Hi, my name is Scott Smiler, and I’m a real estate partner at the law firm of Gallet Dreyer
& Berkey.
I would like to spend a few minutes with you to discuss the importance of due diligence.
The purchase of a home, co-op apartment or condominium unit, is one of the biggest investments
an individual will make, so it’s important to have as much information you can prior
to signing the contract.
The due diligence for co-op apartments and condominium units are similar in nature so
let’s start with that first.
There are a few main documents we would want to review.
The first relates to the financials of the building.
The financials will allow you to see if the building is operating at a deficit, if there
are adequate reserves for potential emergencies or future capital improvement projects, and
if there are any line items that seem abnormally high.
For example, if the line item for legal services are substantially higher than budgeted, that
may be an indicator that the building is involved in defending or commencing a law suit, or
perhaps, it’s indicative of the building spending money on collection actions to address
the building’s arrears.
The notes to the financial statement may also provide information as to the underlying financial
obligations of the building (for example, an underlying mortgage).
I normally ask the client’s accountant or financial advisor to review the financials
as they may have a better perspective on the matter.
If the building is properly managed and the board meets on a regular basis, the Board
should have monthly minutes to review.
This is a great opportunity to review current, on-the-ground, information as it relates to
the building as a whole, and to individual units or “lines” of units.
For example, if your purchasing Unit 4A and there was a flood reported in Unit 5A, this
should give you pause as the unit you are looking to purchase may have a potential mold
issue if the flood and resulting damage was not properly remediated.
Let’s use your purchase of Unit 4A once again, if there are complaints of odors on
the fourth floor or in the “A” line, or complaints of noise emanating from your potential
neighbors, these quality of life issues may cause you to rethink your purchase.
The minutes may also discuss planned increases in your carrying costs or future capital improvement
projects which may result in an assessment or dipping into the building’s reserves.
These are all financial burdens you may not have anticipated when falling in love with
the unit.
Please note that the board minutes are only as good as they are kept.
Some boards do not meet regularly.
Some boards meet every month but their minutes are very scant and have no meaningful description
of what occurred at the meeting.
Other board minutes are too detailed and read like a transcript.
I cannot predict where your particular board minutes will fall on the spectrum, only to
say, we can only work with what we’re provided.
My firm also has a standard co-op and condominium questionnaire that we present to the managing
agent which asks more specific and pointed questions.
For example, we ask what is the financing policy, what is the pet policy and what is
the alteration policy?
If you intend to finance 80% of the purchase price but the building only permits 75%, that
may financially prohibit you from proceeding with the purchase.
If you intend to harbor a pet and the building has a strict no pet policy, you may want to
look at a pet-friendly building.
If you are purchasing the unit to do a compete gut renovation to make it the unit of your
dreams, that dream may quickly turn into a nightmare if the building has black-out dates
or black-out months in which alterations are strictly prohibited.
The building may also prohibit the moving of gas lines, plumbing and support walls,
it may forbid the installation of “wet over dry” areas, and the unit may not have the
current electrical load capable of supporting your alterations.
Relying on the building to approve an electrical upgrade is never guaranteed.
Please note that managing agents may charge a fee to complete the questionnaire and not
all of our questions are answered, but my clients find it helpful when deciding whether
the building is the right fit for them.
In the event the condominium is new construction less than five years old, we would also like
to look at the Condominium’s offering plan as it may have some bearing on your rights
as a unit owner.
In regard to an inspection of the unit, you are somewhat limited when inspecting a co-op
or condominium unit.
While you can inspect the unit itself, it is rare that the building will permit the
common areas to be inspected.
For example, I can’t foresee the building permitting an inspection of the boiler room,
compactor room, elevator machine room or any mechanicals located on the roof.
If you plan on doing a gut renovation, your instinct may be to decide against, an inspection
of the unit as you’re going to rip it all out once you close.
However, and as contrarian as it may sound, it might be more important to do an inspection
when renovating than if you were simply moving into a pre-war unit without any plans to renovate.
Depending upon the age of the unit, I am confident that there is asbestos and/or lead-based paint
in your unit.
So long as it remains in an undisturbed, non-airborne and non-friable condition, it’s safe.
However, your planned renovation may now turn this safe condition into a hazardous one,
and your planned alteration has now morphed into a more expensive and time consuming remediation.
Due diligence when purchasing a home is much more straightforward.
Your inspector can due a complete inspection of the home and surrounding grounds, and will
only be prohibited by access (or lack thereof).
In addition to the standard structural home inspection and terminate inspection, depending
upon where your home is located, you may want to test for radon, septic or well water potability.
There may be some seasonal impediments to your inspection.
For example, if the home comes with a pool and jacuzzi, you will not be able to inspect
those amenities when they are closed for the winter.
This situation will need to be addressed in the contract.
If your purchasing a home subject to an existing tenancy, you should review the lease as you
will be stepping into the shoes of the seller/landlord and assuming the landlord’s responsibilities
thereunder.
Tenant-specific provisions should be included in the contract.
Although not technically part of the due diligence process prior to signing, once the parties
are in contract, I will order a lien search when purchasing a co-op apartment and a title
search when purchasing a condominium unit or home.
These reports are run against the seller, the property, the unit and the building, and
allows us to see if there are any liens, mortgages, judgements, violations or encumbrances which
must be disposed of at or prior to closing.
We need to ensure that you are purchasing free and clear of all encumbrances.
As you can see, the transaction is not limited to just merely negotiating the contract.
There is a lot of due diligence that needs to be performed in advance of signing.
I hope this was helpful and if you have any questions, please give me a call at 212-935-3131
x. 314.
I offer free consultations and it might just be the start to a nice working relationship.
Thank you for your time and I look forward to hearing from you.