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Coop vs Condo
The Undesirable Rich
New Yorkers in search of apartments
are subject to lots of tests -- nerves, will and endurance foremost among
them. But increasingly, many well-employed buyers who haven't flunked so
much as a pop quiz in their achievement-studded lives are failing one exam
in droves: the liquidity test.
Though fortunate enough to be able to afford
today's sharply higher sticker prices, these apartment-hunters are denied
entrance to co-ops despite comfortable incomes of six figures or more,
excellent credit, and credentials as citizens in good standing. They are
unable to buy simply because they don't have enough left over (typically in
cash, stocks and bonds) after the down payment to meet the requirements of
the co-ops they want to join.
What's deemed enough varies among the caste system
of the city's co-op buildings, but at the lowest end, it includes a year or
preferably two of maintenance and mortgage. In the pricier buildings with
the kind of family-sized apartments coveted by up-and-coming professionals,
''enough'' equals one, two or three times the purchase price of the
apartment -- and keeping up with multiples in a spiraling market can be a
daunting feat.
''People tell us all the time: 'I don't
understand. I make $1 million a year and you're telling me I cannot buy an
apartment?''' said Jacky Teplitzky, an executive vice president at
Prudential Douglas Elliman.
Her colleague at Douglas Elliman, Ann Cutbill
Lenane, an executive vice president who represents sellers of family-sized
apartments on the Upper West Side, said: ''It's not about whether you can
afford it or get financing. If you can chew gum and walk at the same time,
you can get financing. It's really about, do they have enough money to get
to the board?''
Often, they do not. ''Take an average $1.5 million
classic six apartment on Lexington Avenue,'' said Kathy Braddock, a partner
at the real estate consulting firm Braddock & Purcell, which matchers
buyers with agents. ''To buy there, you have to put 25 percent down, and
then they want to see $1 million in liquid assets, plus earning power. Most
people have not saved $1 million in liquid assets if they are in their
mid-30's or early 40's and don't have a job with huge bonus potential.''
Boards requiring significant assets are said to be
either blind or unsympathetic to the notion that old ratios need to be
updated to account for the current market. ''The problem is they're using
the same geometric formula, but in absolute dollars it's becoming very
difficult,'' said Daniela G. Kunen, a managing director with Douglas Elliman.
''Most co-op board members couldn't pass their own requirements.''
Still, in a clenched housing market where bidding
wars erupt like hives, boards can usually afford to be stubborn. And some
agents reason that the boards may be more worried about the higher
leveraging that goes hand in hand with higher prices. ''I think that as
prices go up, potential shareholders are taking on enormous financial
responsibilities, and so boards are being as careful as they need to be in
that environment,'' said Mindy Diane Feldman, an agent with Halstead
Property.
A darker spin is that certain boards are taking
advantage of the tight market to refashion their building's reputation. ''I
think every building wants to upgrade themselves,'' said Michele Kleier,
president of Gumley Haft Kleier. On the Upper East Side, she said, ''a lot
of the side-street buildings that are B-minus buildings want to be B-pluses,
so if the board is difficult, the harder it is to get in, the more people
want to get into it.''
Still others point out that real estate agents
themselves bear some of the blame by overscreening applicants to hedge
against a board turndown. Indeed, brokers increasingly screen buyers before
even setting an appointment to view an apartment.
''I think that a lot of brokers create the
strictness of the co-ops as opposed to co-ops really being strict on their
own,'' said Lauren Cangiano, a senior vice president at Halstead. ''When
there's competition and bidding amongst multiple buyers, the bar is raised
partially because of that. They're naturally going to choose the buyer who
is best qualified -- overqualified. And then unfortunately that leaves
someone who's qualified without a place to live, because it seems there is
always someone who has more money than you and they're going to win.''
The zeal to avoid a turndown can trigger
perplexing results. Klara Madlin, president of Klara Madlin Real Estate on
the Upper West Side, recently helped a banker and a doctor buy a $3 million
Riverside Drive apartment. They wanted to pay cash, she said, but Ms. Madlin
advised them that ''the board would rather see liquidity and a mortgage.''
The couple wound up financing half of the price with a mortgage, with the
option of paying it off after the closing. ''It's kind of crazy,'' Ms.
Madlin acknowledged.
As more buyers discover they are co-op unworthy,
they are turning to condos -- even though it almost always means spending
more for less space. Samantha Kleier Forbes, a broker at Gumley Haft Kleier,
recalled the liquidity-challenged young couple she worked with recently. The
couple sought an Upper East Side co-op in the $1 million to $1.5 million
range.
''We wound up upping their budget until finally
they spent almost double, close to $3 million, on a condo,'' she said.
Other co-op refugees make tradeoffs to stay within
their budget. Early last year, Amy and Bill Soviero, both 34, began working
with Robert McCabe, an agent at Halstead, to find a two-bedroom apartment on
the Upper East Side. Mrs. Soviero, an analyst for Citigroup, and her
husband, a sergeant with the New York City Police Department, had saved
about $280,000 -- much of it from the recent sale of their renovated home in
Mount Kisco, N.Y., -- and earned a combined annual income in excess of
$250,000.
The couple figured they could easily afford to
carry an $800,000 apartment. But in March, they lost out on a two-bedroom,
two-bath co-op with outdoor space at East 64th Street and First Avenue for
which they bid $820,000. ''They wouldn't even take our application because
we weren't two years' liquid after down payment; we were maybe six months,''
Mrs. Soviero said. ''Both of us had substantial savings in our 401(k) but
they wouldn't count that.''
With their broker, they concluded that their
chances were slim with any co-op board. ''At best, they were topping out at
$650,000 for a co-op,'' said Mr. McCabe, their broker. So they decided to
hunt for a condo. ''It was totally frustrating because we're a reasonably
young couple with good savings, good jobs and perfect credit scores,'' Mrs.
Soviero said. ''It's just a mystery to me why we couldn't get past these
boards. On paper we look ideal. There was just not enough liquid assets to
do it.'' Last summer, they paid $785,000 for a similar-sized two-bedroom
condo -- farther uptown and minus outdoor space -- in Ruppert Towers at East
91st and Third Avenue. ''I don't think we'll be here forever,'' Mrs. Soviero
said, ''but for right now we're very happy.''
Even Wall Street and hedge-fund employees earning
several million a year can ring up short in the cash department. For one
thing, many co-ops disregard bonus income, labeling it discretionary, and
count only comparatively small base salaries that seldom climb beyond
$200,000. For another, stock options and even vested stock are usually not
considered sufficiently liquid. (Nor are 401(k) plans or Individual
Retirement Accounts.)
Ms. Kleier said she is working with a client in
his 20's who is shopping for a condo in the $4 million range because he
doesn't have the liquid assets to buy a co-op. He is typical of clients who
are ''making several million a year but also spending several million a year
and just haven't gotten ahead and accumulated the liquid assets that they
need,'' she said. For young people with that kind of money, she said, these
condos are stepping stones to the life they eventually envision.
''People who really want prewar Park and Fifth are
considering these $3 million or $4 million condo apartments starter
apartments,'' Ms. Kleier said.
Ms. Forbes agreed, adding, ''I have no doubt that
in 5 or 10 years, they'll be buying $10 million co-ops on Park and Fifth.''
It's not just buyers who find their options
drastically narrowed by liquidity requirements. Sellers are feeling the
pain, too.
Ms. Teplitzky described the fully renovated
two-bedroom postwar Park Avenue co-op that she began trying to sell last
August. The apartment is in a building where buyers must show an amount
equal to the purchase price in liquid assets. Only after multiple offers and
two price drops -- the apartment was finally listed at just over $1 million
-- did a buyer arrive who seems able to meet the requirements. There is now
an accepted offer. Without the liquidity requirement issue, she said, ''I
have no doubt it would have been sold in two or three months, tops.''
''The problem we have had has been finding buyers
who can actually pass the board,'' she said. ''A two-bedroom for a young
family with that kind of money isn't enough anymore -- they want a classic
six. The family with one child doesn't have enough assets.'' According to
Ms. Teplitzky, the most qualified shoppers tended to be empty nesters who
wanted to use the apartment as a pied-à-terre, which isn't allowed under
the building's rules.
Jon Cole, 32, recently made a full-price bid for a
$230,000 Brooklyn Heights studio but was turned down by the co-op board.
''The boards are out there putting these rules in and they're not really
benefiting the people who live in the building,'' said Mr. Cole, who had
been prepared to put 20 percent down and could easily carry the apartment on
the comfortable salary of a fifth-year associate at a large law firm. ''They
didn't think I was liquid enough,'' he said. ''If I'm a sort of a marginal
candidate and make more than 95 percent of the people out there, it seems
problematic.''
He noted that the apartment is back on the market
and has been vacant a total of seven months. ''If I can't sort of easily
come in and buy this place with my finances, and it's just a studio, the
thought of being able to resell it seems sort of bleak,'' he said.
Some agents see boards' refusals to look beyond
stringent liquidity measures as a hallmark of a new era of strictness.
''Everybody seems to be getting a little more paranoid in this day and
age,'' said Ms. Cangiano of Halstead. Ms. Teplitzky added, ''Now it's not
enough to get a brokerage statement, now you have to analyze the brokerage
statement,'' to determine how high-risk a buyer's portfolio may be.
For their part, condominium boards -- which can
reject a buyer only by purchasing the apartment -- now typically require a
board package nearly every bit as nosy as a co-op's. In some cases, to
discourage an unpopular deal, a condominium will stall with continual
requests for information in the hope that a weary buyer will walk -- or
until an irate seller threatens to sue.
According to scattered reports, some boards are
waking up to the need to revisit liquidity requirements, reaching out to
advisers like Steen Rasmussen, director of sales for Dwelling Quest, a
residential real estate brokerage firm, and Ms. Braddock of Braddock &
Purcell.
''It's like college,'' Ms. Braddock explained.
''You've got these kids who are very bright and really talented but maybe
not 1400 or 1500 on their SAT's, and right off the bat their applications
will not be looked at, at Brown or Harvard. It's the same on co-op boards.
If you're just looking at that number, then you're not going to look at the
whole picture.''
Wary of such blind spots, some buildings have
always steered clear of fixed formulas -- a practice lauded by David Hay,
president of Hay Management, which manages co-ops on Park and Fifth Avenues.
Mr. Hay noted that shareholder liquidity means far less to the market than
does the closing price of an apartment. ''There are buildings who want to be
perceived a certain way and have put in these multiples,'' he said. ''The
thing that makes a great building is having a great group of people. Money
doesn't do that.''
He counseled buyers to persevere. A family with
beautiful, well-mannered children may mean more to a building that craves
stability than ''someone with whopping big assets but who is not as nice,''
Mr. Hay said. ''Most board members are very conscious of the fact that there
is a family behind the application who dearly wants to make the apartment
their home. If you're relatively close and easily handle all your
obligations, you should not necessarily give it up so easily.''
Short of shareholder revolt triggered by too many
board turndowns, most observers said they believed that buyers are in for
more of the same -- even when it's their turn to make the rules. ''There is
a phenomenon that happens when people are outside the fence,'' Ms. Teplitzky
said. ''They hate the situation. But when they are inside they become the
social club. It's almost like an epidemic.'' On the other hand, she said,
''if the market goes down and people need to sell, and because of the
restrictiveness of the board, they are basically tied in with their
buildings, then those sellers will put pressure on the board.''
In the meantime, said Mr. Rasmussen of Dwelling
Quest, ''the important thing for the buyers to realize is that having the
down payment in a co-op is just not going to cut it, and having a good
salary is not going to cut it unless they have a long track record, in which
case their assets would probably be O.K. too.''
What happens to the insufficiently liquid? Some
find alternatives, such as co-ops with fewer restrictions, Mr. Rasmussen
said, but ''I would say the vast majority just ends up renting and
waiting.''
Ways to Skirt the Liquidity Trap
While despair may be a reasonable reaction to high liquidity requirements
imposed by co-op boards, it is hardly the only one. Many would-be buyers
stuff the ballot box with so-called enhancements to their applications.
''I don't think there's a single first-stage buyer
that I've worked with in the last two and a half years who has not had to
consider some kind of enhancement to their situation,'' said Mindy Diane
Feldman, an agent with Halstead Property and a former investment banker who
runs seminars for first-time buyers. An enhancement can include a gift from
a family member, a guarantor for maintenance, or a co-purchaser like a
parent.
''Seasoned'' gifts are those made months in
advance of a board package. So long as the total bankbook balance is in line
with a buyer's overall profile, it will probably pass muster. Gifts that
show up on financial statements submitted to the board must be accompanied
by a letter attesting to the fact that it is a gift, not a loan. And bear in
mind that in stricter buildings, any type of enhancement is the kiss of
death.
Another option is finding a co-op apartment that
doesn't require board approval. These fall into two camps: sponsor
apartments and no-approval co-ops.
Sponsor apartments are rental apartments put on
the market by the building's original owner. The first sale and sometimes
the second of such an apartment can be made without board approval. The
drawback is supply: sponsor apartments are few and far between and highly
coveted. ''You have to wait for someone to go out in a pine box,'' said Paul
Purcell, a partner at Braddock & Purcell, a residential real estate
consulting firm.
Ms. Feldman estimates that sponsor apartments go
for up to a 15 percent premium over comparable board-controlled units,
especially in neighborhoods like the Upper East and West Sides, which tend
to have fewer condos.
No-approval co-ops -- co-ops where boards possess
only condolike rights of first refusal -- are also highly sought after and
nearly as hard to find. They make up no more than 5 percent of the city's
co-op stock, estimates Arthur Weinstein, a Manhattan lawyer and vice
president of the Council of New York Cooperatives and Condominiums, who
represents two such buildings.
If all else fails, make an offer on an apartment
owned by someone on the building's board -- especially a board president.
Even though the board member will be recused from the approval process, he
or she will generally have more pull with the board, and in a building with
fuzzy requirements, that may make all the difference. - by
Teri Karush Rogers NEW
YORK TIMES 6 March 2005
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