Seven Steps to Heaven: From Contract to Closing
June 2, 2010
Ready, Set, Go...
After months of pounding the pavement, you've finally found the perfect apartment, or at least close to perfect. It wasn't easy, but you got there and you have an accepted offer. Herewith, my seven-step program to get you through the rest of the process with as little wear and tear as possible.
1. Due Diligence Before the Contract is Signed
I can’t emphasize enough that there is no such thing as too much due diligence when you're about to buy an apartment. From review of the Offering Plan and minutes of the co-op or condo, to the “Q and A” with the Managing Agent about all aspects of the building’s physical and financial condition, there are many steps that must be undertaken, primarily by your attorney, to understand the current status of the co-op or condo. For my “go to” list of ten things that must be investigated before the contract is signed, see “The Due Diligence Short List”.
2. Pre-Purchase Inspections
You must consider whether to have an architect, engineer or home inspector inspect the apartment prior to signing the contract. In the old days, I used to recommend inspections when the buyer was considering a major renovation (such as relocating electrical or plumbing). Today, a pre-purchase inspection is warranted more often than not. Just because the floors are refinished, doesn’t mean you know much about the physical condition of the apartment or the mechanical systems of the building. A good inspector can illuminate problems that are otherwise not readily apparent. Sellers and brokers can be hesitant about pre-purchase inspections because they're concerned that the engineer will reveal something which will sour a buyer on going forward. At the end of the day, a pre-purchase inspection rarely kills a deal. For more information on inspections, see "Is a Pre-Contract Inspection Necessary?"
3. Arranging Your Financing
If you are planning to finance a portion of the purchase price, it is essential that you create your relationship with a mortgage broker or a bank while you are looking for an apartment. This early legwork will allow you to determine how much financing you will qualify for and it will also give you a sense of where interest rates are going. Your mortgage broker may also be able to pre-approve you for a loan. Once you’re pre-approved, it's just a question of finding a co-op or condo that will meet the bank's underwriting requirements. In the world we find ourselves in today, a buyer must secure his lending relationship as soon as possible. For more about the financing process, see “Obtaining Financing” and “The New Normal”.
4. Signing the Contract
Unlike other states where the contract of sale is negotiated for purchaser and seller by real estate brokers, in New York, the contract of sale is negotiated by the attorneys. Although the basic contract is a printed form, a rider is generally added to make up for deficiencies in the form contract and to deal with issues unique to the particular transaction. Believe it or not, since each building is operated differently and special situations and financial points often arise, the contract can go back and forth several times before it's executed. Depending upon a party's bargaining power and the ever-changing market conditions, a delay in getting the contract signed may cause a deal to fall through when a better offer surfaces before the contract is signed. Accordingly, the contract must be negotiated carefully but swiftly. For more details on what should go into this important document, see “Entering into the Contract of Sale.”
5. Applying for Board Approval
As you may already know, once you've signed the contract and have obtained a mortgage commitment, it's time to apply to the Board of Directors (if it's a co-op) or the Board of Managers (if it's a condo) for approval to purchase your apartment. Here's a caveat: If there is anything unusual about your finances, life style or work, you could be headed for difficulty when seeking co-op Board approval. The Board of Directors of a co-op wields a lot of power and can be quite judgmental and unpredictable. Conversely, a condo Board of Managers can only exercise a “right of first refusal” to buy the apartment you're interested in on the same terms offered by the seller. That almost never happens. Altthough a condo Board really does not have a right to reject a purchaser, there are a few upscale condos that try to act like co-ops and have extensive application requirements. At the end of the day, however, condos can only exercise a right of first refusal…that’s it. Determining which type of apartment is best for you will help you avoid a great deal of aggravation when you get to the application process. Notwithstanding what's been said, a co-op or condo Board cannot violate the discrimination laws in making a decision on a purchase application. The members of a Board can subject themselves to significant liability when they turn down someone in violation of the law. For more on the Board process, see “How to Avoid a Board Turn Down” and “The Application Process”.
6. Setting the Closing Date
Without a doubt, determining the closing date has become one of the more anxiety provoking aspects of the entire purchase process. Remember, the closing date in the contract should be viewed as an on or about date. That means that the closing will take place on approximately the date stated in the contract. If you have a particular closing schedule that must be adhered to (e.g, you have to get out of your current home on a specific date), this information must be communicated at the time the contract is being negotiated. Unfortunately, many deals end on a bad note because the actual closing date does not meet the needs of one of the parties. Although there are ways of insuring that the closing takes place on a particular date (imposing a penalty for a late closing or making the closing "time is of the essence"), it is very difficult to get the party who will be subjected to a penalty for not complying with the closing schedule to agree to contractual penalties. As a result, make sure this issue is resolved when the contract is negotiated, not when the parties are getting ready for closing.
7. Preparation for Closing
There are many steps that must be taken to lay the groundwork for a successful closing. Both seller and purchaser have their own checklists (from obtaining the mortgage pay offs and cleaning out the apartment to determining the closing costs and scheduling the walk through). Memo to File: Make sure you’re available for the walk through. As I’ve said in “The Twenty Year Rule, don’t let the little things get in the way of the big picture. If a problem costs less than a flat screen, work it out…For more on getting ready for closing, see “The Closing—Time to Wrap Things Up”.
Residential Reality: Hold Your Breath and Jump in
There you have it. Buying a co-op or condo is an age-old initiation right to becoming a true New Yorker. Let the above serve as your roadmap to a successful transaction. The heavy lifting is over. Let the fun begin...
