The Due Diligence Short List
What Needs to Be Done...
Once your offer is accepted and your attorney has been hired, the due diligence process begins. I can’t emphasize enough that there is no such thing as too much due diligence when you're about to buy an apartment. Here are ten of the most important issues that should be addressed during due diligence phase of the transaction:
Review the Offering Plan. Your attorney should read the offering plan, as amended, for the building in which your apartment is located. That's the document that the Sponsor is obligated to file with the New York State Attorney General’s Office in order to convert the building to cooperative or condominium ownership. If that document is more than ten years old, it’s substantive significance starts to diminish. Nevertheless, the document should be reviewed.
Review the Minutes. The minutes should be reviewed to get a snapshot of the current physical and financial status of the building and the apartment you're buying. If something negatively impacted your apartment (a major leak or other problem), it may be reflected in the minutes.
Confirm Carrying Costs. Make sure that the maintenance or common charges and real estate taxes stated in the listing or in the contract are accurate. You would be surprised how often those numbers are incorrect and sometimes the error is significant.
Review the Governing Documents. The organization documents for the cooperative or condominium should be reviewed. That would be the certificate of incorporation, by-laws and proprietary lease for a cooperative and the declaration (that is, the organizing document) and by-laws for a condominium.
Review the Financials. The most current financial statement should be reviewed to understand the financial condition of the building. Since the financial statement is dated as of December 31st of the most recently ended year, that information is always out of date. For example, if you're looking for an apartment in August, the information in the financial statement is already eight months old. As a result, the account executive of the co-op or condo must be consulted to determine the current financial condition of the building. If you have an accountant, I recommend forwarding a copy of the building's financial statement to get your accountant's input.
Interview the Managing Agent. The account executive of the Managing Agent should also be consulted to determine the most up to date information about the building. If you take a look at the "Hey Nineteen" list, you'll get a sense of the questions that your attorney should be asking.
Speak to the Super. If possible, speak with the superintendent or on site property manager about the building in general and your potential unit specifically. The person who deals with the building’s problems 24/7 has the most current information about the current and past status of the building and the apartment.
Bring in your Design Professionals. If you are planning renovations of any significance (that is, anything other than refinishing the floors and painting), bring in your professionals to go over your plans to determine if there are any threshold problems that would keep your renovation plan from becoming reality. Although most Managing Agents will not discuss renovation plans in advance, try to get as much information about the co-op or condo’s renovation policy to determine whether your proposed plan is likely to be approved.
Lender Approval of Your Co-op or Condo. Because of the limited availability of credit at the moment, your mortgage broker or lender should be consulted to determine whether the building has any impediments (such as low owner-occupancy), that would discourage your bank from making a loan in this building. Many co-ops and condos are on a bank’s “approved” list. Knowing your building has been cleared by your bank, will save a lot of frustration further down the road.
Google Everything. Use the Internet to investigate background on the co-op or condo, the seller, the neighborhood and anything else that might be relevant. You would be amazed at how much information turns up. For an ever-expanding list of Internet resources, see “Links I like”.
Residential Reality: Do as Much as You Can…
Once the above steps are taken, you should have a pretty good idea of the physical and financial condition of your building. Although it happens infrequently, every now and then, something is revealed during the due diligence phase that would caution against going forward with the transaction. Make sure that the above steps will be taken by the attorney who is handling your closing. Measure twice, cut once…
For more on due diligence, see “Give Due Diligence it’s Due: Investigating Before You Sign the Contract.”