CoopAndCondo.com - Addressing the realities of Residential Real Estate

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

How To Avoid a Board Turn Down

       
How To Avoid a Board Turn Down

The Vertical Country Club

Although Groucho didn't want to belong to any club that would have him as a member, in Manhattan, the opposite is true: there are co-ops out there that don't want you even though you want them. Getting approved by a co-op's Board of Directors is as New York as the Statue of Liberty. It is a vestigial initiation rite which complicates the apartment purchasing process and always ratchets up the anxiety level. For the uninitiated, here's what we're talking about.                                                                        

 

 

The Power To Just Say No

As you may know, when purchasing a cooperative apartment (with some exceptions as mentioned below), even though you've got the bucks to purchase the apartment, you still have to be approved by the co-op's board of directors. The co-op board is a group of 6 to 8 tenant-shareholders who reside in the co-op and who are elected by the residents of the co-op to manage the affairs of the co-op. As a part of those duties, the co-op board is responsible for reviewing the purchase applications of all prospective purchasers in each co-op. Unlike a condominium, where the board of managers can only exercise a right of first refusal to purchase the unit from the seller on the same terms offered to the prospective purchaser, a co-op board has the power (as granted by the co-op's by-laws and proprietary lease) to flat out turn down a proposed buyer.

What's Behind the Approval Process

The approval process originated as a means to screen out the socially unacceptable from the Park Avenue and Fifth Avenue buildings. It created an air of exclusivity which in turn, made the real estate more expensive. When this concept first came into play in the twenties and thirties, there might have been hundreds of apartments involved in the screening process. Now there are tens of thousands of co-op units all over the five boroughs. Except for those buildings where financial wherewithal is a given and social acceptability is the real issue, most coops screen potential buyers for financial ability to meet one's obligations to the co-op. Nevertheless, non-financial issues often creep into the board approval process. Although most people who submit purchase applications get approved, board "turn downs" happen all the time. Here are some suggestions to make sure you don't find yourself on the other end of a dreaded telephone call:

Know What You're Getting Yourself Into

When it comes to knowing the skinny on Manhattan co-ops, unless you know someone who lives in the building in question, the best way to find out information on a co-op is through a knowledgeable real estate broker. There are pros out there who know the nuances of the hundreds of buildings that require board approval. And there are hundreds. Although almost all new construction is condominium home ownership, cooperatives still make up over 80% percent of the market. Accordingly, finding a broker who knows his or her stuff is imperative to avoid disappointment and costly delays. If you don't have the financial wherewithal for a particular building, don't waste your time. Further, make sure the broker knows the neighborhood you're interested in. Don't work with an east side broker when you're looking for an apartment on the west side. So here's the first Rule:

Make Sure You're Working With A Knowledgeable Real Estate Broker
  Who Has Experience with the New York Neighborhood You're Interested In

The Board Package

You followed rule one and you've signed a purchase contract on an apartment that meets your needs. Once you have received back a fully-executed copy of your purchase contract, you will have ten business days to submit a "Board Package" to the managing agent for the cooperative. If the transaction is “subject to financing”, the Board package will have to be submitted three business days after the loan commitment letter is issued by your bank. The Board package consists of a standard form of purchase application which most Boards use to collect basic information about your business and personal life (and that of your spouse); authorization for a credit check; various disclosures about the co-op (for example, a board package might contain a notice that all purchasers are required to replace the windows in their apartment or pay an upcoming assessment); a financial statement (usually consisting of a balance sheet and income statement); a request for business and personal references; a request for an application fee; a lead-based paint disclosure if the building was constructed before 1978; and various other documents or board requirements. In most cases, the real estate broker who helped you find the apartment will help you put together your board package together. The broker will review all the information as is comes in and, in many cases, will make suggestions to help you present your information in the best light. The process can border on the absurd and can be unbearably time consuming, but there's no way to avoid the approval process unless you buy an apartment in a condominium (that being said, condos have extensive Board packages as well, but no real rejection rights). Take the process seriously and try to put together the best presentation that you can. It will be reviewed by all of the Board members and will be used to determine whether the board will schedule an interview with you. Boards have the power to turn down a prospective purchaser without an interview if they don't like the board package. It's serious business. A bunch of strangers sitting around a dining room table, looking over your purchase application, can make your life miserable. Listen to what your broker suggests and do what's asked of you...within reason. Rule Number 2:

Don't Misstate Your Financial Condition

There will always be a fudge factor in business and personal matters. Presenting yourself in the best light is expected and appropriate. Nevertheless, if you overstate your assets or income, there is a always a possibility that the managing agent representative or one of the bean counters on the co-op board (and there is always at least one) will figure out that you are cooking the books. When that happens, you will not only run the risk of getting turned down by the co-op board, but you will also run the risk of losing your contract deposit by submitting a board package in bad faith (that is, lying about your financial condition). Your best line of defense is to question your real estate broker thoroughly as to what the financial requirements are of the co-op you're interested in. If the building requires a liquid net worth equal to twice the purchase price and you only have a liquid net worth equal to one and a half times the purchase price (sort of), you're probably looking at the wrong building. In most cases, the broker will give you the third degree to determine which properties should be shown to you based upon your financial condition. It's one of those situations where you should be completely honest about your financial condition with a total stranger. Most of us wouldn't tell a close friend what our real numbers are, but with co-op purchases, you have no choice. Let the broker know what your situation is and never try to outsmart the board with creative accounting. As I have seen over and over, it just won't work.

Google Yourself, As Someone on the Board Will

There is no real privacy any more, thanks to the Internet. As a part of the application process, it is wise to “Google” yourself and see what comes up. In the world we live in today, someone on the Board will. If there is anything out there that is embarrassing or needs to be explained, better you know about it before the application goes in.

Preparation of the Business and Personal References

As a part of almost all board packages, the purchaser will be required to submit several business and personal references (as many as three each). Make sure that you select individuals who you are comfortable can fashion an intelligently written and strongly supportive letter for your application. Work with your broker and make sure that the letters you've assembled are impressive. This is not the time to submit a letter from your kindergarten teacher. Boards take this stuff seriously. A lax attitude about the letters can be costly if you are submitting a marginal financial package. Here is one of the last instances where neatness actually counts. Educate each person who is writing a letter as to what the purpose of the letter will be. Don't leave anything to the imagination. If you don't like the letter and can't get it redone, get another one from someone else.

Submit the Application in a Timely Manner

As mentioned above, the board package is due 10 business days after the contract is returned, unless the contract is subject to obtaining a mortgage commitment (all boards will require that you submit your loan commitment letter with your board package). If you are not getting financing, have your attorney try to get as much time as possible for you to submit your board package. A reference letter you need often can't be obtained within 10 business days because someone is unavailable. Accordingly, your requirement to meet the 10-day deadline should at least be qualified with "best efforts" language, so that you won't be penalized for a late package if the delay was beyond your control. If you are applying for financing, even though you will have additional time to submit your package, start working on the board package as soon as the contract comes back. There is no reason why a board package should not be ready to go as soon as the loan commitment letter comes in. Vince Lombardi is quoted as saying "if you're on time, you're ten minutes late." The same rule could apply to board packages. Get everything done even before it's due. If there is problem with any of your documentation, there will be plenty of time to correct it. Rule Number 3 about the Board package:

Treat the Board Package Like the College Application to Your Favorite School

The..."gulp"...Board Interview

Once the board has reviewed your financial information and has deemed it acceptable, an interview will be scheduled for you to meet either the entire board or an interview committee of the board. The interview should just be a getting to know you session once the financials have been reviewed, but sometimes it's more than that. It’s social in nature, but it’s an interview nonetheless. Do the best you can to present yourself in the best light. Again, check with your broker about any inside information he or she might have about this particular board and act accordingly. All of the above being said, there is an absurdity to it all. Just for grins, see Malcolm Carter's take on "How to Spin a Board Interview."

The Outer Limits of Board Authority

Boards have broad authority to turn someone down, provided the Board is acting in good faith and is making its decision within the bounds of the “business judgment rule”. When a Board discriminates against a proposed purchaser based on race, religion or sexual preference, a Board can be held liable for its discriminatory behavior. When discrimination occurs, Board members can be held personally liable for this offensive and illegal behavior. When you believe a board turn-down has occurred for inappropriate reasons, the entire matter should be carefully reviewed with your attorney to determine whether there are any remedies available to you as a result of what may be an improper and possibly illegal board turn-down. Boards can turn you down because they don't like your style, but they can't turn you down because of the color of your skin, your religion or your sexual preference.

 

Expect Delays

The application process is like flying home for Thanksgiving or July 4th--expect delays. The application process is time consuming and is often off schedule. Many boards do not even meet in the summer. Precise timing requirements just don't work with the board approval process. In almost all cases, it will take longer than expected. There are some co-op boards that act like condos. They're often referred to as "Condops". In those buildings, the approval process is akin to a right of first refusal. I know at least one "condop" that doesn't even have Board interviews. If your financials are good, there is usually very little delay. Even with condos, however, delays are often encountered in obtaining the waiver of the board's right of first refusal. Industry-wide, no one can figure out why there is such an incredible lack of sensitivity to the timing problems we all have in buying an apartment. Didn't these people all go through the process themselves? Ask any broker, no one can figure it out.

Residential Reality: The Clock's Ticking

For those of you who are reading this and have just gotten your purchase contract back, have no fear. The vast majority of board applications are approved. For those of you who are new to the process, going through a Board application is a New York rite of passage. The country club thing is alive and well in Manhattan and it will never go away. Nevertheless, Boards should be encouraged to act reasonably and expeditiously. Remember, the person who waited 3 weeks for a board interview may turn out to be your new next door neighbor.

For more issues to consider when submitting your co-op purchase application, see “Board Package Red Flags.”

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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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

Buying or Selling? Email me at