Jerome Strelov Esq.

Obtaining a Mortgage Pre-Closing

The typical scenario for purchasing a cooperative unit with a mortgage is as follows: a mortgage contingency or non-contingency clause is drafted in the contract.  Most cooperative boards require a copy of the mortgage commitment letter as part of the purchase application so the purchaser cannot submit the application until they have obtained the commitment letter.  The purchaser then typically may have 30 days to obtain the commitment letter after signing the contract followed by a few business days after receipt of the letter to submit the application to the board.

The practical result of purchasing the unit with a mortgage is that the purchase application will be delayed until a mortgage commitment is obtained.  This is very unattractive for the seller who needs to know if the buyer will pass the board’s muster as swiftly as possible.

Obtaining a Mortgage Post-Closing

If it is feasible, the purchaser may want to consider buying without a mortgage and obtaining a mortgage after the closing.

However, this has several pitfalls.  First, under IRS Publication 936, the purchaser will not be able to deduct the interest from the financing unless the mortgage is obtained within 90 days of the closing date.  This time constraint could be an issue on multiple fronts.  First, the new shareholder will be required to obtain the cooperative board’s consent prior to being allowed to get the mortgage.  As such, there is the risk that the cooperative board may not approve of the shareholder’s decision to obtain financing.  Second, even if the cooperative board is amenable to the mortgage, they may be unhurried in approving the same.  Consequently, the board’s approval process puts the shareholder at risk of not meeting the 90 day deadline mandated by the IRS.

Another disadvantage of obtaining the mortgage post-closing is that the interest rates available to the borrower may not be as favorable.

However, this may be worth the risk to the buyer who really wants to trump the competition.

By Ryan V. Stearns and Jerome J. Strelov

“And how many copies do I really need to submit?”

What happens to those copies?  A mystery for sure but one would hope, for the safety of the applicant and the liability of the co-op and its board, that all copies are promptly and properly shredded.

But whose to say some perverted board member doesn’t keep the materials for use at a later date?  How can that be prevented?  In today’s age anyone with a $100 scanner can distribute someone’s entire financial portfolio to the entire planet in about 30 seconds.

And the kicker to all this is that the board members receiving this vital private information quite often do not have the ability to evaluate it.  Very few are accountants or have any real knowledge of what is in or, even worse, missing in a financial statement or whether particular investments make any sense.  So the buyer has his entire $1,000,000 portfolio in a company that builds nuclear power plants in Japan or in another high-risk investment. Is that good?

What to do?

Here is a simple and practical solution.

Have the financial material submitted to an independent accounting firm with knowledge of the co-op’s requirements.  The buyer would pay for the review.  The accounting firm would determine, based on the particular board’s standards of income and financial strength, whether the buyer meets these standards or not or what it would take for the buyer to qualify (for example should there be a guarantor or an agreement to put in escrow up a year or so worth of maintenance).  The accounting firm would be bound to destroy all financial information.

In this simple solution, shareholders need not worry that the neighbor who smirks while saying “Good Morning” in the elevator knows their entire FINANCIAL life.  They need not worry that the psychopathic board member may have retained copies of their most sensitive materials or that some person with absolutely no knowledge of reading financial materials holds all the cards in determining whether he or she is qualified to buy their dream home. In short, one’s neighbors will not see the results of this financial colonoscopy.

This would work particularly well in re-refinancings.  Many co-ops require a full set of financials when existing shareholders seek to refinance their loan especially one that takes out more money.  In these situations, embarrassing and or sensitive information need not be circulated among one’s neighbors.

A downside to this solution would be that board members would have some of their power diminished and would have to satisfy their curiosity fetishes elsewhere.

But remember board members, Curiosity Killed the Cat.  Just think of how many prospective buyers would not shy away from co-ops and what that increased demand would do for co-op prices.

Of course this would not diminish all review by the Board. They would still be reviewing the prospects’ history (are they litigious, do they have a history of disputes with their past neighbors, etc.)

On the other hand, board members would not have to waste their time reading and analyzing boring and often misleading financial information and could spend their time and energy doing the real business of running a building.

I think it’s high time that the process of buying a co-op be made more palatable