Coop Board Rejections, Pricing Collusion?


There’s been a lot of arguing about collusion in the news.  “No Collusion!” is what we hear from our President.  Regardless of which side of that argument you come out on, you are probably disgusted and frustrated.  At the very least, it’s a distracting mess.

Don’t throw your hands up just yet.

A little closer to home, I am seeing what could be construed as collusion in the publicly reported sales prices of cooperative apartments.  And this should give you pause.

Cooperatives comprise about 70% of the housing stock in New York City, and at any point, about 50% of the listings on the market are coops.  There are ways which both condominium and cooperative boards can veto/impact the sale of apartments.

Condo boards can exercise a right of first refusal- and actually buy an apartment from a seller for the negotiated price on a contract.  Coop boards’ veto is murker and more nuanced- and seem to be rife with conflicts of interest.  The public could certainly take issues with what can be viewed in city or state records.

Coop boards can reject a prospective purchase with a “Board Turndown.”  The board does not have to disclose why they are rejecting a sale.  So, a rejection could be for any number of reasons- unqualified buyer, annoying buyer, a buyer who has a bad reputation, a buyer who is too “high profile,” a buyer who owns too many instruments, a buyer who is an opera singer, a buyer who may want to run a business out of their apartment.  Coop boards have been accused of sexism, racism, ageism.  Let your imagination run wild.  Or call me for stories.

And, a board can reject a prospective purchaser simply because the sales price is TOO LOW.

How is this handled?  Perhaps a seller has to infer the too-low price after 2+ rejections of perfectly-qualified buyers.   Alternatively, a board can officially reject a deal, then, behind the scenes, communicate that they reject the buyer for a too low price.  And….then the non-public conversations and what seems like a questionable practice kicks in:

  • The message is given that the price is too low.
  • The buyer and seller create an additional rider or change to a contract that increases the contract price to a level which is palatable to the board.
  • Generally, the lender on a deal (if there’s a lender) okays this change; since the lending requirements are nearly always less strict than a building, the increase in purchase price doesn’t impact the lender’s ability to lend the original amount the buyer wanted.
  • Here’s the important part- the deal also creates a CREDIT that the seller gives back to the buyer at the closing table.  The lender is aware of this, too, by the way.
  • The board package with the revised contract is re-submitted to the coop’s managing agent for review.
  • Presumably, the sale concludes and life moves on.
  • The sale price reported to the public is the HIGHER PRICE.

Jack Black is as dubious as I am on this practice.

No Collusion?

Perhaps you can see the issue here.  The public sees the higher price, with no awareness of the behind-the-scenes adjustments.  When it’s time for another seller to sell, or time to try and do price discovery, these sale prices are distorted, and are literally fakes.  How much of a change in price falls into gray?  Is there a limit when it becomes fraudulent behavior?  Is a lender’s awareness of this practice problematic for you?

In the abstract, I guess a lender wouldn’t care if the amount they already agreed to lend doesn’t change.  But this is incredibly concerning to me and not something that I’ve only considered or experienced in the abstract.  Currently, there is no way to find out what happens behind the scenes, as contracts are not recorded on the city level.

I cannot point to a particular cooperative, but I can tell you with certainty that this is going on.  The intention may be to bring more consistency to sale prices, and a coop board tries to act as a stabilizing force in their building.  But I certainly am not the arbiter of where the line is, and it seems that that line can easily, easily be crossed.

In a market where prices have softened, there may be more, perhaps much more, of this going on than in a rising market.  And the real sale prices of properties may be obscured by coop boards.  Really not ideal.

I think transparency is better.  What do you think?