Jim Winters

Purchaser’s Due Diligence

The layout is perfect, the view is out of this world, you have always dreamed of having your own bathroom, the north node of Saturn is in transit through Cancer, and…you have an accepted offer. Still, don’t break out the champagne just yet, there is a job you need to do before you scribe a check for 10 percent of the purchase price and sign a contract.

That job is known as due diligence. And it’s your time to evaluate and appraise the condo, co-op, or townhouse you are purchasing.

For a house, it refers to the physical inspection as well as the review of title documents, tax documents, and tenant leases.

For an apartment, it refers to the inspection of those common elements that, as a apartment owner, you will co-own, maintain, and pay for (through your monthly charges). Including any or all of the following: the entire building, the land, the taxes, the leased commercial space, the underlying mortgage, the reserve fund, the doormen, the super, the management company, the lobby, the laundry room, the playroom, the exercise room, the parking garage, the repairs, the heat, the hot water, the sewer, the roof, the gutters, the hallways, the elevator(s), the storage room, the bike room, the sidewalk, the common garden(s), the common roof deck(s), and everything else. Phew.

You should “complete your due diligence”within one to two weeks of the accepted offer, after which, the sellers will expect you to sign a contract or inform them that you don’t want to go forward with the purchase. It’s important to note that just as you can change your mind, so can the seller. It’s entirely possible that during due diligence, the seller will receive a better offer from someone else. So do your due diligence diligently, but quickly, and call on your team (broker, attorney, and inspector) to do the same.

If you have (dare I say) a diligent broker, he will have done a lot of this work before you even make an offer. Here is a short list of items to be checked.

Townhouses

Taxes. It’s not a great deal if you can’t afford the taxes.

Violations. In NYC building violations come in all shapes and sizes and from lots of different agencies. Your broker should be able to research these for you. If they cannot your attorney can. You’ll want a commitment from the seller to clear any violations before the sale closes.

Co-ops and Condos

The pet policy. There is no point in having an accepted offer for a co-op that doesn’t allow dogs if you have a German Shepherd.

The sublet policy. Make sure that you can rent out your apartment if that is what you want to do. Almost all co-ops will place some sort of restriction on subletting.

The other board requirements. Many co-op boards won’t explicitly say everything they require of potential shareholders, but if you have a broker, he or she should get you as much intel as possible. For example, to the extent applicable, make sure you are permitted to work from home, that you are okay with any window display restrictions, that you can practice playing piano, that you can install a washer and dryer in the apartment or that you don’t need to cover 80 percent of your floor with a rug or carpet.

Recent board rejections. Your broker should be able to find out if the co-op board has recently rejected any potential applicants and why.

The facilities. Ensure that your shares or deed give you access to the amenities you have been promised. For example make sure parking and storage lockers really are included, you really do have access to the roof garden, there is a door person all the time, or the laundry facility really is free.

The number of rental units. Most banks won’t give you a mortgage if less than 50 percent of the co-op or condo is owner occupied.

Your attorney should spring into action once you have an accepted offer. I suggest you hire only an experienced real estate attorney who understands the borough you are purchasing in. His or her job will be to review any co-op/condo related documents (e.g., offering plan, proprietary lease, the house rules, financial statements, tax returns, meeting minutes, etc.), double check the items listed above, ensure that the co-op or condo is in good financial standing, and negotiate a fair contract for you that protects your interests. Here is some of the information he or she should provide you after the review:

That the person selling your the property is actually the owner of the deed or shares.

That their are no outstanding liens on the property (other than the seller’s mortgage).

For a co-op, the number of shares you will actually purchase, the amount of your maintenance, and the amount that the maintenance is tax-deductible.

The amount of the co-op’s cash reserves. (As a rule of thumb, I like to see a total of $8,000 per unit for co-ops of 8 or less units, $6,000 per unit for co-ops containing between 9 and 20 units, and $4,000 per unit for co-ops of more than 20 units).

The amount of the co-op’s underlying mortgage. (As a rule of thumb, I like to see a mortgage no greater than $40,000 per unit).

The number of sponsor-owned units in either a condo or co-op building.

If any repairs are on the horizon.

If any assessments are on the horizon.

If there have been any tenant disputes.

If any apartment owners are behind in their maintenance/common charges or mortgage payments.

If the building has had any recent damage.

If the maintenance or common charges is about to increase.

Your attorney will utilize this information to advise you as to status of the property. In a nutshell, this is all about checking that the building is not about to fall apart and that the amount of your monthly contribution is not going to increase substantially.

If you hire a building inspector, he or she will review the apartment and the building and will recommend remedies for any structural defects, pest infestations, potential hazards, etc.

I always recommend hiring an inspector when purchasing a house or building.

There are two schools of thought about co-ops and condos and inspections. Many real estate agents advise buyers against having an engineer’s inspection for a co-op or condo. They say that it’s a waste of money and that an attorney’s due diligence is sufficient to vet a co-op.

For co-ops around 8 units or less, I always advise hiring an inspector. Why? As a co-owner you are going to be sharing any repairs and maintenance with only a few other units. In general, the larger the co-op or condo the less critical an inspection is. That being said, here are a few good reasons you may want to hire one regardless of the number of units:

Just in case, you, your broker, your attorney, the management company, the casual conversation with the live-in super, the bribe you paid to the doorman, the meeting minutes, and the financial statements haven’t uncovered the entire story, your inspector is your last best chance.

Inspectors do their work with their clients (you) present. They review the apartment and impart their findings real time. If you have never been on one, it’s an illuminating experience.

If, for example, a roof, a boiler, or a water main, have been repaired or replaced in the last 5 to 10 years, your attorney or broker will uncover that information. However, if a structural item hasn’t been upgraded in quite some time, this information may slip through the cracks. In this instance, your inspector will be able to give you a good estimate of when a structural item may need to be overhauled.

Rodents and pests. Sometimes and for various reasons, supers, co-op boards, and management companies keep things like mice, rats, cockroaches, moths, bedbugs, and other undesirables hush-hush. Your inspector is duty-bound to do the opposite.

If you are still going forward, if you have signed a contract, and if you have just written a mammoth check, then it’s time to move on to the next stage of your purchase. That would be your mortgage, your co-op or condo application, or your closing and that is a post for another day. Thanks for reading.

Condo Versus Co-op

The rules for dinner conversation, as stated by many of Brooklyn’s esteemed successfulites are, 1) Never discuss religion; 2) Never discuss politics; and 3) Never discuss condo versus co-op. In light of this very wise counsel, I ask that you not read the following while eating your supper.

Why are co-ops held in such poor regard by some? For starters, one does not own one’s co-op apartment. Instead one owns stock in a corporation – a.k.a. the co-op. The co-op in turn issues the shareholder a lease to occupy the apartment, essentially making the owner a tenant. And here’s the rub: because the co-op technically owns the apartment, it can – and does – place restrictions on how the tenant can use, occupy, and resell the apartment. This means, that in extreme cases, the co-op can force a “bad” or “disruptive” tenant to sell his or her shares and move out, i.e. evict. Furthermore, in contrast to a condo or townhouse, a co-op apartment owner may not sell his apartment until the purchaser is first approved by the co-op board. One may not even bequeath the apartment to one’s heirs without the board’s approval. And sometimes…the board does not approve. As damning as that sounds, it’s still not the primary reason my buyers say they prefer a condo over a co-op. It is – drum roll please – the sublet policy. Co-ops place restrictions on the amount of time and to whom you can sublet your apartment to. Today’s buyers have plans to work in Europe, study on the west coast, and join the circus. It’s understandable that they don’t want a “nonsensical” board approval or sublet policy to stand in their way.

So, in most buyers’ minds, the obvious advantage to purchasing a condo, is that you are not purchasing a co-op. Here are a few more check marks in the condo column:

· The carrying costs tend to be lower. In general, condo buildings are newer. Newer buildings mean less wear and tear, and less wear and tear means less expensive repairs to pay for. Add into the mix New York City’s generous tax abatements and a condo’s monthly expenses are often very attractive.
· Apartment repairs and upgrades are easy. Want to renovate your kitchen? Split that oversized bedroom into two? Add a bay window? No problem. Your apartment is your castle and no one can tell you what you can do with it.
· Did we mention no board approval or sublet policy?

In addition to being a non-starter for the majority of today’s buyers, a co-op’s rules and procedures can cause much rancor for a co-op board who manages its affairs poorly. However, the perceived or unperceived perils of a co-op become clear advantages when put into the hands of a well-run co-op, and luckily for all, in Brooklyn, most fall into this category. Here’s how:

· Co-ops tend to be occupied by owners. They don’t attract short term buyers, and more importantly, don’t attract investors who never plan on living in the building. A co-op’s sublet policy can be a real drag, but your neighbors tend to take a real interest in the quality of the building, the co-op employees, the common areas, and the shared services. This creates a more stable environment (and, in my humble opinion, a nicer looking lobby).
· It’s often easier to refinance. Your apartment, in a six unit building with only one other owner occupied apartment, is not going to be approved for a mortgage. In order to obtain bank financing, more than 50% of a building’s units must be owner occupied. Again, the co-op’s disastrous sublet policy to the rescue. Co-ops are almost always between 51% and 90% owner occupied, meaning: not only are the occupants able to re-finance, they are able to sell their apartments to someone who is getting financing. (Condo owners often have trouble selling their apartments when less than 50% of their building’s units are owner occupied).
· With the board approval process, there is a real advantage to being able to vet (financially and otherwise) the people you are going to share walls, and expenses with. (Here’s a great NY Times article demonstrating that some condo associations also see this as an advantage: Condos Steal a Page (or 20) from Co-ops).
· Co-ops can obtain an underlying mortgage, using their building as collateral. Condo associations don’t own their buildings and can only obtain a line of credit for much less money. This gives a co-op great flexibility when managing expenses and an additional write-off for its members.
· For a small number of units, co-ops can’t be beat. If I asked you to purchase a townhouse with three other individuals that you have never met, have no idea of their job or financial status, and who may not ever live in the building, would you do it? Probably not, but that is a fairly accurate description of ownership in a small condo building.
· The purchasing costs (i.e. price per square foot) tend to be anywhere from 10 to 50 percent lower (e.g., as of this writing, StreetEasy lists the median price per square foot for all NYC condos as $1333, while for co-ops it is $500).
· The closing costs for a purchaser are substantially lower. There is no mortgage tax with a co-op, and title insurance is almost non-existent.
· Did we mention the board-approval and sublet policy.

Please comment freely on this article. I’m very interested to learn what type of purchase you prefer and why. Co-op vs. Condo?

Thanks for reading.

Blue Bloods

One more parking complaint to add to my very long list: Filming!

This morning my block, here in Crown Heights, was closed to parking by the NYPD so they could film an episode of Blue Bloods ( http://bit.ly/pbd9Ff) . To add insult to injury, they weren’t even filming on our beautiful block, they were simply using it as a trailer park. The actual filming took place around the corner in front of (Banco) Popular (No me puedo imaginar lo que el episodio es sobre) on Nostrand and Eastern Parkway – GMAP: http://goo.gl/maps/LubtA.

And to rub a little more salt in the wound, according to the owner, none of the crew – actors, extras, directors, gaffers, etc. – had the sense to purchase a local sandwich at Syds Serious Sandwhich shop – http://sydsserioussandwichshop.com .

Seriously!

Extras for Blue Bloods wait outside an equipment truck.

The Co-op Interview

Congratulations. You’ve had your co-op application scrutinized by a broker, repackaged by the managing agent, reviewed by the board, and have finally been asked in for an interview. You are 75% of the way home. Most boards won’t waste their time (or yours) with an interview, if they, or the managing agent, didn’t like what they saw in your application. But let’s not start slapping each other’s backs quite yet; approval is now yours to lose.

There are a number of Do’s and Don’ts when it comes to the co-op interview, but there are three (3) that you absolutely have to commit to memory and I’ve trademarked a new acronym to help you remember them: NRA (oddly, RNA and NAR were both taken).

Never Ask Questions

Review your application

Arrive on Time

1. Never Ask Questions. This is the suggestion I get the most pushback about, but ignore it at your own peril. I may be paraphrasing a bit here, but this is how some of my clients have responded: “What do you mean, Jim? We have a lot of questions for the board. We want to know when the co-op is going to replace the building’s windows. When will the exercise room be completed? When is the maintenance going up? Are there any assessments? When will we be able to start our gut renovation?”

No, no, no.

The purpose of this meeting is to decide whether you are going to become a member of this co-op, a neighbor of the people sitting in the room with you. They ask the questions. You answer them. Coffee is for closers, diamonds are forever, politicians are for sale, and questions are for shareholders. You may ask questions once you are a shareholder. Let me also say, that the co-op interview is not the time to be deciding if you want to purchase the apartment. That ship sailed at the end of the due diligence phase. If you have questions because you think you may have been misled, because you didn’t look over all the meeting minutes, because you didn’t read your contract before signing it, or haven’t reviewed the co-op’s financial statements, then have a conversation with your attorney. If you have general questions about the co-op or your apartment, you should ask them before you sign a contract or direct those questions to a third party – the managing agent, your lawyer, or your broker.

Remember, you are being evaluated, so when you ask questions (even ones you think are insightful and show how thoughtful you are), you run the risk of raising a red flag (Troublemaker! Usurper! One-Who-Doesn’t-Follow-Directions!), even if that is not what you meant to do. So answer their questions accurately, politely, and don’t ask any yourself.

2. Review Your Application. You should be familiar with your application, so at the very least read it again before your interview. You will be expected to answer questions about it quickly and accurately. Also, bring a copy with you.

3. Arrive on Time. Enough said.

Please share your own co-op interview experiences and tips in the comments section below. For For more tips and detailed information have a look at Passing the Co-Op Interview on Amazon.com.

The Top 5 Tips for Completing a Stellar Co-op Package and Landing an Interview.

Couple granted an interview after reading this post.

All co-op apartment buildings require prospective tenants/owners to apply for membership by submitting a co-op package. This usually consists of an application, not unlike a job application (only more intrusive), along with some supporting documentation (e.g. tax returns, bank statements, pay stubs, reference letters, etc.). The co-op’s officers – commonly referred to as the co-op board – review your application and, if they like what they see, will later schedule an interview with you. After which, you will be approved (and can go forward with your purchase), or rejected with scant rights to protest or appeal. The process is a minor inconvenience for some, while others need their own copy of DSM-IV to describe its effect on them.

The first step to passing the interview is being granted an interview. Submitting a perfectly constructed co-op board package will substantially increase your odds of being asked on that date, and will go a long way to reducing your anxiety throughout the review process.

1. Get it in writing. Some boards are formal and will provide you with a printed application containing very specific instructions and required documents; others will send you an email with instructions; and there are those, “unstructured” boards, that will leave you a brief voice mail describing a list of documents it would be nice to get from you. This last situation is untenable. Instructions from the board should be unambiguous, complete, and in writing. If yours are lacking, send an e-mail or letter to your board contact or the managing agent (see #3 below), “confirming” your understanding of what is being asked of you.

2. Give them what they want, not just what (you think) they need. If you have followed step 2, you have a formal application or clear-cut instructions from the board or management company. These need to be followed to a T. Here is an example of a classic mistakes some applicants make along the way:

You are a couple purchasing your first apartment together. The board application asks for two personal reference letters from each applicant. In this situation I’m often asked if it’s okay to share one or both of the personal reference letters. This seems reasonable, because couples usually have friends in common, but the answer is no. If the board asks for “two personal reference letters from each applicant,” then give them what they want. Of course, your friends can wax poetic about both of you in their letters, provided each of you has two separate references.

3. Submit well written reference letters. If you have friends or colleagues who write well, and who like to write, then ask these people to write your reference letters. Not everyone is so fortunate. You may need to give your references an outline (or flat out write the letter for them). If possible, collect sample reference letters from other people who have passed a co-op interview. You can pilfer ideas and format from these letters.

4. Be Honest and Forthright.Your references don’t need to reveal every time you forgot to do the dishes or the pens you swipe from the office, but your entire application package should be an accurate reflection of you. So don’t fudge your finances or claim you invented the Internet in your co-op application.

5. Triple check your numbers. This one is very tedious, which is why it trips up so many people. Mistakes here could force the board to ask for clarification or give the impression that you have something to hide. This could delay your interview (and move in date), or worse, you may find yourself rejected by the board. Here are few things to look out for:

There will be a place on the application where you state your annual income. This needs to match the amount on your employee letter.
If you are asked to provide a detailed list of assets, these need to match exactly any financial statements you are including with the application.
The financial documentation (bank statements, tax returns, etc.) you include with the package, should be up to date. More specifically, monthly statements should not be more than 30 days old, and quarterly statements should not be more than 90 days old.

Bonus Tip:

Get Help. A good real estate broker will work his or her tail off to make your application sparkle and to streamline the entire process. However, if you are flying solo, enlist the help of friends or colleagues who have been through the process. Ask them lots of questions and, if they really love you, ask them to review your application package.

When you have a moment, please share your co-op experiences and tips via e-mail or the comments section to this post. Next week, we’ll talk about the co-op interview and how to pass it. For more tips and detailed information have a look at Passing the Co-Op Interview on Amazon.com.

ProCro?

New York Assemblymember Hakeem Jeffries has a very promising career ahead of him. He was instrumental in having Cathie Black fired and may have his sights on the US Congress. But Mr. Jeffries latest bill proposal, about regulating up-and-coming neighborhood names, sounds to me like a stunt. Someone needs to advise the Assemblyman that there is actual real estate crime occurring in Brooklyn.

BTW, I’m thinking of telling people that I live in NoCroHisDis.

ProCro, SoBro, FiDi, BoCoCa: A Lawmaker Says, ‘Enough’

Daily News Opinion

Revenge of the "pushy asshole passive agressive [sic] broker."

Although I have been referred to (anonymously) as a “pushy, asshole, passive, agressive [sic] broker.”

I like to think the comment below is more representative of my work:

“You’ve been incredibly helpful, and if we do in fact choose to move forward with our home search, we would very much like to stay working with you. In our house-hunting experience over the past month, you, by a long shot, come across as a genuine advisor who wants to be our advocate.”

– Paymon

Thanks Paymon, you made my week!

Three's Company

Well now I’ve heard it all. I mean, I’ve always known that oral sex was illegal in several states, and I was not surprised when the Texas Board of Education erased Thomas Jefferson from their textbooks, but this morning I learned that in New York City it is illegal for more than three unrelated people to live together in an apartment or a house! Don’t believe me? Here’s this morning’s NY Times article:

In New York, Breaking a Law on Roommates

28 Days

Here’s a quick anecdote from one of my clients:

Jim,

I think you’ll get a kick out of this. We are refinancing our home through a mortgage broker that shall remain anonymous. Among the mountain of paperwork they asked for, we were asked to provide our most recent bank statement. It had to be an official bank statement with the full account number (like the ones the bank sends monthly) not a download from online banking. So we sent them our February 2010 bank statement. It was rejected…want to guess why? February only has 28 days and the mortgage broker insisted on 30!
Anyway, just wanted to send this your way. We still love our apartment!

Take Care,

Julie

Homebuyer Tax Credit

As if tax season weren’t stressful enough, prospective home buyers have two more looming deadlines to contend with. Both are related to the federal government’s homebuyer tax credit.

(The following article was suggested to me by one of my favorite PHDs.)

As if tax season weren’t stressful enough, prospective home buyers have two more looming deadlines to contend with. Both are related to the federal government’s homebuyer tax credit. In a nutshell, the federal government is paying consumers (up to $8000) to purchase a home. You need to get on your horse though. Purchase agreements (i.e. being in contract) need to be signed by April 30, 2010, and you need to purchase your home (i.e. close) by June 30,2010.

One word of caution. If you intend on taking advantage of the credit, don’t wait until April 1st to start shopping. There is liable to be a feeding frenzy at that time which could artificially push prices higher, and nullify the value of the credit.

Here are the facts:

What Qualifies?

The Tax Credit applies only to the purchase of a primary residence (i.e. home) where the purchase price is $800,000 or less. The home cannot be purchased from a direct relative (i.e. parents, grandparents, siblings, or children).

Who Qualifies?

First-time Homebuyers

First-time homebuyers are defined as people who have not lived in a home they own for the previous three years. For first-time homebuyers, the tax credit applies to 10% of the purchase price up to a maximum amount of $8000.

Repeat Homebuyers

Repeat homebuyers must have owned their current home for at least five years or have lived in the same home for five consecutive years over the last eight. For repeat homebuyers, the tax credit applies to 10% of the purchase price up to a maximum amount of $6500. Notably, the new law does not require that you sell your current residence.

Income Requirements

Single taxpayers with annual earnings of $125,000 or joint filers with annual incomes of $225,000. (Single homebuyers with incomes between $125,000 and $145,000 and married homebuyers with incomes between $225,000 and $245,000 will be eligible for a reduced credit).

When?

You must have a signed contract by April 30, 2010 and your transaction must close by June 30, 2010. This deadline is extended to April 30, 2011 for members of the military who have served outside the United States for at least 90 days between Jan 1, 2009 to May 1, 2010.

How?

Taxpayers can claim the credit on their federal income tax returns. If the credit exceeds the amount of tax owed, the difference is paid in cash – even if the taxpayer owes no tax!

Thanks for reading.

For additional information (of both the detailed and confusing kind) have a look at the IRS websites below:

First-Time Homebuyer Credit

Some Current Homeowners Now Also Qualify

Form 5405

Form 5405 Instructions

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