factors played a very large part in turning away a multitude of qualified candidates who weren’t interested in these policies. Many in fact considered making offers but chose to continue their search for a less "oppressive" building. Those who did make offers within the 6 month marketing period were not financially qualified to pass the Board’s stringent requirements (the current owner, a banker, was asked to put 3 years of maintenance in escrow).
In November, 2006 a contract was signed for the purchase of this property and fully executed by all parties. The Board application including all financial documentation and mortgage commitment letter was submitted to the Board of Directors in December. So imagine our surprise when we only found out on March 5th that the Board would APPROVE these applicants if they agreed to put 2 years of maintenance in escrow to be held for 5 years and to have monthly maintenance payments automatically deducted from their bank accounts. I should also add that the purchasers are financing less than 30% of the purchase price. The purchasers agreed to the Board’s requests and they were GRANTED FORMAL WRITTEN BOARD APPROVAL.
In the meantime, the seller has been compiling receipts for renovations and the like to offset profit in calculating the flip tax. Those receipts were submitted yesterday. I had totally thought that the closing would have been set while I was on vacation last week but I received this email from the purchaser’s agent upon my return on Sunday (forwarded from the managing agent of the building):
I just got off the phone with a few Board members and they want the following form Mr. & Mrs. "Purchaser".
Updated financial statement with verification (recent statements)
Update monthly cash flow statement (same format as the other one)
And 2006 income tax returns with W-2s
This is not an unusual request, particularly when the Board took so long to review, interview and approve. However, it is HIGHLY UNUSUAL when formal Board approval has already been granted as it has in this case. In my 15 years, I have never encountered this from a Board. None of my colleagues have either, some of whom have been doing this much longer than I. Having said that, the purchasers did change their mortgage provider and their mortgage product to a more conservative one just two weeks ago after Board approval was received. Becuase of this, the Board asked the following questions (answers from purchaser follow):
1) Why the last minute change (in mortgage)? Citimortgage Commitment expired and getting extension was lengthy process (they want to close and contract was signed in November).
2) Why didn’t the purchaser’s inform the board of the change prior to the board meeting? We were told that the getting the commitment extended was a simple process. It turned out that all the original information had to be resubmitted and reprocessed as if it were a new application.
3) Why is the board hearing about this now? Because we are now trying to get closing as soon as possible. The new commitment with Countrywide was only received on 3/16/07 well after we were approved by the Board.
4) What happened with the loan at Citimortgage? The Citimortgage Commitment expired and since it had to be extended we were required to submit all new documentation. We decided to review all of the options available to us. The Countrywide Mortgage is a 30 year fixed loan which we felt more comfortable with than the interest only loan with Citimortgage. With Countrywide we will be paying down the principal starting with the first payment. The Citimortgage was going to be interest only for 10 years,
5) Is the old mortgage payment and rate available, if not what happened? Citimortgage’s mortgage rate was floating until the closing date when it would be fixed. There was no ‘old rate" on the Citimortgage.
6) Why didn’t the purchaser’s try to extend the rate lock extension (if this was available to them)? See answer to question 5 above
7) What made the purchaser’s decide to change from Citimortgage to Countrywide? Suggested by our mortgage broker, The mortgage broker worked for Home mortgage acceptance Corp this was taken over buy Countrywide mortgage. and we are more comfortable with a traditional 30 year fixed rate loan.
The moral of the story: Co-op Boards are sometimes made up of people who don’t wholly understand the processes in which they are involved. These purchasers changed their lender which happens all the time and they are actually getting a better rate and better terms that should be more favorable to the Board. I suspect that some Board members are reading way too much about the sub prime mortgage market implosion (which doesn’t apply at all to this situation) and are reacting to the fact that they are familiar with Citimortgage and perhaps not so with Countrywide? Again…pure speculation on my part as a real estate professional and former board member. Who really knows what they are thinking?
Advice to purchasers: Keep your prospective co-op Board in the loop regarding all changes to financial documentation and lending institutions and/or mortgage products. If the board feels that you are open with them and not trying to "sneak" something by them, they will be more likely, in my opinion, to cooperate (after all you are buying a "co-operative") making the process more efficient and less painful for all involved.
Stay tuned for the update to see if these purchasers ever move in to their new home???