CoopAndCondo.com - Addressing the realities of Residential Real Estate

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

Lien On Me

       
Lien On Me

It's Not in Its Nature

Okay, the basics: when you purchase shares in a co-op you are actually purchasing personal property and not real estate. Although ownership of a cooperative apartment has many of the characteristics of owning real estate, when it comes to things like "title insurance", a co-op just isn't considered real estate. As a result, when you close on your purchase of a co-op, the "title" that you are acquiring is very different. Your ownership interest will be evidenced by shares of stock in the cooperative that owns the building you will be living in and by a proprietary lease which gives you a "leasehold interest" in the unit to which your shares are allocated. When you purchase a condominium apartment, you actually receive a deed to the condo unit just like you would if you purchased a house in the burbs. In essence, there is not a real estate "fee interest" to insure with title insurance when buying a co-op. So how do you protect yourself?

The Lien Search

The cooperative corporation owns the "fee interest" to the building in which your co-operative apartment is located. Since that title must have been cleared when the co-operative acquired title to the building, everyone assumes that the title to the building is okay and there's nothing to worry about. That’s a somewhat exaggerated interpretation, but basically, that's actually the premise that folks rely on. Accordingly, everyone (purchaser, bank and managing agent) goes along with the program of clearing "title" to a seller’s interest in a particular cooperative apartment by ordering a "lien search"from a title insurance company or other company engaged in the business of performing cooperative lien searches. What actually happens when a lien search is conducted? The title company or lien search company will search many of the same records that are searched when a title report for a condo purchase is generated. Tax records, litigation filings, UCC filings and bankruptcy filings are checked to insure that the seller has the unencumbered right to transfer his or her shares to the purchaser. When the search process is completed, the search company generates a lien search report that is an abbreviated version of the title report. The purchaser, the purchaser's bank (if there is financing) and the managing agent, as representative of the cooperative, rely on this search to determine the status of the seller's ownership of his or her shares. But that's it. After the search is generated, except as discussed below, there is no cooperative insurance policy issued by the search company at closing. The parties just rely on that search to make the decision as to whether or not to go ahead with the closing. The Managing Agent's representative will issue a stock certificate and a proprietary lease in the name of the purchaser and the purchaser will be reflected as the owner of the shares on the books and records of the cooperative. But what happens if there is a mistake in the lien search?

Oops, We Missed that Tax Lien

Here's the tricky part about purchasing a co-op. Most search companies limit their liability for making a mistake. Limitations on liability can be as low as $1,000 and run as high as $100,000 (if the purchaser's bank demands a higher limitation). So if the search company accidentally missed a $150,000 tax lien or judgment, and the search company's liability is limited to $20,000, there's a big problem. Of course there would he recourse against the seller, but that is always a difficult remedy once the seller is long gone. The truth is, there's not much that can be done when an undisclosed lien surfaces after closing. Although this scenario rarely occurs, it can happen. Everyone accepts that the lien search is accurate and relies on whatever representations the seller has made in the contract (some of which representations survive closing and most of which do not). There is a "trust me"component to co-op purchases that has always been a part of the process. That being said, once the stock and lease are issued to the purchaser, except in the extremely rare case of a voidable transaction as a result of fraud (which I have never seen happen), once the new stock and lease are issued, the purchaser is without question the owner of the shares. However, that does not guaranty that the shares have been transferred to the purchaser free and clear of all liens and encumbrances. Is there anything else you can do to protect yourself?

Leasehold Insurance

Although not used very often, a purchaser can obtained something called a "leasehold insurance"policy from a title insurance company. Leasehold insurance insures that the "leasehold" created by the proprietary lease between the co-op and the tenant-shareholder (the purchaser of the shares), is free and clear of all liens and encumbrances. The search that a title insurance company conducts when it will be issuing a leasehold insurance report is very similar to a title report generated with a condo purchase. Similarly, a "leasehold insurance policy" will be issued at closing just like a title insurance policy. What does it cost? For a $1,000,000 co-op, the leasehold policy premium would be $3,155. A standard cooperative lien search costs about $300, so you can see the difference in the liability assumed by the title company by the higher premiums charged for the leasehold insurance policy. You would think that the protection of a leasehold insurance policy, would be as important as obtaining title insurance. Surprisingly, leasehold insurance is rarely obtained in co-op purchases. A leasehold policy is never requested by the purchaser’s bank and most purchasers don't even know it exists.

The Eagle 9 Policy

A number of years ago, First American Title Insurance Company of New York, recognizing the minimal title insurance protection afforded to purchasers of co-ops, introduced a new insurance product called the “Eagle 9 Cooperative Insurance Policy for Buyers”. This new type of insurance coverage specifically addresses many of the liability concerns that arise in connection with the purchase of cooperative shares and protects the insured against claims arising under the Uniform Commercial Code (affectionately call the “UCC”), which is the body of law that deals with security interests filed against personal property (shares in a co-op), among many other things. Here are just a few items covered under the policy:

  • Someone other than the purchaser claims an interest in the shares.

  • A lender attempts to enforce a wrongfully terminated UCC-1 filing.

  • A tax lien filed in another jurisdiction is being enforced against the unit.

  • A proceeding is commenced to enforce a judgment or a claim.

There are a number of other areas of coverage, but you get the idea. In order to make the product interesting to purchasers and to the industry, First American priced the title product at a lower premium. The same coverage for a $1,000,000 cooperative apartment would be $1,257, instead of $3,155 for a leasehold title insurance policy. Despite the reasonable cost (taking the average price of a co-op into consideration), most co-op purchasers do not purchase Eagle 9 policy coverage.

Which is the More Effective Policy?

As with any type of insurance, the value of the insurance is determined by the insurance company’s willingness to cover a loss once a claim that is made under the policy. Based on my conversations with a number of title companies, I could not find an instance where a claim had been made either under a leasehold title insurance policy or under the Eagle 9 policy. Accordingly, until a claim is made, no on really knows exactly how a title company will respond to the claim and whether the particular claim will be covered under the insurance policy. Further, I have asked a number of title professionals which policy has better coverage and I have not gotten a definitive answer. The Eagle 9 is less expensive, but not necessarily a better product. Until a claim is made and a title company reacts, I don’t think that question can get answered.

Uncertainty Aside, When Should A Leasehold or Eagle 9 Policy be Purchased?

  • Despite the unquantifiable value of leasehold insurance or UCC-related insurance at the moment, when should you consider obtaining leasehold or Eagle 9 UCC insurance policy, even though such policies are used infrequently? Here are a few cases when incurring the cost makes sense.

  • If you happen to be purchasing shares from a bank that has foreclosed on its cooperative lien.

  • If you’re purchasing shares from a bankruptcy trustee.

  • When purchasing cooperative shares from an estate (that is, the entity through which shares are sold after the shareholder has died), particularly if there is any concern about the ability of the estate to transfer the shares and to insure that all estate tax has been paid and all federal and state estate tax lien waivers have been obtained.

  • If you are purchasing from a divorced couple who have just completed a hostile divorce and only one party is actively participating the closing (as the other party has given his or her former spouse a power of attorney to complete the transaction pursuant to the terms of the divorce decree or separation agreement).

  • When the seller is currently a party to material litigation.

  • When a lien search discloses significant liens and judgments against your seller, to insure that all such liens and judgments are disposed of prior to closing,

Again, even in these situations, as odd as it sounds, leasehold or UCC-related insurance is rarely obtained.

What Happens at Closing

With most co-ops closings, unlike a condo closing, there is no "title closer" at the closing. The bank's attorney or the purchaser's attorney will order a "continuation search" to be conducted by the search company on the morning of the closing. This search is performed to insure that no new liens have come of record since the date of the original lien search. If leasehold or UCC-related insurance is being obtained, a title closer will attend the closing to “mark up” the title report initially prepared by the title company in order to issue the policy. As a part of the process of clearing title, at closing, the seller will provide the title closer with whatever documentation the title company has requested, such as federal or state tax releases, satisfactions of judgments or UCC lien terminations.

Residential Reality: Go Ahead and Close

Some of you may be thinking, how can I buy a co-op with such uncertainty about the status of the seller’s title? There is definitely a leap of faith taken by the purchaser when purchasing a co-op because of the holes in liability protection. That being said, co-ops represent about 80% of the ownership-based housing stock in New York City and thousands of people are buying and selling cooperatives every year. Although it can happen, there are very few cases where bad title is transferred when a co-op is sold, resulting in the seller’s problem becoming the buyer’s problem. Obviously, due diligence  is very important. In the vast majority of cases, the professionals take the appropriate action to insure that the purchaser is getting “lien free” title. Attorneys know all of the above and now you do as well.

For more about title insurance, see “What Exactly is Title Insurance.”

For more about closings, see “The Closing—Time to Wrap Things Up.”

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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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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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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Q

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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Q

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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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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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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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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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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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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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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Q

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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