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

Broker Talk New York: Understanding Dual Agency

       
Broker Talk New York: Understanding Dual Agency

January 1, 2011

A New Year, a New Law

Effective January 1, 2011, an amendment to Section 443 of the New York State Real Property Law will significantly change the way brokers selling co-ops and condos in New York disclose their agency relationships with their clients. Although the law of agency, which governs the relationship between brokers and their principals has not changed, there is now an obligation to disclose the agency relationship in writing and to obtain written consent of both seller and buyer when dual agency exists. Since co-ops and condos were previously excluded from written disclosure requirements, many brokers are dealing with these concepts for the first time.

Let's Start with the Basics

A broker has three possible agency relationships with a prospective principal:

  • the broker can act as agent for the seller;
  • the broker can act as agent for the buyer; or
  • the broker can act as "dual agent" for both seller and buyer.

Since a broker, as "agent for a principal", has an absolute duty of loyalty to that principal, when dual agency is created by the broker acting as agent for both seller and buyer, the loyalty owed by the agent to the principal is diminished, as the broker then has a duty of loyalty to both the seller and the buyer. It is for this reason that many believe (including myself) that dual agency is not in the best interests of the parties. Nevertheless, since there's now a legal obligation to disclose agency relationships, and since dual agency can't be avoided in a number of situations, it's important for brokers to understand the basics of how and when the disclosure should occur.

The First Substantive Contact

Brokers must accept the fact that there is a new administrative detail that must be attended to at the commencement of a broker's relationship with a seller (that is, when a listing agreement is signed, assuming an exclusive) or with a potential buyer (when the broker starts the process of showing that potential buyer various apartments). As the statute requires, once that relationship is created with the principal it must be disclosed to the other party when the first "substantive contact" occurs, by completing and delivering the revised form available on the New York State website and from REBNY to its members.

When Does that First Substantive Contact Occur?

Here's the first slippery step on the slippery slope. Until there is litigation and the courts determine, as a matter of law, when the "first substantive contact" is deemed to occur, no one really knows when that moment has arrived. So until the courts tell us otherwise, here are two rules to follow that should ratchet down the stress level of making that determination:

First:

As soon as a broker is directed, engaged or retained in any way by either a seller or a buyer to act for that party, the agency relationship has been created and the appropriate disclosure form should be signed.

Thereafter:

At the first material communication with the other party (whether by E-mail, telephone or open house interaction) the broker's relationship with his or her principal should be disclosed.

But is Signing and Delivering the Form Sufficient to Satisfy the Disclosure Obligation?

A resounding "no" is the appropriate answer. It is essential for brokers to understand that there are two prongs to the disclosure obligation. Yes, there is an obligation to obtain the written consent of the principal, but more importantly, before any paperwork gets signed, the principal must understand the nature of the agency relationship that the principal is entering into with the agent. As required by the statute, it is the broker's responsibility to insure that the principal has "informed consent." The same is true with the disclosure obligation to other parties. It's all well and good to announce that you're the seller's agent, unless the party you're announcing to doesn't really know what you're talking about.

How to Insure that the Parties Understand the Agency Relationships

Again, we're out on the moors in the fog, but there are steps that can and should be taken to give the broker confidence that he or she has acted in a commercially reasonable manner to explain the agency relationships to both seller and buyer.

  • Use the Form: The disclosure form itself defines each agency relationship in relatively clear terms and the broker should review the narrative on the form with the principal before the form is signed and thereafter when the form is distributed.
  • Use Your website: As REBNY is now requiring execution of the forms prior to use of a Virtual Office Website, a tab should be created on your VOW which includes the applicable forms, a discussion of agency relationships and a method for execution of the forms. Links to industry and government resources and other materials that address these issues should also be considered.
  • Use a Cover Letter: Consider preparing a cover letter, in which the principal acknowledges that he or she has read and understands the nature of the agency relationship;
  • Use an Attorney: Ultimately, every seller and buyer will have legal representation in connection with the transaction. A broker who is not comfortable explaining the complexities of the agency relationships, could advise the prospective client to have the form reviewed by his or her attorney prior to signing. Is this necessary in every transaction...no. But as the complexity of the agency relationships increase, a broker should consider informed consent to include review of the disclosure by the principal's attorney before the form is signed.

The Minefield Known as Advance Consent

We live in a world of mega-companies and real estate brokerage is no exception. With co-op and condo transactions, it is often the case that the same large brokerage firm has an agent on each side of the transaction. Despite the so-called firewall within the firm and each agent's undivided loyalty to each party, once the same firm is on both sides of the transaction, dual agency occurs...period. So if you are taking a "customer" around to various open houses and your fellow agent has the exclusive on a particular apartment, dual agency is deemed to occur when the first substantive contact is made with the other broker.

The Lobbying Logic of Advance Consent

So the industry lobby decided that it would be a good idea to allow brokers to obtain "advance consent" to dual agency, primarily for those situations when the same brokerage firm is on both sides of the transaction. An agent can ask his or her customer to agree to advance consent "with a designated agent", so that the dual agency relationship is consented to in advance when a broker goes to an open house with an agent from the same firm. The broker not only has to explain the nature of dual agency, but also has the obligation to explain "advance" dual agency. Yes, it's very confusing, both substantively and logistically. I don't think we can fashion a "one size fits all" rule as to when advance consent should be obtained, but we can set out a few metrics to consider when a relationship with a seller or buyer commences:

  • First and foremost, when a broker has an exclusive, the seller should be asked to give advance consent, to accommodate the possibility of a direct buyer making an offer on the apartment.
  • Secondly, before beginning the process of schlepping the buyer around to apartments, the customer should be asked to consent to advance dual agency with a designated agent, as the likelihood of going to a listing with the same firm on both sides is expected.

But if you're just not sure what to do, consider the following Rule of Thumb:

When in doubt as to whether you are acting as a dual agent, disclose, discuss and obtain written consent to act as dual agent.

About that Uncooperative Seller or Buyer...

There is a ripcord available when a seller or buyer refuses to sign the required disclosure form. The broker should prepare the statutory "Affirmation" indicating that the party was asked to sign the form and refused. That being said, once a party refuses to acknowledge the broker's role in the transaction, all bets are off on what might develop down the road. For this reason, getting the forms signed up front, is the broker's best protection.

Residential Reality: Think Rubik's Cube

There are many twists and turns and many combinations that can create a principal-agent relationship, as well as the more complicated dual agency relationship. So consider this the beginning of the conversation. Brokers should consult counsel as well as look to industry organizations (that were instrumental in implementing these changes) for assistance and guidance in figuring out the appropriate course of conduct as the process evolves over time. Now is the time to ask your questions and to clarify disclosure obligations, as the broker is now charged with the duty to obtain what might be the elusive informed consent of both seller and buyer in every co-op and condo transaction.

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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Q

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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Q

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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Q

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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Q

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

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Q

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

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Q

Does my dog have to be interviewed by the Board?

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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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

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Q

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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Q

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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Q

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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Q

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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Q

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

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Q

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

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Q

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

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Q

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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Q

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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Q

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

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Q

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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Q

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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Q

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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Q

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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Q

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

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Q

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

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Q

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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Q

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

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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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

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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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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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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Q

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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