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Buying a Co-op with ‘Dummy Money’

March 5, 2016

By Ronda Kaysen

Padding the Coffers

My fiancé and I bid on an apartment in the Bronx that requires us to have at least two years of mortgage and maintenance in savings, which we could borrow from a bank. I have two friends who have been approved by tough Manhattan co-op boards after they filled their coffers with “dummy money” from their parents — money that their parents lent them temporarily until the sale closed. I want to do the same, but my fiancé worries that we could get caught, leaving us legally on the hook for false representation. I think his fears are unfounded. Could the board really demand to see our financial statements after we own the apartment? What is the worst-case scenario?

Spuyten Duyvil, the Bronx

Just because your friends game the system does not mean you should, too. Instead, trust your fiancé, whose moral compass seems to be steering him away from deception.

If you accept a gift, your lender would require you to sign an affidavit stating that the money is a gift, not a loan (and your co-op may do the same). By knowingly signing a false legal document, you would very likely be committing fraud. “It’s like lying on your tax returns,” said [a managing director]. “If you don’t get caught, you still lied on your taxes.”

Do not count on the bank to cover your shortfall. Your lender might not loan you the extra money because, like the co-op board, it might want to see that you have several months of mortgage and maintenance in savings.

As for getting caught, once you own your apartment your co-op board probably does not have the right to examine your financial statements again — and if you pay your maintenance every month, it would have no reason to care.

But many boards have become savvy to such schemes and often require buyers to place a lump sum in an escrow account for a few years as a condition of board approval, said Andrew C. Jorges, a Manhattan real estate lawyer. So Mom and Dad might not get their money back anytime soon.

As draconian as these rules sound, the lender and the co-op want to protect themselves should your finances suddenly take a turn for the worse. “Housing cooperatives are only as strong as their financially weakest shareholder,” Mr. Jorges said. Once you are a shareholder in the corporation, you might feel differently about the scrutiny new buyers face.

I can understand why you might not have two years’ worth of monthly payments lying around after you hand over a hefty down payment. You would not be the first leveraged buyer to set foot in New York.

“They used to say that if it didn’t hurt when you bought it, you didn’t spend enough,” said [a financial adviser].

But you should have some money set aside for the unexpected; even if nothing goes wrong, you might need to buy some lamps and throw pillows when you move in.

“It’s crazy not to have some money left over after you’ve made a purchase,”said [a financial adviser]. Rather than lie about your finances, try to find a co-op with rules that fit your financial realities. Not all make such stringent demands.

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