The Rent is no longer “Too Damn High.” This phrase, made famous during the Jimmy McMillan’s humorous mayoral candidacy a few years ago, still has me giggling today. But not for long. What if the bar is still too high for some renters or buyers, despite a vastly different landscape from Jimmy McMillan’s epic rant?
Rents are still down 25% or more from pre-COVID levels. It is a time when many people are more than content to plunk down a still-sizeable rent amount and save in this market. However, if their credit happens to be low, new state regulations no longer allow landlords to collect extra security deposit to get comfortable with a tenant with poor credit. The landlord may just reject the tenant in turn.
The same thing may be happening on the sale side. Some buyers, instead of buying a home in the overheated suburbs, have chosen to take advantage of being “priced into” this market in Manhattan, or Brooklyn.
However, cooperative buildings have been hamstrung by this rule, an unintended consequence that is punishing the people the rental law was meant to help.
Imagine this. A buyer has slightly less income or assets than a cooperative building would like. In the past, the board would ask the buyer to place monies in escrow, for twelve or twenty-four months, just to ensure that the buyer was meeting his/her/their obligations to paying monthly maintenance. A bit draconian, but plausible. Now, in a situation where a cooperative building would have asked this of slightly less-qualified buyers to get comfortable, they can no longer do so.
What are the options for a cooperative board now? (1) They may just choose to reject an otherwise lovely buyer. (2) They may search for other options where they aren’t holding the escrow, but perhaps a bank is.
One such option in lieu of an escrow account is an ILOC, an irrevocable letter of credit. Let’s say that a building wanted a buyer to put $100,000 in escrow for a period of time post-closing. For a very small sum, say $1000, a bank may guarantee a borrower will have $100,000 available, should the buyer ever fall behind on obligations. In this case, the buyer would have to keep monies in an account per his/her/their agreement with the bank, and the building could call on those funds at any time if necessary from the bank.
The only issue is which banks permit this, and if the coop wants to run the risk of getting into trouble with the new state rule. Is this a loophole? I don’t think so, but some board member might.
It’s quite a conundrum. Perhaps the window for less-qualified buyers is closing, given the amount of buyer activity in the marketplace. Bidding wars usually mean more conservative sellers, to be sure.
Either way, no seller wants to see nice people get rejected by their cooperative board, for what seems like a simply board request that is no longer legal.
What do you think? -Scott