After many years of planning and saving, you’re finally in a position to buy. To be on the safe side, you’ve saved 35 percent of the purchase price. You’ve also ensured that after putting 35 percent down, you will still have substantial savings. After all, in this market, anyone who will be wiped out by a purchase is unlikely to get past a co-op board. Finally, you’ve saved up additional money to cover the cost of closing a deal. There is one variable, however, you may have not anticipated—the need to pay your co-op fees forward in escrow for anywhere from six months to several years.
The demand for prospective tenants to pay fees forward in escrow is recent.
If you haven’t anticipated this factor, you’re not alone. Paying fees forward in escrow—by definition, any bond, deed or document held in trust with a third party until certain conditions are satisfied—is one of the most opaque and arbitrary costs associated with purchasing co-op apartments, and it is also one of the newest costs. Attorney Joseph Meyers of Meyers & Associates has helped to close hundreds of deals on New York City co-ops over the past three decades but says the demand for prospective tenants to pay fees forward in escrow is recent. “I didn’t notice this until three years ago, but then, I started to see both younger buyers and buyers with high net worth but lower incomes being asked to pay their fees upfront.”
This new co-op board demand poses two major obstacles. First, it raises the overall cost of closing a deal. Second, it is a variable that no one can predict or control. “When a board asks for fees in escrow,” says Meyers, “That’s something that I can’t negotiate—the amount and length of the term is fixed.” Meyers emphasizes that it is also important to understand that when co-op boards ask for maintenance fees upfront, the fees are not replacing tenant’s current fees: “These fees are held in escrow and not released, so tenants are still paying their monthly fees throughout the hold, which in my experience is nearly always three years.”
These fees are held in escrow and not released, so tenants are still paying their monthly fees throughout the hold, which in my experience is nearly always three years.
While it may seem unfair, understanding why co-op boards are increasingly asking some new tenants to pay several years of maintenance fees upfront and how to handle such requests when closing a deal is of critical importance, especially to younger first-time buyers and high-net-worth/lower-income buyers of all ages, even those in a position to close cash-only deals.
Why Co-ops Ask Tenants to Pay Forward
While co-ops have always been cautious, following the financial collapse in 2008, boards became increasingly nervous about welcoming new shareholders. As a result, asking for maintenance fees in escrow has become an increasingly common request. While paying six months to three years in fees upfront is now common (in most co-ops this means having anywhere from approximately $12,000 to $72,000 available to put in escrow at the time of purchase), in some cases, co-ops have been known to ask that much more money be put into an escrow account under longer terms.
Given that it is a seller’s market and co-op boards already dissect prospective buyers’ finances, one may wonder how any co-op board could possibly feel insecure about a prospective buyer. As Meyers explains, the decision to ask for fees in escrow rarely makes sense. “If boards are looking at a prospective buyer’s financials and they feel that something is not solid, they ask for three years. This has become an extremely prevalent tool when co-op boards feel insecure about a prospective tenant’s income.” But is the practice justified? Meyers says that in his experience, co-op boards have no reason to ask for the additional fees: “I’ve seen people plop down one million in cash-only deals and then be asked to come up with three years in fees because they are retired and their income is lower than the board wants to see. It may not make sense, but it’s becoming more common.”
How to Prepare and How to Respond
While there is no real way to prepare, if you’re young, a first-time buyer of any age or a foreign national just entering the U.S. market, there is good reason to brace yourself for the possibility that your closing conditions may include an escrow arrangement. Likewise, if you’re someone with high net worth and a lower fixed income—for example, you’re retired and downsizing—you should also be prepared for the possibility of being asked to pay substantial maintenance fees upfront in escrow.
If one’s co-op fees are $2000 per month and a board demands three years in escrow, the real question is how to raise an additional $72,000 without wiping out one’s savings and compromising the stable financial profile that a board also wants to see. For high net worth buyers, the obvious solution is to simply dig deeper into one’s savings or to forego plans for a cash-only purchase—for example, opt to put only 70 percent or 80 percent down instead.
For first-time buyers, the situation is generally far more challenging. One obvious option is to go begging. In some cases, a well-heeled relative—usually a parent who is invested in ensuring their child’s deal doesn’t fall through—is able and willing to hand over the required money needed to satisfy a board’s escrow request.
For buyers without a willing and wealthy relative to lean on, however, the options can be limited, especially since borrowing is bound to be difficult at this point in a purchase and may be impossible for many first-time buyers. As a rule of thumb, the only way to be prepared is to ensure you have saved as much as possible prior to going on the market. Working with an experienced agent can also help, since they may be able to steer you clear of co-op boards that have already gained a reputation for demanding that new tenants pay their fees forward.
Contributing Writer
Cait Etherington
Cait Etherington has over twenty years of experience working as a journalist and communications consultant. Her articles and reviews have been published in newspapers and magazines across the United States and internationally. An experienced financial writer, Cait is committed to exposing the human side of stories about contemporary business, banking and workplace relations. She also enjoys writing about trends, lifestyles and real estate in New York City where she lives with her family in a cozy apartment on the twentieth floor of a Manhattan high rise.
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