Timing is Everything
Clear Enough, or is it?
Paragraph 6.2.1 of the printed portion of the standard co-op contract addresses the issue of when the Board package has to be submitted. When a contract is subject to financing, the buyer is not obligated to submit his or her Board package until the earlier of either the date on which the loan commitment period expires (usually 30 days after the date the fully-executed contract is returned) or 3 business days after the issuance of a “Loan Commitment Letter” by an “Institutional Lender”. As a matter of practice, the operative time frame is usually the latter. Seems clear enough, but the logistics can get a bit tricky.
When is a Commitment Letter Issued?
Banks have a bad habit of issuing a loan commitment letter, soon after the application is submitted, that is chock full of conditions that the borrower has to satisfy. In almost all cases, underwriting has not been completed as numerous conditions still have to be addressed. Further, most commitment letters are issued subject to the bank obtaining a satisfactory appraisal of the apartment. So, if the bank issues a commitment that is subject to a satisfactory appraisal, for purposes of submitting the Board package, has a commitment been issued that starts the clock running on the submission of the Board package?
What Does the Contract Provide?
Paragraph 18.1.2 of the printed portion of the contract provides as follows:
“An offer [to make a loan from an Institutional Lender] conditional upon obtaining an appraisal satisfactory to the Institutional Lender, shall not become a Loan Commitment Letter unless and until that condition is met.”
In human speak, what exactly does this mean? If the bank issues a commitment letter, for purposes of the contract, the commitment is not deemed to be issued until the bank has obtained a satisfactory appraisal (that is, an appraisal with a value for the apartment that is equal to or greater than the purchase price).
Logistics of Submitting the Board Package
As a result of the above, there is a timing factor that buyers should keep in mind as the bank works its way through the underwriting process. Once the commitment is issued and an appraisal is satisfactory, the buyer has 3 business days to get the Board package submitted. In practical terms, that means getting all of the buyer’s documentation to the buyer’s broker who will put the package together for review by the seller’s broker. Once the seller’s broker signs off on the package, it can be submitted to the managing agent.
If the appraisal is obtained too early in the process, and the commitment becomes effective, the buyer may not have finished putting the Board package together and might be late in submitting the package. As a result, the buyer, the buyer’s broker and the buyer’s bank, must be cognizant of the buyer’s obligation to timely submit the Board package. The issuance of the effective commitment should coincide, if possible, with the buyer’s completion of the Board package.
Why Is Late Submission of the Board Package a Problem?
Generally speaking, the co-op transaction should be a “win win” scenario. Seller wants to sell, buyer wants to buy. But when a buyer is turned down by a co-op Board, and the deposit has to go back to the buyer, a seller will often take a look at the buyer’s behavior under the contract to make sure the buyer has complied with his or her obligations before the funds are returned. After all, if the buyer did not submit the package in good faith, the seller could assert that the buyer breached the contract (Paragraph 6.4 of the printed form). If the seller can establish that the buyer acted in bad faith and intentionally submitted the package late as the first step in an overall plan to get his or her application rejected, things can get ugly.
Start Shuffling Paper as Soon as Possible
The best approach for the buyer is to start putting the Board package together as soon as the contract is signed by the buyer and submitted to the seller for signature. Don’t wait for the fully-executed contract to come back, just get started. As you get each piece of the package completed, forward the documentation to your broker who will start organizing the package. Particularly with first time buyers, reference letters often have to be redone or replaced and documenting net worth can require more paperwork than the buyer anticipated.
Residential Reality: Sometimes Television Can Provide a Board Package Tutorial
Like the guy on the Ed Sullivan Show, who keeps the plates spinning, the buyer has a lot going on until both the loan commitment letter is effective and the Board package is submitted. So remember: When it comes to submitting the Board package, timing is everything.