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The Undesirable Rich

NEW YORKERS in search of apartments are subject to lots of tests - nerves, will and endurance foremost among them. But increasingly, many well-employed buyers who haven't flunked so much as a pop quiz in their achievement-studded lives are failing one exam in droves: the liquidity test.

Though fortunate enough to be able to afford today's sharply higher sticker prices, these apartment-hunters are denied entrance to co-ops despite comfortable incomes of six figures or more, excellent credit, and credentials as citizens in good standing. They are unable to buy simply because they don't have enough left over (typically in cash, stocks and bonds) after the down payment to meet the requirements of the co-ops they want to join.

What's deemed enough varies among the caste system of the city's co-op buildings, but at the lowest end, it includes a year or preferably two of maintenance and mortgage. In the pricier buildings with the kind of family-sized apartments coveted by up-and-coming professionals, "enough" equals one, two or three times the purchase price of the apartment - and keeping up with multiples in a spiraling market can be a daunting feat.

"People tell us all the time: 'I don't understand. I make $1 million a year and you're telling me I cannot buy an apartment?' “said Jacky Teplitzky, an executive vice president at Prudential Douglas Elliman.

Her colleague at Douglas Elliman, Ann Cutbill Lenane, an executive vice president who represents sellers of family-sized apartments on the Upper West Side, said: "It's not about whether you can afford it or get financing. If you can chew gum and walk at the same time, you can get financing. It's really about, do they have enough money to get to the board?"

Often, they do not. "Take an average $1.5 million classic six apartment on Lexington Avenue," said Kathy Braddock, a partner at the real estate consulting firm Braddock & Purcell, which matchers buyers with agents. "To buy there, you have to put 25 percent down, and then they want to see $1 million in liquid assets, plus earning power. Most people have not saved $1 million in liquid assets if they are in their mid-30's or early 40's and don't have a job with huge bonus potential."

Boards requiring significant assets are said to be either blind or unsympathetic to the notion that old ratios need to be updated to account for the current market. "The problem is they're using the same geometric formula, but in absolute dollars it's becoming very difficult," said Daniela G. Kunen, a managing director with Douglas Elliman. "Most co-op board members couldn't pass their own requirements." Still, in a clenched housing market where bidding wars erupt like hives, boards can usually afford to be stubborn. And some agents reason that the boards may be more worried about the higher leveraging that goes hand in hand with higher prices. "I think that as prices go up, potential shareholders are taking on enormous financial responsibilities, and so boards are being as careful as they need to be in that environment," said Mindy Diane Feldman, an agent with Halstead Property.A darker spin is that certain boards are taking advantage of the tight market to refashion their building's reputation. "I think every building wants to upgrade themselves," said Michele Kleier, president of Gumley Haft Kleier. On the Upper East Side, she said, "a lot of the side-street buildings that are B-minus buildings want to be B-pluses, so if the board is difficult, the harder it is to get in, the more people want to get into it."

Still others point out that real estate agents themselves bear some of the blame by overscreening applicants to hedge against a board turndown. Indeed, brokers increasingly screen buyers before even setting an appointment to view an apartment."I think that a lot of brokers create the strictness of the co-ops as opposed to co-ops really being strict on their own," said Lauren Cangiano, a senior vice president at Halstead. "When there's competition and bidding amongst multiple buyers, the bar is raised partially because of that. They're naturally going to choose the buyer who is best qualified - overqualified. And then unfortunately that leaves someone who's qualified without a place to live, because it seems there is always someone who has more money than you and they're going to win."

The zeal to avoid a turndown can trigger perplexing results. Klara Madlin, president of Klara Madlin Real Estate on the Upper West Side, recently helped a banker and a doctor buy a $3 million Riverside Drive apartment. They wanted to pay cash, she said, but Ms. Madlin advised them that "the board would rather see liquidity and a mortgage." The couple wound up financing half of the price with a mortgage, with the option of paying it off after the closing. "It's kind of crazy," Ms. Madlin acknowledged.

As more buyers discover they are co-op unworthy, they are turning to condos - even though it almost always means spending more for less space. Samantha Kleier Forbes, a broker at Gumley Haft Kleier, recalled the liquidity-challenged young couple she worked with recently. The couple sought an Upper East Side co-op in the $1 million to $1.5 million range. "We wound up upping their budget until finally they spent almost double, close to $3 million, on a condo," she said.

Other co-op refugees make tradeoffs to stay within their budget. Early last year, Amy and Bill Soviero, both 34, began working with Robert McCabe, an agent at Halstead, to find a two-bedroom apartment on the Upper East Side. Mrs. Soviero, an analyst for Citigroup, and her husband, a sergeant with the New York City Police Department, had saved about $280,000 - much of it from the recent sale of their renovated home in Mount Kisco, N.Y., - and earned a combined annual income in excess of $250,000. The couple figured they could easily afford to carry an $800,000 apartment. But in March, they lost out on a two-bedroom, two-bath co-op with outdoor space at East 64th Street and First Avenue for which they bid $820,000. "They wouldn't even take our application because we weren't two years' liquid after down payment; we were maybe six months," Mrs. Soviero said. "Both of us had substantial savings in our 401(k) but they wouldn't count that."

With their broker, they concluded that their chances were slim with any co-op board. "At best, they were topping out at $650,000 for a co-op," said Mr. McCabe, their broker. So they decided to hunt for a condo. "It was totally frustrating because we're a reasonably young couple with good savings, good jobs and perfect credit scores," Mrs. Soviero said. "It's just a mystery to me why we couldn't get past these boards. On paper we look ideal. There was just not enough liquid assets to do it." Last summer, they paid $785,000 for a similar-sized two-bedroom condo - farther uptown and minus outdoor space - in Ruppert Towers at East 91st and Third Avenue. "I don't think we'll be here forever," Mrs. Soviero said, "but for right now we're very happy."Even Wall Street and hedge-fund employees earning several million a year can ring up short in the cash department. For one thing, many co-ops disregard bonus income, labeling it discretionary, and count only comparatively small base salaries that seldom climb beyond $200,000. For another, stock options and even vested stock are usually not considered sufficiently liquid. (Nor are 401(k) plans or Individual Retirement Accounts.)

Ms. Kleier said she is working with a client in his 20's who is shopping for a condo in the $4 million range because he doesn't have the liquid assets to buy a co-op. He is typical of clients who are "making several million a year but also spending several million a year and just haven't gotten ahead and accumulated the liquid assets that they need," she said. For young people with that kind of money, she said, these condos are stepping stones to the life they eventually envision. "People who really want prewar Park and Fifth are considering these $3 million or $4 million condo apartments starter apartments," Ms. Kleier said. Ms. Forbes agreed, adding, "I have no doubt that in 5 or 10 years, they'll be buying $10 million co-ops on Park and Fifth."It's not just buyers who find their options drastically narrowed by liquidity requirements. Sellers are feeling the pain, too.

Ms. Teplitzky described the fully renovated two-bedroom postwar Park Avenue co-op that she began trying to sell last August. The apartment is in a building where buyers must show an amount equal to the purchase price in liquid assets. Only after multiple offers and two price drops - the apartment was finally listed at just over $1 million - did a buyer arrive who seems able to meet the requirements. There is now an accepted offer. Without the liquidity requirement issue, she said, "I have no doubt it would have been sold in two or three months, tops." "The problem we have had has been finding buyers who can actually pass the board," she said. "A two-bedroom for a young family with that kind of money isn't enough anymore - they want a classic six. The family with one child doesn't have enough assets." According to Ms. Teplitzky, the most qualified shoppers tended to be empty nesters who wanted to use the apartment as a pied-à-terre, which isn't allowed under the building's rules.

Jon Cole, 32, recently made a full-price bid for a $230,000 Brooklyn Heights studio but was turned down by the co-op board. "The boards are out there putting these rules in and they're not really benefiting the people who live in the building," said Mr. Cole, who had been prepared to put 20 percent down and could easily carry the apartment on the comfortable salary of a fifth-year associate at a large law firm. "They didn't think I was liquid enough," he said. "If I'm a sort of a marginal candidate and make more than 95 percent of the people out there, it seems problematic." He noted that the apartment is back on the market and has been vacant a total of seven months. "If I can't sort of easily come in and buy this place with my finances, and it's just a studio, the thought of being able to resell it seems sort of bleak," he said.Some agents see boards' refusals to look beyond stringent liquidity measures as a hallmark of a new era of strictness. "Everybody seems to be getting a little more paranoid in this day and age," said Ms. Cangiano of Halstead. Ms. Teplitzky added, "Now it's not enough to get a brokerage statement, now you have to analyze the brokerage statement," to determine how high-risk a buyer's portfolio may be.

For their part, condominium boards - which can reject a buyer only by purchasing the apartment - now typically require a board package nearly every bit as nosy as a co-op's. In some cases, to discourage an unpopular deal, a condominium will stall with continual requests for information in the hope that a weary buyer will walk - or until an irate seller threatens to sue.

According to scattered reports, some boards are waking up to the need to revisit liquidity requirements, reaching out to advisers like Steen Rasmussen, director of sales for Dwelling Quest, a residential real estate brokerage firm, and Ms. Braddock of Braddock & Purcell.

"It's like college," Ms. Braddock explained. "You've got these kids who are very bright and really talented but maybe not 1400 or 1500 on their SAT's, and right off the bat their applications will not be looked at, at Brown or Harvard. It's the same on co-op boards. If you're just looking at that number, then you're not going to look at the whole picture."

Wary of such blind spots, some buildings have always steered clear of fixed formulas - a practice lauded by David Hay, president of Hay Management, which manages co-ops on Park and Fifth Avenues. Mr. Hay noted that shareholder liquidity means far less to the market than does the closing price of an apartment. "There are buildings who want to be perceived a certain way and have put in these multiples," he said. "The thing that makes a great building is having a great group of people. Money doesn't do that."

He counseled buyers to persevere. A family with beautiful, well-mannered children may mean more to a building that craves stability than "someone with whopping big assets but who is not as nice," Mr. Hay said. "Most board members are very conscious of the fact that there is a family behind the application who dearly wants to make the apartment their home. If you're relatively close and easily handle all your obligations, you should not necessarily give it up so easily."

Short of shareholder revolt triggered by too many board turndowns, most observers said they believed that buyers are in for more of the same - even when it's their turn to make the rules. "There is a phenomenon that happens when people are outside the fence," Ms. Teplitzky said. "They hate the situation. But when they are inside they become the social club. It's almost like an epidemic." On the other hand, she said, "if the market goes down and people need to sell, and because of the restrictiveness of the board, they are basically tied in with their buildings, then those sellers will put pressure on the board."

In the meantime, said Mr. Rasmussen of Dwelling Quest, "the important thing for the buyers to realize is that having the down payment in a co-op is just not going to cut it, and having a good salary is not going to cut it unless they have a long track record, in which case their assets would probably be O.K. too." What happens to the insufficiently liquid? Some find alternatives, such as co-ops with fewer restrictions, Mr. Rasmussen said, but "I would say the vast majority just ends up renting and waiting."



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