Understanding the Importance of Due Diligence when Purchasing in NYC

by Ryan Saxton, Esq.

Perhaps one of the most exciting feelings, as a prospective purchaser, is the moment you receive an accepted offer.  And it should be, as it seemingly ends what can sometimes be a long and grueling search.  It is important to remember, however, that before you can sign a Contract you need to be certain that you understand the risks and responsibilities in connection with your becoming a Shareholder or Unit Owner.

Today’s blog focuses on due diligence, and more specifically it focuses on due diligence for re-sale coop/condo purchases. Note that New Development Due diligence and Due diligence for Single and Multifamily properties is different than for Coops and Condos and so we save that for another day.

The due diligence that we recommend is almost identical for Cooperatives and Condominiums .

At H&A, we draft a thorough written due diligence report and review it in detail with our clients before you have signed the contract and given a down payment. Some of the key points that we look for include the following:

For our due diligence we look for a laundry list of items to ascertain   the physical and financial aspects of the Purchase as well as the Buyers rights, responsibilities and risks in connection with their purchase.

Legal Designation/Status of the Apartment:

For Coops and Condos the description is found in the Offering Plan as well as on government databases such as the NYC Department of Buildings. There are other forums to obtain the

information but we recommend starting here. Some of the key points we focus on are:

-          How many legal bedrooms/rooms/bathrooms are there

-          Is there a valid certificate of occupancy

-          Does Storage come with the unit

-          Has the property been combined with another unit, and, if so, was it done legally

-          Have all projects and renovations been done legally/to code and with Board approval.

-          Does the property contain lot-line windows

-          Who is responsible for maintenance/repair of any outdoor areas

-           is the building landmark?

Monthly Carrying Costs and Building Financials:

We review audited financials for the building, the NYC Dept. of Finance website, board minutes and management’s responses to our customized questionnaire.

-          Confirm monthly maintenance, or common charges and real estate taxes

-          Investigate any patterns of large year to year increases in maintenance/common charges

-          Is there a charge for storage, parking or other amenities if any

-          Review to understand history of special assessments and whether additional assessments might be expected in the near future

-          improvements or emergency repairs

-          Does the property/building receive any special tax benefits

Day to Day Operations and Issues (present or past) 

A review of board minutes as well as specifically tailored questions to management help identify whether or not any noteworthy issues exist at the building.  We also review the Alteration Agreement, Purchase Application, Sublease Application, bylaws and House Rules.

-          Have there been issues with leaks, mold, noise, neighbors, security, bed bugs, rodents, etc. that impact the property

-          Are wet over dry renovations and washer/dryers, dishwashers, fire places allowed

-          Are there any other rules for renovations

-          Is subletting allowed and are there any limitations or fees

-          Are pets allowed

-          Is the Coop/Condo involved in any litigating

-          What is the owner occupancy ratio (important for financing)

-          Is there a maximum amount of financing allowed

-          Are there any major repairs/projects planned and how are they being funded

-          When was Local Law 11 work last completed

Estimated Costs Charged by Management in Connection with Application and for Closing

Typically, a review of the purchase application and following up with management is sufficient to compile the costs associated with the Application Process.  Our Closing Estimate also outlines closing costs associated with transfer taxes, title insurance, banking costs, and filing and recording fees.  Some of the costs a purchaser should expect include, but are not limited to, the below:

-          Application Fee

-          Credit Report/Background Check Fee

-          Financing Fee

-          Move-in Fee and/or Deposit

-          Working Capital Contribution

-          Title Insurance (condos only)

-          Lender’s Title Insurance

-          Recording and Filing Fees

-          Mortgage Tax (condos only)

-          Mansion Tax

-          Legal Representation

-          NYC and NYS Transfer Taxes (typically only on New Development where the Buyer Generally pays)

-          Bank Legal and Loan Fees (there are separate Bank costs)

The above is just an overview of many issues we examine when conducting our due diligence. Please feel free to review our sample templates so that you see what we provide on our buy side.

Links to templates of our due diligence reports can be found below.