A Detailed Description of the NYC Home Buying Process
I really enjoy working with first-time homebuyers in NYC real estate because I feel like I add the most value to them, financially, strategically, and emotionally. Financially, with the rebate; strategically, with my market knowledge, written analyses, and guidance throughout; and emotionally, as the buying process can be extremely frustrating and depressing for many first-time buyers. Most first timers ask a ton of questions right off the bat. A lot of this post is typically covered over the course of several detailed preliminary conversations. Since there are a number of different phases to the process, which is foreign to many, I wanted to post a detailed description of the buying process. This post begins from the point when you find a place you are interested in, and it is annotated with the way Digs will assist you throughout.
Once we target an apartment on which you want to make an offer, I will analyze the price of that particular unit. I will look at comparable apartments which have recently sold, are in contract and those that are currently on the market in the neighborhood. In addition, I will factor in prevailing market trends (both macro and micro). In addition, I will contact the seller’s broker to try and get intel on the unit. For example, I will find out whether any other offers have been submitted, what the agent’s intention is for additional showings, how they are handling offers, specific questions about the unit and building, etc. Based on the analysis and intel we get, we can figure out whether the apartment is well-priced and how to approach bidding.
Financing v. Cash Offers
Once you decide to make a bid on an apartment, I will prepare and present your offer. If you are financing, any offer we make must be submitted with the REBNY financial statement and a pre-approval letter. The pre-approval can be for the amount of your loan or an amount in excess of your loan. Without these two things, you risk your offer not being taken seriously (or considered at all) by the seller. The financial statement is essentially a personal balance sheet and statement of your income. It allows the seller and his/her broker to perform some preliminary underwriting on you to determine the likelihood that you will be able to pass a co-op board or get the necessary loan to purchase the unit.
If you are making an all-cash offer for a condo, a prudent seller’s broker will require proof of funds submitted with the offer (not all of them do). REBNY financial statements are not typically required. If you are making an all-cash offer for a co-op, proof of funds may still be required, but the REBNY financial statement will also be required to determine whether your income and post-closing liquidity will pass muster with the co-op board.
Co-op boards typically require a debt-to-income ratio of 25% and post-closing liquidity of 24 months of your fixed monthly costs (e.g., mortgage and maintenance payments). The debt-to-income ratio is arrived at by dividing your annual fixed monthly costs (typically your mortgage and maintenance costs) by your gross annual income. Many co-ops also include discretionary bonus income in this calculation, but some don’t. Post-closing liquidity is simply the sum of all cash and liquid assets (typically marketable securities) you will have after the closing.
Contingent v. Non-Contingent Offers
Historically, except in all-cash deals, most purchases have been contingent on the buyer’s ability to obtain financing. In today’s seller-friendly environment, however, sellers often ask that the buyer waive the mortgage contingency. This transfers the risk of the buyer not being able to get a loan from the seller to the buyer. In competitive bidding situations, it is unusual if the seller does not make this request. When you waive your mortgage contingency, you are agreeing that you will purchase the unit whether you can get a loan or not.
If we encounter a competitive bidding situation for an apartment that you really want, we can discuss waiving the mortgage contingency to make your offer stand out a bit more. Mortgage bankers (my favorite, Harry Kalvonjian) can often help get you reasonably comfortable with the likelihood that you will get your loan commitment. However, you won’t be able to get a full loan commitment without a signed contract and an appraisal (which is ordered after the signed contract is received. In today’s lending environment, if you are a strong borrower with adequate assets and income relative to the loan you need, it is highly unlikely that you will not get the loan. However, it is still somewhat unsettling for buyers to waive this, and I don’t encourage waiving the contingency unless you are 100% comfortable and come to that decision independently.
Following submission of the offer, there may be a brief negotiation period where the parties go back and forth before settling on a purchase price and other terms of the deal. With inventory continuing to linger at historically low levels, if an apartment is priced well and has broad appeal (e.g., in good condition, nothing too taste-specific or unusual about it), it is likely that there will be multiple offers after 1 or 2 weeks of open houses and showings. In this case, the seller’s broker will likely announce a deadline by which the buyer must submit their highest and best offer. Once you submit your highest and best offer, the seller typically accepts what they deem to be the best offer. Generally speaking, there should not be any negotiation in these highest-and-best situations, but, sometimes, a losing bidder might come back with a higher number that the seller may entertain. Note that a seller’s broker is obligated to bring all offers to the seller. An ethical seller’s broker should encourage the seller not to accept this because it is in violation of the bidding terms that they themselves set. Sometimes, though, negotiations are opened up again, and you will have to decide whether to negotiate.
In a highest-and-best situation, you will typically hear whether your offer has been accepted within a day of making it. Once an offer is accepted, the seller’s broker will send out a deal sheet to both parties and their attorneys. This is essentially the term sheet for the deal. It typically lists the material terms such as purchase price, whether it is a contingent or non-contingent deal, the amount being financed, the targeted closing date, etc.
Attorney Review/Due Diligence
Once the deal sheet is circulated to the parties, the seller’s attorney will send a draft contract to your attorney. The contract is based on a standard form that is used in virtually every residential deal. There is not too much to negotiate unless there are relatively unique terms to your deal. The riders are where all the deal-specific provisions will be. Your attorney will submit a “purchaser’s rider” to the seller’s attorney, which includes certain additional buyer protections not included in the standard form. This should include additional seller representations. At the same time the contract is being negotiated, your attorney will perform due diligence on the building and the unit. This includes reading the board minutes of the co-op and condo to determine whether the unit has been the subject of anything noteworthy over the past few years. In addition, your attorney will review the building’s financial statements and submit a detailed questionnaire to the building’s managing agent.
You can also have a home inspection performed at this time. Home inspections are not too common for apartment purchases, but some buyers do them. It is important to note that a seller’s agent will likely continue showing an apartment to potential buyers and fielding offers as back-up until a contract is signed. This is standard and makes sense because no deal is certain until a contract is signed (and many deals fall apart during this period). It, unfortunately, adds stress and puts additional pressure on you to sign the contract quickly.
Choosing a Good Attorney
Residential deals are, generally speaking, not particularly complicated and are often priced on a fixed fee basis ($2,000 – $3,500). The good attorneys that I’ve worked with are the ones who are most responsive and thorough. I have worked with attorneys who are great and would be happy to refer you to one if you do not have your own (Larry Adler has never let my clients down).
Once your attorney completes due diligence and negotiates the contract, it will be time to sign the contract. At signing, you will deliver your signed contract to the seller’s attorney together with a payment of 10% of the purchase price, which is deposited into escrow. The seller’s attorney typically holds the escrow account. Promptly after signing you will submit the signed contract to your mortgage banker, together with all other paperwork necessary, to continue the process of obtaining your loan commitment.
Board Application Package
It is advisable that you begin assembling all materials necessary to prepare your board application package right after you sign your contract. Both condos and co-ops have extensive board applications. Condos are often less extensive because the approval process is significantly less rigorous, but many still require submission of significant documentation.
The major difference between the board approval process for condos and co-ops is the condo board’s right of first refusal. If a condo board turns down your application, then they must purchase the unit at the purchase price you agreed on with the seller. As you can imagine, this very rarely happens. Co-op boards, however, have no such rule and can freely turn down buyers for any reason or no reason at all, in most cases without consequence or explanation.
Accordingly, if you buy a co-op, your application package must be timely submitted, professional and complete. I will handle making sure that the application is timely submitted and professional, but you need to make sure that you send me everything required. I will send you a detailed email after contract signing outlining what you need to produce for the co-op board package. You should expect to provide, at a minimum, several personal and business letters of reference for you (and whomever else will be involved in the purchase), a letter of good standing from your current landlord, detailed financial statements dating back 3-6 months for all bank and investment accounts you have, tax returns and income and employment verification letters. Generally speaking, board applications must be submitted for review within a few business days after your loan commitment is received.
With a condo, the board generally has a month or so (20 business days) to issue a right of first refusal waiver. This document is a condo board’s de facto approval of your application. There is typically no interview process. With a co-op, if your application passes muster with the co-op board, you will then be required to sit for an interview with one or more members of the board before formal approval is issued. Co-op board interviews are generally an unreasonable cause for concern, and in many buildings are more of a formality and a meet-your-new-neighbors gathering than anything else. Regardless, if you decide to buy a co-op I will help prepare you for your interview.
Following your approval, your attorney will schedule the closing. Immediately prior to closing (it can be the morning of or the day before), I will perform a walk-through of the unit with you. In the standard purchase agreement, the buyer agrees to purchase an apartment in the condition in which it exists on the date of the contract. As a result, the walk-through is your opportunity to confirm that nothing has really changed in a material way since you signed. Among other things, you test the faucets to make sure hot and cold water flow properly; you flush toilets; if you are not planning to re-do the kitchen, you test each appliance; you make sure the heat works in each room; you open and close each window and look around them to make sure there is no sign of leaks or mold; you look for signs of water stains on the floor or cracks in the ceiling; you test each outlet to make sure there is electricity, etc.. I will prepare a checklist in advance so that we cover all bases.
The closing is a relatively uneventful affair (except for the fact that you will be going into serious debt and parting with a significant chunk of money ;-). You will be sitting at a table in a conference room next to your attorney and will be asked to sign what will seem like 100 documents. Assuming that you have a good attorney, he or she will explain each document to you before you sign it. Once all documents are signed and the bank has approved the funding of your loan, the deal will close. Everybody will shake hands and smile and you will get several sets of keys to the apartment and a big rebate check from me.