Red flags with coop, condo & the due diligence

A.    COOPS:

1)    Offering Plans : Bylaws , House Rules, Proprietary Lease, Schedule A (note: NO FLOOR PLANS or PRICE PER SQUARE FOOT)

2)    Board Minutes – includes inside knowledge, behind the scenes info that mgmt. may not disclose by way of general questionnaire

3)    Pre-Contract Inspections? – optional for buyers, unit owner is responsible for all appliances and internal contents, Coop Board is responsible for all systems (electrical, heating/cooling, plumbing)

4)    Financing contingency restriction (ie: 70% max, 80% max etc) – verify with your Buyer & Coop

5)    BOARD APPS: extremely extensive process and documentation required (tax returns, pay stubs, bank statements, reference letters, etc). Board approval is needed in order for Closing. Can take up to 30 days for approval but should be submitted within 3 business days from Loan Commitment Date. Then Buyer is required to attend Board interview for approval as well.

6)    MAINTENANCE FEE ESCROWS: may be required for Buyers who are borderline (DTI – 35% is standard). Board will require 1-2 years of maintenance in escrow for condition of approval.

7)    Sublet Policy- if permitted, limited to 1 or 2 years max (subject to Board approval) and then Owner has to reoccupy the Unit for another 2 years before they can rent again

a)     Sublet fee – sometimes 15% of the monthly maintenance charge – addl cost to the coop for the entire lease term

8)    Flip Tax- this is a cost to Sellers, so when calculating their bottom line (net sale proceeds) make sure you verify with the Managing Agent (standard is 2% of gross sales price)

9)    Financials- main thing is to verify Coop has a sufficient reserve fund and operating at a positive cash flow (expenses are less then income)  (**attorneys review same during due diligence )

10) Landleases – (when the coop doesn’t own their building and rather leases the land from the City) standard mortgages are either 15 or 30 years in term, so important to ensure that the Coop has at least 30 years left on its landlease

11) Large Assessments – may be negotiated between the parties based on the nature of the assessment, amount, timing and relative to correcting a prior problem or future improvement / repair )

B.    CONDOS:

1)    Pre- Contract Inspections? – optional for buyers, unit owner is responsible for all appliances and internal contents, Condo Assoc/Mgmt is responsible for all systems (electrical, heating/cooling, plumbing) – NOTE: New construction comes with standard 10 year builders warranty (1 year appliances / 2 year systems / 7 years structure)

2)    Financials- main thing is to verify Condo has a sufficient reserve fund and operating at a positive cash flow (expenses are less then income)  (**attorneys review same during due diligence )

3)    Offering Plans : Bylaws , Property Description Reports, Schedule A , Floor Plans, Budgets

4)    BOARD APPS: much smaller than coops but can still be extensive. Board approval is needed in order for WAIVER of First Refusal to be issued in order to close.

a)     NOTE:  Can take up to 30 days for approval but should be submitted within 3 business days from Loan Commitment Date.

5)    New Construction :

a)     Warrantable vs Non Warrantable: if a building has less than 50% sold or in contract, then Sponsor owns a majority which means lender will have a harder time approving the condo building, best to go with a lender that has a non-warrantable program Also applies to condos that have 10% or more of the units investor owned (tenant / rented out ) .

b)    Sponsor Sales: Burden of paying NYC & NYS Transfer Tax shifts to Buyer unless you negotiate this at time of offer (significantly increases closing costs to roughly 6% of purchase price) . Also BEWARE OF working capital contributions and resident manager units .

c)     Punchlists- created 7-10 days prior to closing date, be very thorough and add everything to the list, Sponsor will address within 60 days from closing (as per MY RIDER)

d)    TCO vs CO: TCO must be issued in order for closings to commence. Then permanent CO issued within 6 months (unless Sponsor requests extension of same from DOB) NOTE: unit owner may NOT do any renovations or pull permits from DOB until PERMANENT CO is issued.

e)     Tax Abatements : most tax abatements are 10, 15 or 20 years in length (ie : 421-A and J-51)- important to note when the abatement expires as the taxes will be reassessed based on market value and thus may increase significantly for your client.

C.   TH/SINGLE/MULTI FAMILIES:

1)    Pre- Contract Inspection : MUST BE SCHEDULED before contract signing to negotiate credits or repairs. Standard of law is “BUYER BEWARE” seller does not need to disclose

2)    Illegal Decks – make sure a permit was pulled for same and it was build properly as per code, otherwise if not Buyer will assume the burden of filing for same after closing.

3)    No CO – prior to 1938, no CO’s were required so property was grandfathered in.

4)    Permits – many sellers have chosen to renovate properties without getting the necessary permits and DOB inspections. If buyer is accepting the risk due to a lower purchase price, then I always request an indemnification for Buyers against any liabilities resulting therefrom.

5)    HPD/ ECB Violations / Sidewalk Liens- Seller should clear all prior to closing, but we can negotiate money in escrow in order not to delay closing.

6)    Illegal basements (no kitchens and bathrooms permitted)- will jeopardize appraisal

a)    NOTE: can sell a legal 2 family that is being used as a single fam, or a legal 3 fam that is being used as a 2 fam. But you CANNOT sell a legal 2 fam that is being used as a 3 fam, or legal 1 fam that is being used as a 2 fam. (MUST OBTAIN CHANGE OF CO)

7)    Utilities- make sure sellers CLOSE their ACCOUNT for National Grid (gas) and Con Ed (electric) NOT turn off the utilities. Then Buyers will call within 3 days of closing to start a new account in their name .

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Taliya Bashani ESQ

Are you tired of spending so much time and energy running around with buyers showing them properties only for them to jump ship or not pull the trigger ? Are you getting into contract only to lose deals and have them fall through midway? I have helped thousands of agents just like you refocus their energy on sellers and win more exclusive listings. They are doubling their commission with a lot less time and stress. I have spent the last 15 years as a broker and real estate attorney closing over 10,000 deals and over $1 billion in real estate.

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