Purchaser’s Due Diligence
Due diligence after an accepted offer is the last chance for you and your team to kick the tires of your dream home purchase before you take the leap into a signed contract
The layout is perfect, the view is out of this world, you have always dreamed of having your own bathroom, the north node of Saturn is in transit through Cancer, and… you have an accepted offer. Still, don’t break out the champagne just yet, there is a job you need to do before you scribe a check for 10 percent of the purchase price and sign a contract. That job is known as due diligence. And it’s your time to evaluate and appraise the condo, co-op, or townhouse you are purchasing.
For a house, it refers to the physical inspection as well as the review of title documents, tax documents, and tenant leases. For an apartment, it refers to the inspection of those common elements that, as an apartment owner, you will co-own, maintain, and pay for (through your monthly charges), including any or all of the following: the entire building, the land, the taxes, the leased commercial space, the underlying mortgage, the reserve fund, the doormen, the super, the management company, the lobby, the laundry room, the playroom, the exercise room, the parking garage, the repairs, the heat, the hot water, the sewer, the roof, the gutters, the hallways, the elevator(s), the storage room, the bike room, the sidewalk, the common garden(s), the common roof deck(s), and everything else. Phew!
You should “complete your due diligence” within one to two weeks of the accepted offer, after which, the sellers will expect you to sign a contract or inform them that you don’t want to go forward with the purchase. It’s important to note that just as you can change your mind, so can the seller. It’s entirely possible that during due diligence, the seller will receive a better offer from someone else. So do your due diligence diligently, but quickly, and call on your team (broker, attorney, and inspector) to do the same.
If you have (dare I say) a diligent broker, he will have done a lot of this work before you even make an offer. Here is a short list of items to be checked.
Townhouses
TAXES: It’s not a great deal if you can’t afford the taxes.
VIOLATIONS: In NYC building violations come in all shapes and sizes and from lots of different agencies. Your broker should be able to research these for you. If they cannot your attorney can. You’ll want a commitment from the seller to clear any violations before the sale closes.
Co-ops and Condos
PET POLICY: There is no point in having an accepted offer for a co-op that doesn’t allow dogs if you have a German Shepherd.
SUBLET POLICY: Make sure that you can rent out your apartment if that is what you want to do. Almost all co-ops will place some sort of restriction on subletting.
OTHER BOARD REQUIREMENTS: Many co-op boards won’t explicitly say everything they require of potential shareholders, but if you have a broker, he or she should get you as much intel as possible. For example, to the extent applicable, make sure you are permitted to work from home, that you are okay with any window display restrictions, that you can practice playing piano, that you can install a washer and dryer in the apartment, or that you don’t need to cover 80 percent of your floor with a rug or carpet.
RECENT BOARD REJECTIONS: Your broker should be able to find out if the co-op board has recently rejected any potential applicants and why.
THE FACILITIES: Ensure that your shares or deed give you access to the amenities you have been promised. For example, make sure parking and storage lockers really are included, you really do have access to the roof garden, there is a door person all the time, or the laundry facility really is free.
NUMBER OF RENTAL UNITS: Most banks won’t give you a mortgage if less than 50 percent of the co-op or condo is owner occupied.
Your Attorney
Your attorney should spring into action once you have an accepted offer. I suggest you hire only an experienced real estate attorney who understands the borough you are purchasing in. His or her job will be to review any co-op/condo related documents (e.g., offering plan, proprietary lease, the house rules, financial statements, tax returns, meeting minutes, etc.), double check the items listed above, ensure that the co-op or condo is in good financial standing, and negotiate a fair contract for you that protects your interests. Here is some of the information he or she should provide you after the review:
That the person selling your the property is actually the owner of the deed or shares
That their are no outstanding liens on the property (other than the seller’s mortgage)
For a co-op, the number of shares you will actually purchase, the amount of your maintenance, and the amount that the maintenance is tax-deductible
The amount of the co-op’s cash reserves (as a rule of thumb, I like to see a total of $8,000 per unit for co-ops of 8 or less units, $6,000 per unit for co-ops containing between 9 and 20 units, and $4,000 per unit for co-ops of more than 20 units)
The amount of the co-op’s underlying mortgage (as a rule of thumb, I like to see a mortgage no greater than $40,000 per unit)
The number of sponsor-owned units in either a condo or co-op building
If any repairs are on the horizon
If any assessments are on the horizon
If there have been any tenant disputes
If any apartment owners are behind in their maintenance/common charges or mortgage payments
If the building has had any recent damage
If the maintenance or common charges is about to increase
Your attorney will utilize this information to advise you as to status of the property. In a nutshell, this is all about checking that the building is not about to fall apart and that the amount of your monthly contribution is not going to increase substantially.
Your Inspector
If you hire a building inspector, he or she will review the apartment and the building and will recommend remedies for any structural defects, pest infestations, potential hazards, etc.
I always recommend hiring an inspector when purchasing a house or building.
There are two schools of thought about co-ops and condos and inspections. Many real estate agents advise buyers against having an engineer’s inspection for a co-op or condo. They say that it’s a waste of money and that an attorney’s due diligence is sufficient to vet a co-op.
For co-ops around 8 units or less, I always advise hiring an inspector. Why? As a co-owner you are going to be sharing any repairs and maintenance with only a few other units. In general, the larger the co-op or condo the less critical an inspection is. That being said, here are a few good reasons you may want to hire one regardless of the number of units:
Just in case, you, your broker, your attorney, the management company, the casual conversation with the live-in super, the bribe you paid to the doorman, the meeting minutes, and the financial statements haven’t uncovered the entire story, your inspector is your last best chance.
Inspectors do their work with their clients (you) present. They review the apartment and impart their findings real time. If you have never been on one, it’s an illuminating experience.
If, for example, a roof, a boiler, or a water main, have been repaired or replaced in the last 5 to 10 years, your attorney or broker will uncover that information. However, if a structural item hasn’t been upgraded in quite some time, this information may slip through the cracks. In this instance, your inspector will be able to give you a good estimate of when a structural item may need to be overhauled.
Rodents and pests. Sometimes and for various reasons, supers, co-op boards, and management companies keep things like mice, rats, cockroaches, moths, bedbugs, and other undesirables hush-hush. Your inspector is duty-bound to do the opposite.
What's Next
If you are still going forward, if you have signed a contract, and if you have just written a mammoth check, then it’s time to move on to the next stage of your purchase. That would be your mortgage, your co-op or condo application, or your closing and that is a post for another day. Thanks for reading.