Of all the stages of co-op life, the initial application and approval process, especially the interview, is certainly the most harrowing. Many people fear that just one wrong word will mean the difference between acceptance and rejection. The more “exclusive” and upscale the building, the more difficult this process seems to be.

There are many “pluses” to co-op living. In this day and age, when fewer and fewer people belong to fraternal orders, churches, sports leagues and so on, and families are scattered all over the country, being a co-op shareholder may provide a person with the sense of community he or she doesn’t find elsewhere.

Also, a co-op can be a more permanent type of community than a condo development—especially in cases where investors buy blocks of condo units, then rent them out to tenants.

Still, the application process proves to be difficult. In particular, many non-Chicagoans who are trying to move to the city and who are unfamiliar with Chicago-style co-ops are completely befuddled and frightened by the entire process. And everyone’s heard the horror stories—co-ops that insist that applications be printed out in a particular font and type sizes or that insist on weighing applicants’ dogs to make sure they’re not “over the limit.”

Condo boards don’t have the same amount of authority over buildings that co-op boards do, but some condos are making their application process just as difficult.

Thankfully, several brokers and lawyers with years of experience dealing with co-op and condo boards and committees, are willing to help applicants navigate the process.

What is the Difference?

Virtually everyone is in agreement that, by and large, the co-op approval process is longer and more intensive than the condo approval process. To begin with, there are legal differences. In a co-op, you’re buying shares in a corporation while in a condo you’re buying real estate. But it goes deeper than that.

“The first and most important difference is that condos do not have approval; condos at most have a right of first refusal. That simply means that the condo can decide to buy the unit that is up for sale on exactly the same terms that the contract buyer had agreed on to buy it,” says Mark R. Rosenbaum, an attorney and principal with the law firm of Fischel & Kahn, Ltd. in Chicago. “In a co-op, the co-op typically has a right of approval. They can typically say they want or don’t want that buyer, and you are out. They can reject a sale. They can say we don’t want that buyer because we don’t think he’s financially viable.”

Co-ops have the right to grant or withhold consent to any proposed sale for any reason except in cases where discrimination can be proved. Many experts agree that this is very rare.

Both co-ops and condos require information about the purchasers and their finances, employment, credit history and so forth. Many real estate lawyers warn their clients to expect a “financial colonoscopy.”

“The first requirement is your credit score,” explains Liza Aisen, a broker associate with Prudential Rubloff Properties in Chicago. “Then comes your employment verification and references from previous employers. After you obtain all of the information, you pass it on to the building management.”

Communications

How can boards communicate their expectations and requirements to brokers who handle sales in their building?

“The best process to use for that is to actually have a fact sheet with a bullet- point listing of what’s required for the building,” says Stuart A. Fullett, a managing partner with the law firm of Fullett Rosenlund Anderson PC in Lake Zurich. “Especially in co-ops since a lot of attorneys may not have experience dealing with a lot of co-ops, because it’s a different animal. When you have a condominium closing—anybody can buy in and it doesn’t really matter. When it comes to co-ops they can actually make a determination whether they want this person in or not as long as there is no discrimination involved. The better places I see have a checklist, and they provide it to brokers and or attorneys who are handling the sale.”

“Let’s talk condos for a moment. If there’s a right of first refusal, the declaration and/or the rules will typically spell out the information that is required to be obtained as part of the right of first refusal process. A broker, I think, should make it their business to find out if there is a right of first refusal and what the process is so that the buyer’s information can be given as quickly as possible to the association,” says Rosenbaum. “On the co-op side, because the co-op typically has a right of refusal there is even more information that is needed to be obtained. It’s usually financial, but they often request character references and other background information. The level of obligation in a co-op is much different than in a condo. Co-op owners want to make sure this person will fit in a financial sense with the building.”

Other real estate professionals believe that boards should communicate their expectations and requirements to brokers through the board-application package. This usually can be maintained on the managing agent’s website, making it readily available to all brokers, and be updated periodically to include any changes in substances or fees.

Some boards are very specific about what they want, but others are more vague on certain details—for example, their required income-to-debt ratio. That’s where an expert broker, one who knows how to talk to the manager or managing agent, comes in handy.

For brokers to educate themselves about a building’s approval process and explain it to clients, they should talk to the manager. They also should read the house rules and bylaws of the buildings. Additionally, they should know the difference between what’s required in one building and what’s required in another.

More Stringent

The co-op approval process, like everything, is a product of outside economic conditions. With this in mind, we should examine how the recession of the past five years has changed things.

“The last five or six years have been abnormal in that the economy has been abnormal,” says Rosenbaum. “Therefore, co-ops have been much more interested in investigation of potential buyers. Often co-ops have mortgages from pre-recession times. These are large mortgages with higher rates than now exist. So the recession has made a difference, but I think we are past the collapse in many cases. Some individual boards may be more paranoid than others, but that depends on their financial situation and every board’s financials is a little different. Keep in mind in Chicago there are relatively few co-ops; it’s a relatively small percentage of association living.”

“Everything depends on the building,” says Fullett. “Some will let anybody in because they are nervous about the market. Others have kept the same stringent requirements, the same full-approval process. They are going to check out your background. In a co-op, the person is going to be a shareholder. So I will say while a few have become more understanding that people need to sell, others have not.”

According to experts, Fannie Mae loan requirements have become stricter, both to the buyers and to the property into which they are buying. One real estate attorney notes that if an applicant has impeccable financials, if the co-op or condo does not meet the Fannie Mae requirements, e.g., its reserve fund is inadequate, the bylaws do not contain language that Fannie Mae requires or if the building is involved in litigation not covered by insurance, the loan may be disapproved.

The stricter the co-op’s requirements for new buyers, the more intimidating it may be. Yet, there may be some people who like the idea that they’re buying into an “exclusive club” that not everyone can join. Some people say that co-ops, by their very nature, are such a club—and some clubs are more exclusive than others.

Horror Stories

Anyone who is involved with co-op or condo sales on a day-to-day basis has some stories about a particularly eccentric application process.

“At one of my co-ops in the city, I had an attorney who was looking to buy,” says Fullett, “The association did their due diligence. They realized that attorneys of their own nature—tend to be litigious. The board expected to find that there was going to be a lot of lawsuits where the person is either representing or defending, but this person in particular had a lot of lawsuits on behalf of himself. And the board looked at that and said, ‘this is not the type of person we want in here.’ So he was rejected. And his comment was ‘I’m going to sue.’ And my comment was, ‘that’s why you’re being rejected.’ The board figured every time he would disagree with someone he would file suit. The bottom line is that some people do not belong in close-quartered living where you have to get along with people and live within a set of rules and regulations.”

Experts note that co-ops in every price range and location can require over-the-top information, and the only way to successfully navigate the application process is to provide what is being asked for.

In general, it’s a good idea to find out the requirements of the building, get yourself an experienced broker who knows how to put together a good application package, remember not to ask too many questions that could be perceived as argumentative or hostile, and above all, to cross your “t’s” and dot your “i’s.” And remember—you’re not the only one who has to go through this.    

Raanan Geberer is a freelance writer and a frequent contributor to The Chicagoland Cooperator. Staff writer Christy Smith-Sloman contributed to this article.