Total existing-home sales—completed transactions that include single-family homes, townhomes, condominiums and co-ops—rose 3.1% from December to a seasonally adjusted annual rate of 4.00 million in January.
GUEST VIEWPOINT: Due Diligence for Coops and Condos in the Age of COVID-19
Purchasers can spend weeks, months, sometimes even years searching for that perfect place to call home. Finally, they find it—a great space, perfect location, priced within the budget. New York is a caveat emptor state—buyer beware—and before a purchaser signs a contract for the perfect home, they need to do due diligence.
When buying a single-family home, purchasers typically have an engineer or inspector inspect the property. When individuals are buying a condo or co-op unit, there’s an additional element to the due diligence that should be performed and that includes a legal and financial review of the building documents including the bylaws, house rules and declaration (in the case of a condo) and proprietary lease (in the case of a co-op). These documents will outline the building policies on various issues such as pets, sublets, alterations and any other restrictions or requirements that might affect the future owner.
The financial statements will reveal trends of expenses and revenues such as increases in maintenance or common charges as well as expenditures on capital improvements and general building maintenance. The financial statements also provide information about the building’s underlying mortgage, including the interest rate and the maturity date, both indicators of potential upcoming increases in carrying costs.
In addition to the building’s documents and financials, it is critical that, prior to signing a contract, the purchaser’s attorney reviews the Board minutes. These minutes can be the most important part of the due diligence process as they reflect what is going on in the building on a current basis, including leaks, upcoming repairs and capital improvements being considered, noise or other neighbor complaints and shareholders in arrears. Copies of Board minutes are usually kept with the managing agent and are typically available for review in that agent’s office.
Enter the COVID Complication
Prior to COVID, upon receipt of a co-op or condo term sheet, the purchaser’s attorney would contact the managing agent and make an appointment to review the building’s Board minutes. While each managing agent and each building has its own policy about minute review, in an effort to comply with social distancing guidelines, many managing agents have ceased to allow in person minute review altogether and not all of them have an alternative. Some managing agents will e-mail minutes or upload them to a portal. Others will not.
Some managing agents will complete a questionnaire prepared by the attorney in an effort to capture the information that could be gleaned from reviewing the Board minutes. There are several shortfalls with using questionnaires in lieu of traditional minute review. First, it takes time and that is not a luxury that buyers have in a seller’s market. Most managing agents charge a fee for such questionnaires and will not start the process until a purchaser has delivered a certified check for that fee. In addition, if a purchaser is applying for financing, it is likely that their lender will also want such a questionnaire completed, however the lender questionnaire is not typically provided until after the contract has been signed and most lenders will not typically accept the attorney’s questionnaire.
Third, a purchaser’s attorney and the building managing agent have different fiduciary obligations—the attorney to the purchaser, the managing agent to the building as a whole. Their perspectives on what is and what is not important can be very different. Finally, no matter how thorough an attorney’s questionnaire, no one can anticipate all issues that a particular purchaser may find of interest.
So, how can real estate professionals and co-op and condo purchasers better navigate the due diligence process right now?
First, before making an offer, ask about the managing agent’s due diligence process. Is minute review permitted and if so, how? If in person review is not permitted, is there any alternative?
Next, if the purchaser plans to borrow money, ask the lender at the very beginning of the process to provide any required due diligence questionnaire. If the attorney has additional questions, he or she can supplement the lender’s existing questionnaire rather than using his or her own.
Sellers and their agents should get the diligence materials together before the unit is listed for sale. It is the seller’s job to provide the offering plan, bylaws and financials and if a seller does not have them, they will need to be obtained from the managing agent. Start the process early.
Finally, have patience. Things take a little longer right now, but the additional time to complete due diligence is far less dangerous than proceeding without it.