Residential Realities August 2011
August 22, 2011: Lexicon Alert...A telltale term says it all...
Redefining the Market Continues
Yesterday was a good day to recover from the two-week rollercoaster ride called the stock market. And through the lens of the financial rumblings, pundits and players try to figure out how the tumult will impact the local real estate market in the weeks and months ahead. Who will thrive in this changing economic environment?
In Vivian Toy’s New York Times piece yesterday, entitled “In New York, a Sprinkling of Higher Prices”, a phrase she used speaks volumes about what to expect down the road. Those areas of town that seem less vulnerable to market mood swings were aptly described as “micro markets”. That is, neighborhoods and specific buildings that play against the market trend because of location, layout, amenities, the newness of construction and a variety of other factors. The new general rule is that there is no general rule. Every deal has to pass scrutiny on its own, building by building and apartment by apartment.
It’s About the Deal
We’re approaching a Sy Syms moment where the educated consumer ignores commentary on where the market is going spun out by industry soldiers. Instead, a prevailing view of caution hangs over the real estate industry and will for the foreseeable future. And so, New York welcomes the “micro market”, where buying an illiquid asset still makes good sense.
August 11, 2011: Lost Can Cost--Checkbook Burn From Losing Docs...
How Much is That Fee?
I recently had a closing where the seller, who had owned her co-op for many years and had no mortgage, could not find the stock certificate and proprietary lease associated with her apartment. In today’s a la carte world, when that happens, it can get expensive. In the old days, if someone could not find the stock certificate or proprietary lease, the managing agent charged a reasonable fee (let’ say $300.00), to prepare a “lost stock and lease affidavit”. That was in a universe a long time ago and far, far away.
Managing Agents are Addicted to Fees
In this case, the managing agent charged $1,000.00 to prepare the one page affidavit. No additional searches were run to insure that there were no liens attached to the shares. There was just a whopper of a fee. As it turns out, sometimes the managing agent charges the same fee if someone loses either the stock or the lease and sometimes a double fee if both documents can’t be located. Several managing agents insist that the seller obtain leasehold title insurance (known as an “Eagle 9” policy), in addition to the fee for the lost stock and lease affidavit. Depending upon the purchase price for the apartment, that can add several thousands of dollars to the seller’s closing costs.
Why the Concern?
There is always the very unlikely but possible scenario, when a seller claims that the stock and lease are lost, that the seller ‘s shares are encumbered by a lien and the stock and lease are being held by a third party as collateral. If the managing agent issued a new stock certificate to the buyer, the lien holder would try to assert a claim against the new owner of the shares on the theory that the shares were transferred subject to the lien. If you didn’t follow the last sentence, let me boil it down to one word: litigation. So managing agents should be cautious when someone claims that he or she can’t find the documents necessary for closing. But charging $1,000?
Lenders are Losers
Banks often lose the stock and lease. When that happens, the seller usually advances the fee for preparation of the affidavit and is reimbursed by the bank that lost the documents. Let me translate. After the closing, the seller or the seller’s attorney (that would be me), will hound the dysfunctional back office of the lending institution in question until the fee is finally reimbursed. Think of it as trying to find your way out of a corn maze in Iowa, which is where the banks keep the collateral documents these days.
Residential Reality: Be Cautious with Your Co-op Ownership Documents
At the closing, when your attorney drones on about keeping the stock and lease in a safe place, you actually should. That’s what a safe deposit box is for. Getting dinged at closing for another pointless fee is never fun, no matter how large the sale. So hold on to your ownership docs. You can do it, I know you can.
August 1, 2011: Gone Baby Gone--Can a dying deal be saved?
As the struggling recovery inches along, many of us on the ground know residential real estate's dirty little secret: getting to the closing table has become increasingly more difficult and sometimes doesn't happen. The main cause of deal extremis is obvious: the underwriting process for many banks is now geometrically more complicated.
Lender Lunacy: Underwriting as Theatre of the Absurd
After two years of battling with banks, I've concluded that lenders are suffering from PCLD: Post Crash Lending Disorder. On the one hand, banks appear to have the necessary accoutrements of lending: loan officers, underwriting departments, closing attorneys, and of course, money. At the same time, as a result of over-regulation, financial crisis pendulum swing and heightened concern over collateral, banks only make residential loans if they really, really have to.
A Loan Commitment Letter Isn't What it Used to Be
Before the world of residential lending got turned upside down, once a loan commitment was issued, the parties knew that the transaction was on its way to the closing table. Unfortunately, that simply is no longer the case. To compensate for the bad old days, the bank's underwriting department now piles on "conditions" to the loan commitment letter that can be difficult, if not impossible, for the borrower to satisfy. Although a commitment may technically have been issued, the parties may not be able to close because the conditions can't be satisfied. This Catch 22 can and does happen with unpleasant logistical complications for both sides. Both buyer and seller should understand that until the underwriting process is completed in all respects and has been "cleared to close," all bets are off as to whether the transaction will actually be consummated. Buyers and sellers must factor this reality into every transaction, no matter how large or small.
When the Buyer is Qualified but the Building Isn't
And it's not just the borrower who has hurdles to jump over. As detailed on my blog recently, Fannie Mae lending guidelines, that impose various financial requirements and underwriting thresholds on co-ops and condos, are causing transaction delays and deal terminations. Even if the loan exceeds Fannie Mae's lending limits (currently a loan in excess of $729,750.00, but soon to be reduced to $625,500.00), many lending institutions are still requiring compliance with the restrictive policies. Although banks always insisted on reviewing the most recent financial statement of the co-op or condo and required a relatively standard form of "questionnaire" to be completed by the managing agent, the financial metrics of the co-op or condo were more of a "check the box" item and rarely caused a closing not to happen. Over the past year, however, the regulatory landscape has changed dramatically and co-ops and condos have to be qualified for underwriting, just like the borrower. As pointed out in the Times by Lynnley Browning earlier this year, Fannie Mae usually grants a waiver for a co-op or condo that doesn't meet the current lending guidelines. That being said, a borrower should not assume that a particular lender will be willing to seek the waiver, if required.
Make Sure Your Building Qualifies for Financing
Banks have a bad habit of underwriting the co-op or condo late in the loan application process, so addressing this issue after application can have disastrous results. Borrowers are well advised, therefore, to determine before the loan is applied for, whether the co-op or condo is already on the bank's "approved list." If not already qualified, before going forward with the proposed lender, a borrower should be confident that the building will pass scrutiny under all applicable lending guidelines that the particular bank seeks to impose. Even if the borrower is a slam dunk to get a loan approval, the building may come up short.
There's More to Shop Than Interest Rates
In addition to shopping interest rates and loan programs, borrowers should also seek out banks that have already made loans in the co-op or condo in question or who are willing to work with the borrower to get a Fannie Mae waiver in order to complete the loan. Consideration should also be given to specifically addressing this issue in the contract of sale by adding a funding contingency, so the borrower doesn't wind up with a commitment for a loan that will never close.
Residential Reality: Beware of Regulation Creep that Can Kill Your Deal
The wild west environment that pervaded residential lending a few years back has irrevocably changed the way that residential loans are now processed, underwritten and closed. To keep transaction anxiety in check, make sure to pre-qualify your bank, just like the bank pre-qualifies you...
August 3, 2011: Know Thy Sponsor
August 3, 2011
Back to the Future…
The bell curve of bad developers to good developers is more like a hair pin turn on a NASCAR racetrack. Once the transaction gets going, things can spin out of control and good can turn bad very quickly. Whether it’s the quality of construction, the time table for completion, post closing punch lists, or latent defects, the new construction process is fraught with problems that seem a million miles away from the model apartment and the signing of the purchase agreement. When these issues arise, purchasers often try to exit the transaction, which is not easy to accomplish. Although the financial crisis leveled the playing field for purchasers and unreasonable negotiating postures gave way to more flexible terms and deep discounts on pricing, as the market slowly improves, things seem to be heading back to the dark side again.
As Regis Would Say…
Once the paperwork is signed, buyers often feel “out of control” with the flow of information provided by the developer. Sponsor’s counsel, the transaction gatekeeper, can be monosyllabic in conveying status updates about completion of the apartment, problems with construction or other material issues impacting the sponsor or the development. The mantra is often “read the plan”. The firewall of protection accorded every developer, no matter how big or small or how inexperienced, is puzzling, since so many of these transactions often wind up with problems both before and after closing. Making matters worse, the Attorney General’s real estate division, the co-op and condo cops, is up to their eyeballs in offering documentation and rarely intervenes with run-of-the-mill transactional hassles that drive many buyers to distraction. More than ever, it is essential for the potential buyer to research the sponsor’s background, track record and current status of the development in question before signing on to purchase an apartment. But what to do?
That Internet Thing
Fortunately for buyers, there is a hard drive full of information available through online portals such as streeteasy discussion boards, curbed for development updates and sponsor gossip, the real deal for industry news and trends, Huffington Post New York, for a variety of New York issues, NY1 with Jill Urban, as well as condo blogs and Google searches. Often, there are extensive comments about specific developers and specific projects that shine a very bright light on a variety of topics including pricing, construction status, litigation, and a developer’s success or lack thereof in general. As the expression goes, where there’s smoke, there's usually fire. If there are numerous negative comments about a particular building, the buyer is well advised to proceed with caution and to require explanations of the unflattering commentary before the contract is signed.
When Elvis Leaves the Building
A brand spanking new building should be free of construction issues for many years to come. In many cases, however, that is simply not so. Some sponsors are responsive to issues. Others, not so much. It can be like pulling teeth without Novocain to get a sponsor to complete minor punch list items. When it’s a major issue that impacts the entire building…you get the picture. The goal of the developer is to sell all of the units and to move on to the next deal. Remember, once the sponsor exits, it’s your apartment, and in most cases, your problem.