Friday, February 29, 2008

Getting a Divorce? Don't Buy A Co-Op!

Urban Digs
by Christine Toes
February 29, 2008 at 12.21 PM

I seem to be living in co-op HELL these days. See my post on the nightmare of the proprietary lease renewal here.

My latest adventure was working with a customer who was going through a divorce. I didn't think it was a big deal that he didn't list alimony or child support payments on his financial statement because none had been determined yet. Word to the wise: Going through a divorce? Don't buy a co-op.

Co-ops are generally looking for:

- 20 - 25% down payment (sometimes more, rarely less)
- 18 months at a minimum and most likely 2 years of mortgage and maintenance payments left over in reserve in liquid assets (401Ks and IRAs do not count!) after the down payment (Sutton Place and Park/5th Ave buildings frequently look for much higher reserves - this at least gives you a ballpark requirement for most co-op buildings)
- A 25 - 28% debt to income ratio (if your payments are $3,000/month, you need to gross about $12,000/month)

So if you are going through a divorce where you may be required to pay alimony or child support in the future, a board is going to be very concerned about your future debt to income ratio, even if your current numbers are great.

In this case, my customer had 2 years of payments in reserve, he was putting more than 20% down on the apartment, he had a great job history, a credit score of 770 and had a 26% debt to income ratio.

After submitting the board package, the board's managing agent asked for my customers divorce settlement paperwork. I explained that the divorce wasn't final and no paperwork had been drawn up yet. We ended up having to get a letter from the wife stating that her husband wasn't going to have to pay alimony or child support. I felt terrible for my customer and can not imagine how awkward it must have been for him to ask his wife to do this for him.

But even the letter from the wife wasn't enough for this building. The board then asked my buyer to put a year's worth of maintenance payments ($11,000) into an escrow account for an indefinite period of time. Although the broker rumor mill is that other people in the building have asked for and received their escrow $ back after one year, there is really no absolute guarantee that the building will give it back until my buyer sells his apartment. Different buildings work their escrow agreements differently.

Toes says:

If you are going through a divorce, buy a condo!

If you can't buy a condo, be prepared to furnish any paperwork that has been drawn up, or be prepared to have an attorney or your soon to be ex draft a letter to the board about estimated (or better yet, maximum) alimony or child support payments.

If you are going through a divorce be prepared to offer a year or two of maintenance to be kept in an escrow account to make a co-op board feel comfortable with your future debt to income ratio and reserves.

If you buy a co-op when you are going through a divorce, you'd better be be overly qualified to buy the apartment! Don't submit joint bank statements because naturally the board will assume that only half of the funds in that account will end up being yours. As my mother always said, "a woman should always have her OWN MONEY!"

When buying a co-op, plan to bear your heart and soul to the co-op board. Nothing is sacred! NOTHING.

My wife and I bought a co-op a year ago. We had great credit scores, solid job history, put 20% down, debt ratio under 25%, good amount of liquid left over and we had to put 2 years of maintenance into an escrow account. It is more common now with most buildings we looked at that were co-op.

Posted by Craig | February 29, 2008 2:08 PM


Are you saying the co-op boards are enforcing income and reserve requirements more than they had in the past year or two? Are they reacting to the credit situation by being more diligent in enforcing their existing rules or is this how they have always treated divorcing people?

Posted by Pez | March 1, 2008 10:22 AM

Hi guys! It seems more and more common that boards are asking for one or two years of maintenance to be put in an escrow account. All you need is one person in the building who stops paying their maintenance for a board to become more strict with a buyer's financials.

I do feel that with the current credit environment and layoffs on wall street, those working in finance, especially those who make a lot of their income in bonus, are at a higher risk of a board turn down than they would have been before the credit crisis.

The issue of putting funds into escrow isn't that big of a deal if the board will give you a straight answer on how you get the funds BACK. Some boards will give the funds back to you in a year if you have successfully paid your maintenance on time and can show that your financial situation is better than it was when you purchased the apartment. Some boards make no promises that you will get the funds back until you move out! So you have to be careful about the wording of the actual escrow agreement. You should definitely have your real estate attorney review it.

Additionally, when I sell my co-op, I will add a clause to the contract that the buyer must be willing to put one year of maintenance into an escrow account should the board require it. There is nothing worse than a board approving someone conditional on them putting maintenance in escrow and having the buyer say "nope!" Then the buyer can back out of the deal and the seller is stuck starting all over again.

Posted by toes | March 2, 2008 7:42 PM

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