What is Real Estate Due Diligence in NYC
What is your real estate attorney actually doing when he or she conducts legal and financial due diligence on your behalf? In New York City, a buyer’s real estate attorney is responsible for legal and financial due diligence on behalf of the buyer versus the buyer’s broker. Brokers are not allowed to provide legal, accounting or financial advice.
Who Conducts Due Diligence for Buyers in a Real Estate Deal in NYC?
Once your buyer’s broker has found and negotiated a deal for you, your real estate lawyer will step in and analyze your target property for any legal or financial risks. An experienced real estate attorney will produce a real estate due diligence report which summarizes all of his or her findings, similar to the sample report we’ve included below.
As you can see from the NYC real estate due diligence report sample we’ve included, a good real estate attorney will analyze the building’s annual financial statements, the building’s board minutes, check for violations and liens, and inspect the original offering plan and any amendments. If the target property is a condo, townhouse or a multi-family building, your lawyer will also order a title report and analyze it on your behalf.
Will My Real Estate Attorney Protect Me from Fraud in NYC?
A good real estate lawyer from help protect you from most sale related fraud. You can uncover most value fraud yourself from perusing any number of useful real estate websites in NYC, such as the actual square footage of a condo unit.
Value Fraud — when an important detail about the property is incorrectly advertised or misrepresented in a manner that makes the property appear more valuable. For example, a multi-family property is advertised as a four unit townhouse, but your lawyer finds out that it’s really a legal two unit property and the two additional units are illegal.
Mortgage Fraud — banks are actually not required to notify a home owner when a mortgage has been taken out on their property. As a result, when it comes time to sell, some unfortunate sellers are surprised to hear from the buyer’s attorney about a mortgage on their home that they are completely unaware of!
Often times, the seller may only discover that there is a fraudulent mortgage on their property when it comes time to sell. The criminal may have cashed out with the mortgage many years ago!
Title Fraud — title fraud occurs when the deed to a property fraudulently changes hands, often without the knowledge of the rightful owner of the property. This is unfortunately quite easy for criminals to do. They can simply submit a fake deed to the NYC government, then proceed to cash out on your property with a new mortgage immediately after!
On a positive note, many popular real estate websites provide up to date property records these days with data pulled directly from ACRIS. As a result, owners who search for their homes online periodically can rest assured when they see that they are still the owner of record!
Special Situations to Be Aware of During Real Estate Due Diligence in NYC
Estate sales — you will need to make sure all members of the estate are on board with the sale and that all taxes on the seller’s side are done correctly. Be especially careful if you are only communicating with one member of the estate.
Often times one member of the estate will be more interested in selling than the other members, and you need to make sure everyone in the estate actually consents to the sale and will show up to closing!
Multiple parties — sometimes a property will be jointly owned by different family members or even different business partners. Similar to an estate sale, you need to be especially careful when your primary contact is only one of the co-owners.
You need to make sure that all owners are on board with the sale and will show up on closing day! Be careful even when the co-owner you are dealing with is very confident that his or her partner is on board. Often times that may not really be the case which will mean you end up wasting time and money!
Divorce — it’s important to understand that one or both parties to a divorce may act irrationally and illogically given the emotional trauma associated with a bitter divorce.
Therefore, don’t assume that either party will not do something illogical that is actually to their detriment, as sometimes they may want to do just that to hurt their former spouse. An example of this is one party refusing to show up to closing even though they need the money from the sale proceeds.
Even though this behavior would seem irrational as they need the money, it may make sense in the moment for the aggrieved party as they believe not showing up to closing will irritate the other party.
Short sale — these are not always the deals you may think they are! Keep in mind that you won’t have control over the timeline in a short sale as you’ll need to wait for the bank to approve the sale, if they ever even get to it!
Sellers in a short sale may be motivated to try to cut a side deal with you for their personal property, such as barbecue grills or fixtures, which is not eligible to be repossessed by the bank. Sellers may try to ask for an above market rate for their personal property in return for a good deal on the house itself.
Just be careful as most banks will require both parties to sign an agreement saying that they have not entered into any side deals.
Tenants in place — be especially careful if you are looking to move in on closing date yet there are currently tenants in place, even if the seller says the tenants will move out by closing.
The seller may ask to delay the closing last minute because the tenants aren’t moved out yet, at which point you are faced with a difficult decision. If you decide to close anyway, you must think about how you’re going to occupy the property.
Evictions in NYC are a really difficult and time consuming process, and it’s not something you want to deal with when you’re expecting to start enjoying your new home.
Is the Original Offering Plan Worth Reading in NYC?
It’s up to you whether you want to read the offering plan yourself as it is a very lengthy document; however, your lawyer will always peruse the original offering plan on your behalf during contract due diligence.
Keep in mind that the offering plan will be especially important to study when it comes to new construction because all of the information is fresh, new and relevant. Even the original offering plans for older buildings will be useful to peruse as they’ll offer important clues such as whether the layout for any apartments have changed.
Keep in mind that the Attorney General “accepting” the offering plan for a new development only means that the offering plan has provided the required amount of disclosures to potential buyers. The Attorney General accepting an offering plan is not a substitute for due diligence by your attorney.
Note: new development condo buyers will often be surprised during the final walk-through when they see their actual units for the first time because the actual windows are different from the ones they saw in the sales gallery originally. Often times in high-rise new construction homes, the actual windows will only open part way for obvious safety reasons, yet the windows in the sales gallery opened fully. This can be avoided by reading the offering plan which will have a disclosure on the actual nature of the windows!
Should I Review the Co-Op or Condo Board Minutes Too in NYC?
Most buyers are fine with just letting their attorney review the co-op’s or condo’s board minutes on their behalf. However, we recommend that you review them as well as only you will be able to tell if certain things about the building will be a nuisance to you or not.
Keep in mind that most managing agents will only allow lawyers and buyers to review the board minutes in person at their office after having made an appointment. Therefore, if you’re interested in perusing the coop or condo board minutes yourself you’ll need to tag along with your lawyer during the appointment he or she makes.
Keep in mind that there is no standard to how coop or condo board minutes should be written. Some coop or condo board minutes can be extremely short, with literally just a list of which board members showed up. Other condo or coop board minutes might be multiple pages in length, with meticulous recordings of the back and forth between board members.
Keep in mind that many boards review the minutes and approve them before letting outsiders review them, so they may be sanitized in many cases. However, you may still be able to perceive potential issues down the road by reading the minutes such as a troublesome tenant on the same floor as you, or if you notice that the board is discussing whether to implement a flip tax.
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Disclosure: Hauseit (https://www.hauseit.com) and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. The services marketed on Hauseit.com are provided by licensed real estate brokers and other third party professional service providers. Hauseit LLC is not a licensed real estate broker nor a member of any multiple listing service (MLS).
