CoopAndCondo.com - Addressing the realities of Residential Real Estate

From the Law Office of Ronald H. Gitter, Esq.

What Exactly is Title Insurance?

       
What Exactly is Title Insurance?

Clearing Title

One of the great mysteries of real estate transactions is the portion of the deal that involves "clearing title." This is the process by which an attorney makes a determination that the "title" which the seller is offering to sell to the buyer (that is, seller's ownership interest in the property) is free and clear of all liens, claims and encumbrances. Or as they say in the title insurance world, that the buyer is getting "clean title." How is that determination actually made?

Ordering the Title Report

When purchasing a condominium apartment or any other type of real estate, after the contract is signed, the buyer's attorney will call a title insurance company and "order title." Although that process might not start until the buyer obtains a mortgage commitment, if the transaction is subject to financing, the title is usually ordered shortly after the contract is signed. When the attorney orders title, he is asking the title insurance company to search various city, state and county records to determine the status of the title owned by the seller. The results of that search are manifested in a document known as a title report. Under ordinary circumstances, the completion of the title report takes about two weeks. When purchasing a one or two-family house, if the buyer is financing a portion of the transaction, the buyer will also be required to obtain a survey of the land and the structures on the land at a cost of $1,000.00 or more for a standard survey. When a survey is required (which is never the case with condos) the preparation of the title report can take significantly longer depending upon the schedule of the surveyor. But back to condos.

Review of the Title Report

Once the title report is completed, the title company will forward copies of the report to the attorneys for the buyer and the seller and the attorney for the bank that is making the mortgage loan to the buyer. The buyer's attorney will review the report to determine whether any action has to be taken by the seller to "clear title". What kind of stuff appears in a title report that would require action? The report may disclose outstanding judgments against the seller or tax liens which the seller would have to satisfy (that is, pay off ) at or prior to the closing of title. The report may disclose a current bankruptcy filing that may impact on the seller's ability to transfer title. The report may disclose one or more mortgages which the seller will also have to satisfy at closing. In addition, the report may disclose the interest of another party in the unit or an interest of a prior owner that was not properly disposed of when the seller purchased the unit. The interests of any other party other than the seller have to be resolved before the buyer purchases the unit. Any outstanding lien, encumbrance or claim against title that is not resolved prior to closing can create an "unmarketable title". This means that the buyer may be purchasing a title that the buyer may have great difficulty transferring in the future. The report may also disclose violations (that is a breach of a governmental regulation) against the condominium or the unit itself which must also be dealt with at or prior to closing. In most cases, the condominium (usually through its managing agent) will deliver an "indemnification letter" to the buyer and the buyer's bank, by which the buyer and the buyer's bank are indemnified by the condo against the violation. The condo will also promise to "cure" the violation within a reasonable time. Even though the violation will not be "removed" from the title report as an "exception" (and will remain in the report as an encumbrance to title), the parties will go forward with the transaction as long as the condo gives the indemnity letter. There are instances where a violation can actually be a problem, if the condo disputes the violation and does not want to give the indemnity letter. When the violation is against the unit itself, unless there is no financing and the buyer is willing to accept the unit subject to the outstanding violation, the violation will have to be removed before the closing can occur. Don't worry, that rarely happens.

Title Problems...Look to the Contract

As a general rule, once the title report is issued by the title company, any matters which the seller must deal with are usually disposed of in due course. If a hefty financial lien against the seller is revealed in the report, the seller may not want to go ahead with the transaction if a significant portion of the proceeds will be needed to satisfy the financial obligation, such as a federal tax lien. The seller's obligation to satisfy any "objections" or "exceptions" to title is determined by the seller's obligations to do so as stated in the contract between the seller and the buyer. In many contracts, the seller is obligated to do nothing if there is an objection or exception to title. The seller will be given a period of time to cure the objection (30 to 60 days), and if the seller can't remove the objection, either party can cancel the contract. The buyer will then be given the opportunity to take whatever title the seller can give (subject to the objection), but a buyer will rarely take an encumbered title. Some contracts obligate the seller to incur up to a certain amount of money to cure title (let's say $5,000 or more), but that might not be enough to make the problem go away. Since most sellers want to sell their property, they will take whatever action is necessary to clear title, even if it costs a significant amount of money.

What Happens at Closing

One of the unannounced guests at closing is the representative of the title company known as the "title closer". The title closer's job is to review the title report and make sure everything is in order so that the title insurance company can issue a "title insurance policy" to the buyer. The title closer will go through the title report and take out the objections that have been cleared by the seller. This process is called "marking up" the title report. The buyer's bank will get a separate title insurance policy called a "mortgage policy" and the buyer will get a separate title insurance policy called a"fee policy." As a matter of practice these days, the title policy is issued at the closing. That being said, sometimes the actual title policies are issued after the closing and reflect the title as "marked up" by the title closer at the closing. One of the closing cost items that always produces the "deer in the headlights" stare, is the custom of giving the title closer a "gratuity" or "attendance fee" at the end of the closing. This payment, which is usually starts at $150 and goes higher, is given because the title company modestly compensates the closer for attending the closing. I once had a buyer refuse to pay the closer and it got a little ugly at the closing table. Don't make a big deal about it as the it's part of the process of purchasing real estate. The seller will also pay the title closer a "pick up fee" of approximately $200 for each mortgage that the seller is paying off. This fee covers the title closer's efforts to deliver the pay-off check to the bank and record the mortgage satisfaction which the seller's bank will prepare after it receives the check. Remember, be nice to your title closer, he or she can make difficult things go away if they're so inclined.

Uh Oh, Problems at Closing

One of the most important things that the title closer does at closing is call the title company for the results of the "continuation search" conducted by a representative of the title company on the day of the closing. Hopefully, this search will reveal whether there are any additional or new objections to title which appear of record since the date of the original title report. This continuation search also reveals the status of the payment of real estate taxes by the seller so that the parties can properly "adjust" for the portion of taxes payable by each party. If the continuation search reveals a lien or encumbrance which the seller did not know about and is unable or unwilling to satisfy at closing, the closing will have to be adjourned until the seller is able to remove such objection from the title report. This scenario happens infrequently with condo transactions...but it does happen. One of the best things a buyer can do to make sure that the seller does not have any undisclosed liens which are not revealed until the day of closing, is to keep his or her fingers crossed or to say a little prayer immediately before the closing begins. Most of the time that works.

Missing an Objection in the Title Report

The other reason why title issues arise at closing, is because a matter revealed in the title report which the seller must address is ignored by one of the attorneys. Sometimes an issue can get brushed aside in the pressure to get the parties to closing. If a matter is disclosed in the title report, however, there is usually plenty of time to get the matter resolved at or prior to closing. In most cases (most but not all), a title issue which is raised in the title report but which is not addressed prior to closing, is due to the "L" word....laziness. Even when a title issue is forgotten until closing, it usually gets resolved at the closing table by the seller giving an undertaking to get something done or by making an additional payment to the title company. Title companies do what they can to be cooperative and get the deal closed because there is a lot of competition out there for title business. When something is left for the last minute, it's almost guaranteed that everyone will be sitting around the closing table for an extra two or three hours. It's painful, but not fatal.

What Does Title Insurance Cost?

Title insurance rates are set by government regulation in New York and can vary by county. For example, in New York County, a purchase price of $1,000,000.00, with a mortgage of $600,000.00, will generate a fee policy premium of $4,508.00 and a mortgage policy premium of $732.00 (for a total premium cost of $5,240.00, excluding other title charges such as municipal searches and other required title endorsements). When you are purchasing from a sponsor (that is a developer of a new condominium building), you may get the benefit of discounted title insurance premiums because the same policy is being written for a large number of unit owners. It is always a good idea to ask the title company to generate an estimated title bill as soon as possible, so that the buyer will be apprised of the expected title charges as soon as possible.

What Happens if a Claim Arises After Closing?

When a recorded lien or judgment is not found by the title company, the holder of the lien or judgment can seek to enforce its rights in the future. Alternatively, when someone goes to sell the property, the new title report may disclose the prior lien that was not previously disclosed. Title companies often work out indemnification agreements to indemnify the new title company against the prior undisclosed lien. In some cases, there can be a serious claim against title that won’t go away by the issuance of an indemnity by the prior title insurance company. More serious undisclosed title impediments can create significant issues and can delay a closing or kill the deal entirely. The claims department of a title company is like the claims department of any insurance company. Title polices have exceptions and limitations, just like any other insurance policy. If there is no coverage for your particular claim, the financial responsibility for removing the claim will fall upon the owner of the property. If it's a gray area, it could take time to get the title company to commit to cover the claim. The good news is that title claims rarely are made in connection with condo purchases. It's probably safer than riding a bike, and no helmet is required at the closing.

What about Co-ops?

Getting comfort that liens or judgments are not outstanding against the shares allocated to the apartment in question is usually resolved by ordering “a co-op lien search”. The entire co-op transaction industry relies on the lien search, but co-op lien searches pale in comparison to a title report and issuance of a title policy. Recently, title companies have been issuing "leasehold" title insurance analogous to the insurance issued in connection with a condo purchase. Those policies are very different and the effectiveness of such policies has yet to be determined. More on lien searches in the future.

Residential Reality: Yes, You Need Title Insurance

If a portion of your purchase price is being provided by a bank, you will have to obtain title insurance or the bank will not go ahead with the closing. There's just no choice. If you are an "all cash" purchaser, you can go ahead with the closing without getting title insurance, but that just doesn't make a whole lot of business sense. Without title insurance, there is no real assurance that the title of the condo you are purchasing will be free and clear of all liens, encumbrances and other seller-related title problems. Those assurances come from the title policy. Buyers often complain that title insurance is a racket. It is. That being said, it's a necessary evil and part and parcel of the closing process. Bring plenty of checks to the closing, you'll need them. 

 

Simplifying the complexities of Cooperative and Condominium transactions in New York City

Asked and Answered

Q

I don’t smoke, but the smell of smoke is wafting into my apartment from my neighbor. Is there anything that can be done to remedy this condition?

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I’m selling my co-op tomorrow and my bank attorney has not yet received the stock certificate and proprietary lease from my bank. Will the closing have to be adjourned?

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The seller has indicated that there was a leak in the bathroom from the apartment above that has been repaired in all respects? Can I rely on seller’s representation to that effect in the contact?

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Q

My mortgage lender has informed me that the cooperative in which I am purchasing an apartment has inadequate insurance coverage and has requested that the co-op increase its coverage to meet the bank’s new minimum requirements. Can the bank withdraw its underwriting due to a lack of insurance coverage by the co-op?

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The commitment letter included a condition that my loan was subject to a “second review” by the investor to whom the loan will be sold. Has my commitment letter been issued?

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Can I purchase my co-op in the name of a trust?

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Can I allow the seller to remain in possession after closing?

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There’s a repair needed in the apartment that the Seller promises to remedy after the closing. Is that a good idea?

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Do I care who the bank attorneys are?

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Do I have to go to the closing?

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One of the conditions in my loan commitment states that the monthly maintenance cannot increase by more than five percent? Is that a problem?

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Can I have a roommate after I purchase my co-op apartment?

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Can I undertake renovations before the Closing?

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Do I need a home owner’s insurance policy for my apartment at the time of my closing?

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Should I let the broker do the walk through?

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Once I get a loan commitment, is my loan approved?

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When it comes to purchasing an apartment, what exactly is due diligence?

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Do I have to let the maintenance people in to fix a building system?

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Does my dog have to be interviewed by the Board?

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Is buying an apartment in a small building a good idea or a bad idea?

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Can I fudge on my numbers in my financial package to the Board?

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Should I use a mortgage broker or should I go direct to a bank?

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Should I have the apartment inspected before I sign the contract?

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Do I Really Have to Give the Board My Tax Returns?

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I am purchasing an apartment with extensive landscaping on the terrace. Can the co-op or condo make me remove landscaping that was existing at the time of my purchase?

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I have an opportunity to buy a garage space, but the sponsor is calling the arrangement a “license” rather than a “purchase”. Does that matter?

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We are considering an apartment that will require us to move the bathroom to another location in the apartment. Is such a move possible?

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The seller’s bank can’t locate the stock and lease for the co-op closing. Can we still close?

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The broker told me that I can adjourn the closing for 30 days? Is that correct?

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Q

The Offering Plan for my condo indicates that the apartment has a “lot line” window. Is that a problem?

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My dog bit someone in the lobby and I have been notified that if it happens again, my dog will have to go. Does the Board have the power to restrict me from having a pet?

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There is an unobstructed view from the apartment I am considering, but there is a vacant lot directly in front of that side of the building. Is that reason for concern?

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The Managing Agent called and it looks like my finances will not be sufficient to get Board approval. Is there anything I can do?

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The managing agent has had our application to purchase a cooperative apartment for three weeks and nothing has happened. Is there anything we can do to move things forward?

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We are considering an apartment in a co-op where the sponsor still owns units. Is that a problem?

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The seller’s apartment presently has a storage unit. Does the storage unit transfer with the apartment?

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We’re closing in three weeks, but our lease is up next week. Can we move in before the closing?

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I just did the walk through on the purchase of a sponsor unit and we have an extensive punch list. Will the punch list be completed by the time of closing?

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I’m buying an apartment from a sponsor and the Offering Plan requires me to pay the sponsor’s transfer taxes and attorneys fees. Do I have to?

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The purchase price of my apartment is over $1,000,000.00. Is the transaction subject to the “mansion tax"?

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I’m selling my apartment, but I’m not a resident of New York State. Are there any special closing costs?

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We did the walk through and the apartment was filthy. The contract required the apartment to be “broom clean”. Can we complain at the closing?

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I have to sell my apartment in order to afford the new one I’d like to buy. Can the contract be contingent on the sale of my existing apartment?

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I’m a famous person (no, I really am) and I really don’t want my financial information given to eight strangers on a co-op Board. Is there a way to avoid that?

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I’m the executor of the estate of a deceased shareholder. Do I have to go to the closing?

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I just graduated law school and have a job with a large law firm. I have a significant salary, but no liquidity or significant assets. Will I be able to buy a co-op?

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The listing indicates that the apartment has “roof rights”. How can I be sure?

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When buying a condo, is it worth the time and effort to get an assignment of the seller’s mortgage?

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The Seller removed an expensive chandelier right before Closing. Is that permitted?

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My husband and I found an apartment we love, but there’s a bidding war. Should we participate?

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We love the apartment, but the building has bad financials. Should we go ahead?

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My closing is in December, but the lease for my apartment does not expire until the following March. What do I do with my lease?

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We are buying a condo, but we have a delayed closing as the seller has a tenant in place for the next six months. We will be able to retain our loan commitment for an extended period of time?

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Should my husband and I take title as tenants by the entirety, tenants in common or as joint tenants?

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When a gay couple buys the shares of a cooperative or buys a condominium apartment, what is the best way to hold title?

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I have not been able to make my co-op mortgage payment for the past three months. If the bank declares my loan in default, how long will it take before the bank forecloses on my apartment?

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A co-op owner asks: I have found that maintenance is usually higher in coops than in condos because of the contribution by the shareholders to the building's underlying mortgage payments. In condos, the unit owners only pay for real estate taxes and common charges for common areas. Will the monthly maintenance be reduced after the underlying mortgage has been fully amortized?

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Can a corporation or other business entity own the shares of a cooperative apartment?

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I’m buying an apartment in a building designated as a “landmark.” Should I be concerned?

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I am buying a co-op that needs major renovations. The super has offered to do the work at a significant discount. Is that a good idea?

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We just submitted the Board package and we realize that we neglected to disclose a lawsuit against my husband’s company, in which my husband is named as a defendant? The lawsuit is covered by insurance and my husband is indemnified from liability by his employer. Should we notify the managing agent and amend the purchase application?

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We are negotiating the contract and we just found out that there is a substantial assessment that will go into effect the month that we close on the purchase. Should the assessment be deducted from the purchase price at closing?

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The bank attorney was two hours late to the closing. Was that my attorney’s fault?

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I’m buying a cooperative apartment in Manhattan, but I move out to the Hamptons from June to the end of September each year. Will I be able to sublet the apartment each year when I’m away?

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I just got the purchase application package and it's twenty pages long. Should my broker be helping me with organizing the required documents?

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It’s the day before the closing and I just found out that the maintenance for the apartment is higher than the maintenance stated in the contract. Is that grounds to terminate the contract?

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The financials for the condo are more than a year out of date and there is a delay issuing the new financials. Should I be concerned?

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The contract requires “official bank funds” in the form of certified or official bank checks. Can I bring “official" checks from my brokerage account?

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My parents want to buy me an apartment while I’m in graduate school in Manhattan. Will a co-op allow me to purchase the apartment, if my parents are co-owners?

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I obtained sole ownership of my condo in my divorce, but the deed for the apartment is still in both of our names. Will my ex-spouse’s cooperation be required when I’m ready to sell the apartment?

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I just found out I have to pay a fee to have my mortgage recorded. Is that right?

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I am buying an apartment in a small building and I just found out that the elevator is being renovated and will be out of service for three months. Do I have to close if the elevators will not be operational on the closing date?

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My husband and I own a co-op and we would like to transfer the shares to an irrevocable trust that we recently created for estate planning purposes. Will our cooperative allow us to make that transfer?

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The seller is a foreign citizen and does not have a social security number. Does that prevent the seller from selling the apartment?

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An “assessment” was imposed by the co-op Board after the contract was signed. Is payment of the assessment the seller’s responsibility?

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Q

There is a leak in my apartment and the Resident Manager is not being responsive. Should I call the Board president?

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I just bought an apartment and I am only refinishing the floors and repainting. Do I need the consent of the Board before I get started?

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The co-op I’m interested in is pet friendly and I have a dog. Is there any chance the Board could approve my application without approving my pet?

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Q

We purchased our apartment in January, but our first mortgage payment is not due until March 1st. Why isn't the first payment due February 1st?

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I’m buying an apartment from a sponsor and the contract does not provide for a “mortgage contingency”. Is that a provision that I can negotiate into the contract?

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I am buying an apartment from a sponsor and the contract provides for the buyer to pay the sponsor’s transfer taxes and legal fees? Is that normal?

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I'm buying a condo and my attorney just ordered the "title report". What's a title report?

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There is a leak in my apartment and the Resident Manager is not being responsive. Should I call the Board president?

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Q

My boyfriend and I are interested in buying our first apartment in a new construction condominium. Our mortgage broker tells us we should qualify for a 90% loan, but it will be a close call for the bank. The sponsor wants us to sign a “no contingency” contract. Is that a good idea?

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We are considering a condo purchase in a new development that is only 25 percent sold. There is a bank that has approved the project and will make the loan, but should we be concerned about the number of units that the sponsor still has to sell?

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We are buying an apartment that has been extensively renovated. Among other things, the size of the master bath was significantly increased. Can we rely on a representation in the contract that all required approvals were obtained from both the Cooperative Corporation and from the New York City Department of Buildings?

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Q

We received a draft of the contract of sale for the cooperative apartment we are buying and our social security numbers are on the front page! Our attorney told us that we will have to provide our identification numbers to the managing agent for a credit check as a part of the Board package, so it’s not a big deal. Do we have to list our socials on the contract?

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Q

The listing stated that the apartment was 1,100 square feet, but the appraisal measured the apartment at 900 square feet. Can we cancel the contract and get our money back?

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Q

I'm about to pay off my co-op loan. What evidence will I have from the bank that the loan has actually been paid off?

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Q

I am considering an apartment in a new construction condominium. There is park under development by New York City that will greatly enhance the value of the condominium when it’s completed. Although the sponsor’s salesperson indicated that the first phase of the park will be completed in the next year or so, the Offering Plan contains a “Special Risk” that states that the sponsor gives no assurance as to when, if ever, the park will be completed. Who and what should I believe?

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Q

We are in negotiations to purchase a co-op apartment on the Upper East Side. Our lawyer reviewed the minutes and discovered that the building has a bedbug infestation. Should we go forward with our purchase?

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My purchase application was approved by the co-op Board, but it is conditioned upon my providing a maintenance deposit and guaranty by my parents. Do I have to comply with the conditions?

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Q

At my closing, I had to reimburse the Seller for his New York State “STAR” rebate that appeared on the maintenance statement for the month following the Closing. What exactly is the STAR rebate and will I be able to obtain the rebate as well?

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Q

I'm selling my co-op next month and my attorney aked me to "freeze" the line of credit I have with my bank. What exactly do I have to do?

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I just found out that the seller will be unable to close for an additional two weeks. As a result, I will have to extend my rate lock, at a cost of $1,200.00. Is the seller obligated to reimburse this cost?

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Q

I am buying a new construction condo and the Offering Plan is over 400 pages. Do I need to read the entire Offering Plan?

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Q

We ran across a co-op that has a few “sponsor owned” apartments for sale. Is there any advantage in buying one of the remaining sponsor apartments?

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Q

I am about to make an offer on an apartment, but I have not been provided with the current financial statements for the co-op. Am I entitled to review the financials before I make my offer?

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Q

We are selling our apartment to our neighbor, but our neighbor can’t afford to purchase our apartment unless she sells her apartment. Her lawyer wants the contract to provide that the purchase of our apartment is contingent upon the sale of her apartment. Our lawyer is advising us against including a provision that makes the transaction contingent on the sale of the buyer’s apartment. Should we go along with the contingency?

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Q

We are selling our co-op and the buyer is not obtaining a mortgage in connection with the purchase. The contract required the Board package to be submitted within 10 business days after the fully-executed contract was returned to the buyer. The buyer is two weeks late in submitting the package. Is the buyer in default?

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Q

I’m selling my condo and I have not been able to pay my common charges for the past six months (I lost my job). I have a buyer for the apartment, but the Board of Managers will not release the Waiver of the Right of First Refusal, unless I pay the outstanding balance of the common charges. I’m between a rock and a hard place, as I don’t have the money. What should I do?

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Q

I am combining two adjacent apartments that I own and I want the co-op to issue one stock certificate for both apartments. There is an outstanding UCC lien against one of the apartments. The other apartment is owned free of any liens. Can the co-op object to the combination?

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My attorney asked me to contact the managing agent to verify the maintenance and assessment information that's disclosed in the contract for the apartment I intend to purchase. Isn't that my attorney's job?

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Our application to purchase a co-op was turned down by the Board without an interview. Although our attorney asked the managing agent to disclose the reasons for the Board’s decision, none were given. Can the Board just turn our application down without any explanation?

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Q

My bank issued a loan commitment, but then withdrew its underwriting because private mortgage insurance was not available. Will I have a problem canceling the contract and getting my deposit back?

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Q

The seller has a storage bin, but the contract indicates that the apartment does not come with a storage bin. If I buy the apartment, can I be sure that a storage bin be avaialable?

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Q

I’ve been asked to serve on the Board of my co-op. Could I be held liable if the co-op is a party to a law suit?

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I am buying a co-op in Manhattan. The managing agent is located in Brooklyn and refuses to send a closing representative to the attorney’s office for the buyer or seller located in Manhattan. Will everyone have to go to Brooklyn for the closing?

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We are purchasing a condo that was occupied by a tenant at the time the contract was executed. We just did the walk through and there is damage to a portion of the floor that was hidden by the tenant’s furniture. Are we entitled to a repair credit at Closing?

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Q

A loan commitment was issued, but the bank requested an explanation for a $14.00 missed credit card payment that occurred nine years ago. Could the bank withdraw its commitment as a result of this missed payment?

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I'm selling my co-op, which I own with my mother and father. Is it okay to have the closing checks made out to the three of us?

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A leaking pipe inside the wall of my co-op was recently replaced. The following month, my maintenance account was charged $1,000.00 on the theory that the pipe only serviced my apartment. Am I responsible for this repair?

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A condo buyer has a mortgage contingency, but the closing will not take place for six months as the seller has a tenant in the apartment. When should the purchaser apply for financing?

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We submitted our Board package a month ago, but the Board has not scheduled an interview or asked for any additional information. To make matters worse, the managing agent won’t give us any indication as to what’s going on. Is there anything we can do?

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Q

My co-op contract included the seller’s flat screen, but the bank underwriter required that it be removed from the contract as it was “impacting” loan to value. Can the bank do that?

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Q

I am buying an apartment in a small co-op that is self managed. How does the bank obtain the required “co-op questionnaire” in order to complete its underwriting?

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Contact Ron Gitter

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