Purchasing a Co-op in NYC: The Four Phases

Phase I: Due Diligence (Not Yet in Contract)

It is imperative at this point to have highly experienced legal counsel representing you. The Law Offices of Kishner & Miller, through our extensive years of legal experience, will guide you through this process. Due Diligence refers to the procedure in which an Attorney investigates various aspects of the Cooperative corporation, finances, building, and unit. Through this process the “financial health” of the Cooperative may be ascertained, therefore empowering prospective Purchasers to make a far wiser investment. As a part of Due Diligence, an Attorney will generally analyze the following documentation before a Purchaser signs a Contract of Sale.

1. The Cooperative’s Financial Statements – the Financial Health of the Cooperative

• An Attorney will use the Financial Statements to determine, among other things, the financial health – such as whether the Cooperative Corporation receives maintenance or assessments in excess of the operating expenses (is the Cooperative financially sound).
• The Financial Statements disclose the underlying mortgage, if any, and whether the mortgage may be maturing soon.
• Through the Financial Statements, an Attorney may determine if there are current assessments or recent maintenance increases.

 2. The Offering Plan and Amendments

• The Offering Plan includes the scope of the original project, a description of the corporate setup, by-laws, and other required information. Generally, the younger the building the more significant this document is.

3. The Meeting Minutes of the Board of Directors

• The Meeting Minutes sometimes reveal the cash amount that the Cooperative Corporation holds in their reserve fund as well as other past or ongoing issues occurring in the cooperative (sometime even the very unit you may be acquiring.)

4. Discussion with the Managing Agent/Questionnaire

• At times, an Attorney may need to seek answers from the Managing Agent of the Cooperative. This is sometimes done in the form of what is commonly known as a “Questionnaire,” where the Managing Agent is asked written questions by Kishner & Miller and responds via written answers to important matters dealing with the Cooperative and Unit.

Location, size, amenities, and price are important factors to consider when purchasing a Cooperative. This is for you, the Purchaser, to make a personal decision; can I live here? Is the space large enough? Do I like the area? Nonetheless, focusing merely on these aspects would be misguided. Through Kishner & Miller’s Due Diligence, Cooperative Purchasers can obtain the details pertaining to the Cooperative which one cannot see just by having visually seen the Unit. All of the findings during this process of Due Diligence are directly and clearly explained to you. Only once the Purchaser has a complete understanding of the Attorney’s Due Diligence may one really make a determination of whether they wish to move on to the next phase, which is signing of a Contract of Sale.

Phase II: The Negotiation and Signing of a Contract of Sale – Financing and the “All Cash” Transaction

A Contract of Sale is a crucial document, as the terms of a Contract of Sale memorialize the agreement between the Seller and Purchaser. You may not use the excuse that you did not know what you signed; if you do not understand something you must ask for clarification. Many years ago Attorneys had essentially agreed among themselves through custom in the industry, that there would be one form of a Contract of Sale and that all Attorneys would essentially use that same form. Nowadays there are many permutations of form Contracts of Sale, produced by a litany of distributors of form documents. As such, the Contract of Sale has become a highly negotiated document containing many terms, provisions, agreements, representations, and contingencies. On top of the many forms that are used by Attorneys, Attorneys add what is known as “rider” to the Contract of Sale. Contract riders have many terms and may be very confusing to a Cooperative Purchaser. After all, it seems like such an easy concept; someone wants to sell and someone wants to purchase. An experienced Attorney such as Kishner & Miller will be able to inform you what customarily should and should not be included in a fair and equitable Contract of Sale. As a Purchaser, if the transaction is not made in “all cash,” then the terms of a Contract of Sale are crucial to protect you from the loss of your Contract Deposit.

Kishner & Miller will make certain that each and every term of the deal made between the Parties is clearly contained in the Contract of Sale. There are a wide variety of common terms and conditions in a Contract of Sale that need to be addressed in a Cooperative real estate transaction. For instance, normally you purchase a unit in its “as is” condition. However, as a Purchaser, you may want repairs done or try to ensure that you are delivered a Unit in a certain physical condition. Kishner & Miller will try to ensure that the Contract of Sale explicitly enumerates each Party’s respective responsibilities, if any, for making repairs that were mutually agreed upon. Furthermore, in some Contracts of Sale, an Attorney must confirm that the Seller is delivering specified major systems of the unit such as the heating or cooling systems in working order. In other words, an Attorney may make sure which systems or appliances of the unit are guaranteed and which are sold “as-is.” Given the reality that most Cooperatives are in old buildings, having an experienced Attorney like Kishner & Miller confirm these contractual matters is ever so important for Purchasers of Cooperatives. Intuitively, Cooperatives are in older buildings and are generally more vulnerable to dilapidation. Therefore, costly repairs are likely to arise and if known and you want them addressed they should be addressed during this initial phase of contract negotiation.

While all of the terms and conditions explained thus far appear to be very straightforward, a typical real estate purchase contract is complex, densely written, and jammed with legal jargon. It is very possible to simply overlook or misinterpret a single clause that may result in a loss of thousands of dollars. There are in fact many Purchasers who for certain reasons may not have the linguistic competency or even just leisure to fully decipher the meaning of the terms and conditions in a Contract of Sale. Fortunately, Kishner & Miller will have the patience, developed critical analysis skills, and legal knowledge to thoroughly evaluate if the terms and conditions in a Contract of Sale are well tailored to protect the Cooperative Purchaser’s interests.

Even more, the Purchaser’s protection is further ensured, as Kishner & Miller may add a Purchaser’s rider to the Contract of Sale. With this rider, Cooperative Purchasers may obtain many protections including the possible ability to void the Contract of Sale without penalty in cases where the Purchaser is unable to obtain financing on the terms specified in the contract after making a reasonable or good faith effort to do so within the time provided. Normally, this provision grants a Cooperative Purchaser 30 to 60 days to obtain a loan commitment. Indeed, in a very competitive Seller’s market, a Seller is more likely to not allow for a mortgage-contingency or a rider that deals with financing protections. If this is the case, Cooperative Purchasers should be reluctant when signing a purchase contract, as the absence of this clause might force Purchasers to finance a home purchase at a bad interest rate or may lead to the loss of your Contact Deposit. However, Kishner & Miller will take the time to explain and analyze all risks.

Ultimately when the Purchaser signs a contract of sale they give a 10% contract deposit to the Seller. The Contract Deposit is supposed to be maintained in escrow by the Seller’s Attorney. The following items are some of the things that you should think about or look out for in the Contract of Sale:

 1. Correct identification of yourself

•  Use your legal name and be consistent throughout the entire process to ensure that your name is always spelled the same.

2. Correct identification of the Unit you are purchasing.

3. Items to be

• Included
• Excluded

In this category think of the following:

• All items of Personal Property
• Built-ins
• Appliances
• Televisions (especially ones that are anchored onto a wall)
• Window treatments like, curtains, blinds, levelers
• Storage Units

All items must be specifically set forth in the Contract of Sale.

4.  Monetary Obligations

• Purchase Price
• Contract Deposit aka Down-Payment
• Balance of Purchase Price Due at Closing

5. Financing- is the Contract of Sale

• “contingent”
• “non-contingent”
• “all cash”
• protections in the event Purchaser is unable to obtain financing

6. Time Frames

• To submit the Board Application
• To obtain financing
• Is the Closing an “on or about” date or “Time of the Essence”

7. Other contingencies

Phase III: Approval {Bank Approval and/or Board Approval} – Financing vs. “All Cash” Transaction

By the time you have reached Phase III of the process, this means that you have reviewed Due Diligence with your Attorney and you still like the unit sufficient enough to have entered into a fully executed Contract of Sale, in which you have agreed to all the terms contained in the Contract of Sale. As such, you are now seeking to do two things: (1) to have the funds necessary to go the closing and (2) to obtain Board approval. These two items have been in some manner addressed in your Contract of Sale. The Contract of Sale most likely has specified a designated amount of time for you to have your funds available/obtain financing and how much time you have to submit your board application.

 1. Bank Approval/Funds Available for Closing

•  The “All Cash” Transaction
  • An “All Cash” transaction, in the true sense of the term, means that you are not financing. This is very different from a transaction that is merely “non-contingent.” A non-contingent transaction means that you may still be obtaining financing from an institutional lender/bank but you cannot necessarily, by right, void the Contract of Sale if the institutional lender does not fund the transaction. Basically, you must know what type of Contract you are entering into!

• Financing or the “Non-Contingent” Transaction
  • With the very first steps of contract negotiation and due diligence out of the way, what follows is that a Cooperative Purchaser must arrange for financing with a bank assuming that the transaction is not being made in “all cash.” Your ultimate goal at this stage is obtaining an unconditional Loan Commitment Letter from an institutional lender {aka a bank.} Most likely, you have already been in discussions with a bank or mortgage broker. It must be ensured that the mortgage broker or bank representative possesses all necessary documentation, knows all due dates, and has the level of experience required in the New York Cooperative market. Every Cooperative varies with respect to how much financing its permits a prospective Purchaser. While most Cooperatives limit financing to 80% of the purchase price, there are highly selective Cooperatives that limit financing to 50% or less of the purchase price.

• • • (a) Lock in Rates: Purchasers must be cautious to not lock in a rate until a loan representative has seen a copy of the Contract of Sale and understands the “on or about Closing date.” Closing dates in New York, if not “Time of the Essence,” are not precise dates but rather “on or about,” which means that there is customarily {not definitely} a 30 day time frame in which to close from the date listed in the Contract of Sale to close. To avoid extension fees, Purchasers should think carefully whether or not to lock in a rate too early, especially in view of knowing that the Cooperative Board review process can take a while. It is also prudent for Purchasers to find out whether the loan product acquired has extension capability and associated fees, just in case the closing is postponed. Purchasers will receive a Loan Commitment Letter after the bank has finally reviewed all relevant documentation, run a credit report, and agreed to fund the loan.      

• • • (b) Pre-Approved Lenders Lists: Cooperatives usually keep a list of pre-approved lenders, that is, all of the financial institutions that have already consented to provide loans to the Cooperative. These banks can normally be obtained from the Cooperative’s management office. Cooperative mortgages, also known as share loans, are available in nearly all of the varieties that are available for traditional mortgages. Purchasers can choose from an adjustable rate, a fixed rate, or a hybrid loan.

• • • (c) Timing of Submission of Board Application and obtaining Loan  Commitment Letter: When the Contract of Sale is contingent on financing, a specified period of time (normally 30 days) will be granted to obtain the Loan Commitment Letter as well as the submission of the Cooperative Board Application Package. It may be the case that a Cooperative Purchaser will fail to secure the Commitment Letter from a bank for legitimate reasons at the expiration of this 30-day period. Nonetheless, provided that the Purchaser had applied in full good faith and has a contingent Contract of Sale, he or she retains the right to cancel the Contract of Sale and receive the Contract Deposit. Also, it should be noted that the Purchaser could still, even at this point, try to convince the Seller to allow a contingency extension, which will yield more time to obtain the Loan Commitment Letter.

• • • (d) Loan Commitment Letter: The Loan Commitment Letter should be a clear indication that the Cooperative and the Purchaser have fulfilled the lender’s underwriting requirements. These requirements may include submitting additional bank statements, justifying any red flags in employment history, and showing credit history. A Loan Commitment normally does not become a binding agreement until the bank receives an acceptable appraisal. Furthermore, the contingency period generally comes to a close the moment that the Loan Commitment Letter issued. The Cooperative Purchaser is still obligated to respect the Contract of Sale, even if the remaining terms of the Loan Commitment are not favorable. If the loan is revoked due the Cooperative itself and not the Purchaser, often the Seller can be convinced to terminate the Contract of Sale.

•  Having Your Funds Available. The Balance of the Purchase Price.
  • You need to ensure that you have the Balance of the Purchase Price in readily available funds and are prepared to produce the remaining Balance of the Purchase Price at the Closing. Remember, at this juncture you are already in contract, so now you need the remaining 90% of the Purchase Price (i.e. the balance.) Depending upon your financial situation, where your funds are located, and who is actually delivering the funds, it is important that this issue is resolved. Many people do not necessarily have readily available funds as their funds are held  in mutual funds, securities, or in other investments. Due to this, there may be time needed to have funds liquidated in such a manner that you will have the funds available to bring to the Closing. In almost every Closing of a Cooperative, the Purchaser must bring bank checks to the Closing from a Institutional Lender who has a clearing house in New York County. Kishner & Miller are prepared to assist you to make this process as easy for you as possible. Also, please note that it is rare that you write just one check for a Closing equaling the amount of the Balance of the Purchase Price. Rather, the Seller has the right to direct you to produce several checks to many different payees, which should and will equal the balance of the Purchase Price in addition to any adjustments. This is because a Seller needs to make payment to other entities to make the deal happen, such as paying off the Seller’s mortgage or payment of taxes. Even in an “all cash” transaction, there is much coordination and thought that must go into the process of having your Balance of the Purchase Price ready for the Closing.

2. Board Approval/Board Interview

One of the most famous and well-known parts of the purchase of a Cooperative (Co-op) is the Board Approval process. It is imperative to have full transparency with a Board as well as with the information that is submitted to the Board. While many people do not like the Board approval process while they are going through the process (as they feel sometimes it is invasive), it serves a legitimate purpose to protect the building. Generally, if a real estate Broker is involved with the transaction they will be assisting in the assembly, duplication, and submission of the Board Application.

• The Board of Directors.

• • A Board of Directors, also known as the “Board,” manages the Cooperative and must approve all prospective Purchasers. The Board generally speaking supervises the maintenance, finances, and policies of the corporation. There are two basic legal obligations that the Boards of Directors in Cooperative must honor:

• • • The Board of Directors must adhere to the internal rules of the Cooperative which are stated in the By-Laws, the Proprietary Lease, the Certificate of Incorporation, and sometimes the House Rules.
    • Just as with any other corporate board, the Board of Directors in a Cooperative must apply good business judgment when making decisions.

• Completion of the Board Application.

• • In cases where the Purchaser hires a real estate Broker, that same Broker will likely assist in the preparation and delivery of the Cooperative Board Application package to the Managing Agent. However, at Kishner & Miller we also try to assist and explain the process of obtaining all of the necessary documentation. Although Boards vary, there will likely be substantially more rules and regulations in a Cooperative as opposed to a Condominium. The Cooperative Board Application will likely demand very similar personal information to that which was gathered for the mortgage application, so it is advisable to keep duplicates of everything you submitted to the Bank when obtaining your Loan Commitment Letter. Furthermore, the Cooperative Board may also mandate letters of recommendation along with another credit check. This all might seem highly intrusive, but this is typically how most Cooperative Boards must operate to ensure that a prospective Purchaser has sufficient funds to not only make the purchase, but also to maintain the monthly maintenance commitment. Every single piece of information requested needs to be provided. If the Board rejects the Purchaser’s Board Application, the entire Contract Deposit should be returned to the Purchaser, provided of course that the Purchaser applied in complete good faith and did not act in bad faith. While the Cooperative Board is entitled to make virtually any rule that does not violate the law it cannot, of course, reject applicants on the basis of discrimination.

•  Timing of the Submission of the Board Application Package.

• • As far as the general timing of when a Board Application Package needs to be submitted, same is usually controlled by the wording contained in the Contract of Sale. In the “all cash” transaction, the Board Application Package must normally be turned in 10 to 20 business days from the date of the Contract of Sale. This time frame is/should be stated in the Contract of Sale. If a Purchaser is financing, a Purchaser is generally given 30 calendar days from the date of the Contract of Sale or 3 business days from the date the Loan Commitment Letter was received. It is highly recommended that an applicant begin work on the Board Application Package as soon they are “in contract.”

• The Interview.

• • After the filing of the Board Application Package, a personal interview is scheduled. If a real estate Broker has already been hired, that Broker can likely assist the Purchaser in preparing for the Interview. You should talk with your Broker/Attorney as to what to expect in the Interview. Generally speaking, the Board will make its decision known shortly at or after the Interview. Once the Board has approved the Purchaser and the loan, if necessary, is “clear to close,” the Purchaser’s Attorney can schedule a Closing Date. It is important to be aware that a Cooperative Purchaser’s preference of a Closing Date will not necessarily be available given how hectic New Yorkers seem to be. However, it will not be Kishner & Miller standing in your way to close as our team is available to accommodate a Closing.

Phase IV: Closing Day- the “Big Day”

Following the approval of the Cooperative Board Application and having, if necessary, the loan “clear to close,” a Purchaser can safely conclude that Closing day is near and must get ready to close. The closing statement and check instructions will likely be sent only right before the actual closing day. Though this can be aggravating, this is part of the typical real estate transaction in New York. When purchasing “all cash,” however, check instructions may sometimes be provided by Purchaser’s Attorney far earlier than if financing. The last minute feel of getting instructions for how to write your checks is due to essentially two factors: (1) The Purchaser’s Attorney must await the Seller’s Attorney for instructions on how the Seller wants the checks and in what amount each check should be; and (2) Purchasers must wait for the Lender’s Attorney to issue the “net proceeds” on the loan, which refers to the actual amount the bank brings to the Closing. The Bank will directly deduct its many fees from the requested loan amount. Therefore, the Purchaser should be prepared to bring multiple Certified or Official Bank Checks, from a Bank that is part of the New York Banking Clearinghouse. One last “walk through inspection” of the unit is recommended to ensure that all appliances and plumbing fixtures are in the condition as contemplated by the Contract of Sale. If there is an issue during the “walk through inspection” same must be raised at the Closing. Once the Closing occurs it is difficult if not almost impossible to deal with these issues. Purchasers should make sure to reserve 2 hours for the closing process, which will normally take place at the Cooperative’s management office. Lastly, there are many cases where the Seller will be purchasing a new property and may not be able to move out on closing day. A Cooperative Purchaser can consent to allowing the Seller to stay beyond the closing day and be compensated accordingly with rent deductions.   This is known as a Post Possession Arrangement.

Items to be certain to bring to the Closing:

1. Two (2) forms of Valid Picture Identification
2. Your personal Check Book
3. Your favorite Pen