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Board to Buyer: Nah. Not at That Price.

BUYING or selling a Manhattan co-op has long presented unexpected pitfalls and moments of unique drama. But as real estate prices continue relatively flat, one obstacle has become more prevalent: Co-op boards are rejecting sales outright if they deem the price of the apartment to be too low.

Some boards are so determined to hold the line on prices that they are unswayed by buyers’ offers to place years of maintenance fees in escrow, to increase the down payment and even to pay in cash.

Co-op boards aren’t required to disclose the reasons they reject applications, which makes it difficult to determine just how often buyers are being turned down because the offer isn’t as high as the board might like. But interviews with more than a dozen Manhattan real estate experts, including brokers, board members and real estate lawyers, suggest that boards are saying no more often as they seek to maintain the value of the apartments in their buildings amid a sea of price-conscious buyers.

“In the last month,” said Aaron Shmulewitz, a real estate lawyer, “I must have had 5 to 10 questions about that from various boards that have turned down or have contemplated turning down purchases for price, as well as various purchasers who contacted us for being turned down.” Mr. Shmulewitz oversees the co-op/condo practice at the Manhattan law firm Belkin Burden Wenig & Goldman.

“I don’t know if prices have gone down, or if boards are expecting the price to go up,” he added. But the incidence of board rejections because of low sales prices has been “markedly increasing.”

Outside of New York, such impediments to homeownership are largely unheard of, because co-ops are so rare. But they account for 75 percent of the housing stock for sale in Manhattan, according to Jonathan J. Miller, the president of the Miller Samuel appraisal firm. And although some condos now also ask buyers to submit financial information when they apply, co-op boards subject potential shareholders to more rigorous scrutiny, often requiring reams of financial and personal information, right down to references for pets.

Many buyers are willing to undergo the anxiety-inducing process to get into the Manhattan market, where inventory has become particularly tight. But few are willing to overpay. At the same time, some sellers who lack equity or the economic stability to trade up to a new apartment have decided to cut their losses and list their apartments for prices lower than they had hoped.

“If you’re desperate to get out because you’ve been waiting for two years,” Mr. Miller said, “you sell for what you think you can get.”

Evelyne Luest hasn’t quite reached the desperation level, but her patience is running thin. Ms. Luest, a professional pianist, listed the Hudson Heights one-bedroom apartment that she uses as a practice studio for about $300,000 in 2009, just as the market was beginning to plunge.

Earlier this year, after repeatedly lowering the asking price, she was pleased to receive an all-cash offer for $225,000 — slightly less than 6 percent below the asking price of $239,000 —from a fellow musician, Thomas Bergeron of South Hadley, Mass. They went into contract in the summer. Mr. Bergeron made plans to move. Everything seemed to be falling into place until the board rejected his application.

Ms. Luest said she had spoken with two board members and the building’s sponsor, who all confirmed that price had been a deciding factor. “It’s a business problem,” she said. “It’s not good business for them to sell apartments for a low price.”

After he was turned down, Mr. Bergeron, who recently began a two-year teaching fellowship, offered to put a year’s worth of maintenance in escrow upfront and to have his mother sign as a guarantor — even though he was paying the $225,000 in cash. But he drew the line at paying a higher price, which was suggested by Ms. Luest and her broker as well as Mr. Bergeron’s broker, Kelly Cole of the Corcoran Group.

“In my opinion,” Mr. Bergeron said, “the price we went into contract on was the market price.”

In the end, Ms. Luest decided not to pursue the offer. Mr. Bergeron is now renting, and she has relisted her apartment at the slightly higher price of $259,000.

Credit…Illustration by Christoph Hitz

The board, reached via the building’s management company, declined to discuss its decision.

For all anyone knows, there may have been other reasons Mr. Bergeron was turned down. His profession as a trumpet player could have raised the issue of a potential noise threat.

“I don’t understand how it can be legal for them to deny people without giving any reason,” he said. “It really surprised me that that was O.K. to do.”

As long as it does not discriminate illegally, a co-op can turn down a sale for practically any reason. And recent court decisions have held that a board’s decision to reject apartment sales because of a low price falls within its business judgment.

Compared with just three years ago, “a board’s price-based rejection of an apartment transfer is much more likely to be protected and insulated from challenge in 2012,” said Eva Talel, a partner at Stroock & Stroock & Lavan in charge of the co-op/condominium board representation group. In January she co-wrote an article in The New York Law Journal about co-op rejections based on pricing. “I think courts began to feel a greater comfort level in addressing the issue of the scope of the board’s business judgment to deal with what is a legitimate concern for buildings,” she said. “If prices are not sustained at a certain level, then it would likely have a negative impact on the values of other apartments.”

If the only thing holding up a sale is the price on paper, brokers say there are ways to get around the problem. Earlier this summer June L. Gottlieb, a broker at Warburg Realty, encountered a seller who would not accept her buyer’s $690,000 cash offer for a Midtown East pied-à-terre listed at $700,000 for fear the board would consider it too low and not approve the sale. The buyer refused to increase his offer because the apartment, which was part of an estate sale, needed a total renovation.

“The only way to get the deal done was to agree to split the flip tax,” Ms. Gottlieb said. The buyer paid more for the apartment in the contract, but at the closing the seller wrote him a check for part of the flip tax, “so the contract read at a price that would be acceptable at the board,” she said.

Another creative solution, brokers say, is to increase the purchase price on paper and create an offsetting credit, or a “seller’s concession.” A buyer willing to pay, say, $770,000 for an apartment listed at $800,000, would assent to the $800,000 price, then at closing receive a credit of $30,000 in the form of a check from the seller to be used for renovations or other improvements. That way, the buyer would pay no more than previously agreed, the seller would be able to sell the apartment, albeit at a cost, and the transaction would be recorded at a price that pleased the co-op board.

Such deals are completely legal, as long as the marked-up sales price is disclosed in the transaction documents and all parties understand and agree to it, said Mr. Shmulewitz of Belkin Burden Wenig & Goldman.

But Barry Weidenbaum, a New York real estate lawyer, pointed out that some banks and co-ops “may not view such an arrangement as proper.” Some banks, for example, limit seller’s concessions or credits, often capping them at 6 percent, he said.

While secrecy is typical in cases of rejection involving price, some co-op boards are taking a more direct approach. Steven R. Wagner, a real estate lawyer who is on the board of Southgate, a five-building co-op complex in the East 50s near the East River, said sales price had not been an issue there until earlier this year. “Suddenly, there were three or four apartments that came up, all of which were significantly lower than where the apartments had been previously selling for,” he said.

But rather than flat-out rejecting applicants who otherwise would have passed muster with the board, he said, “we actually took a chance and raised the issue with the broker and individuals and said, ‘Listen, before we say no to this application, we want you to know it’s because of this, and if you wanted to submit a different contract price, very likely no would be yes.’ And people did in fact come back.”

Still, even with the best intentions, boards that try to control sales prices may end up hurting themselves. “The irony,” Mr. Miller said, is that “by being too aggressive in policing transfers of property in your co-op, you can actually make it worse.” When apartment deals are repeatedly turned down because the board wants a higher price, the properties end up lingering on the market. The inference, he pointed out, “is they are overpriced when they’re not.”

The board unwilling to approve a lower price for an apartment may also be missing a signal from a seller who is experiencing financial distress and could end up defaulting on maintenance if unable to sell. And co-ops that repeatedly turn down applicants for price reasons also run the risk of gaining a reputation as a tough building — which could ultimately backfire.

“This always says something to me about the board in the building,” said Ms. Cole, the broker who represented Mr. Bergeron, the trumpet player, “and it sends a really bad message. Now, when working with a buyer, I say: ‘By the way, just know there was a board turndown here with a cash buyer, and they pulled the rug out from everyone. So buyer beware.’ ”

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