My Top Ten Residential Realities...
Celebrating Ten Years
After ten years of writing this blog, as you might expect, I’ve accumulated a few pet grievances with the way residential real estate transactions play out. Here’s my top ten:
1. Using an Out of State Bank
It doesn’t happen as often as it used to, but some buyers still insist on using out of state banks or internet lenders that are completely unfamiliar with the way things work in New York. Our town is quirky enough as it is. When you invite a lender into a transaction who doesn’t really know what a co-op is, you are asking for big delays and potentially big problems. Please avoid using an out of state bank unfamiliar with New York conventions at all costs.
2. Using a Managing Agent Who Doesn’t Have an Office Where the Building is Located
I can’t adequately describe the pain of traveling to a managing agent’s office outside of Manhattan, for a closing on a Manhattan co-op (condos don’t require the managing agent’s presence at the closing). That being said, if the apartment is located outside Manhattan, there is an expectation that the closing will be held in the borough in which the building is located. Fair enough. When the apartment is located in Manhattan, however, there is an expectation that the closing will take place in Manhattan. It is an unsolvable mystery as to why the Board of a Manhattan co-op would choose a managing agent located in Brooklyn, Queens or even Westchester or Nassau counties. It is a complete waste of time for all involved to travel outside of Manhattan for such a purpose. It doesn’t happen very often, but when it does, we all dread the day the closing will occur.
3. The Unprepared Broker
It is frustrating when a seller’s broker sends out a deal sheet on a new transaction and the broker does not have the due diligence materials ready to go (that is, the offering plan, all amendments, most recent financials and the purchase application requirements). The apartment has been on the market for weeks, but the broker did not use that time to get everything organized. And along these lines, it is incredibly annoying when the broker sends out barely readable copy of the offering plan or an incomplete document. It is challenging enough to have to grind through a 400 or 500 page document. When pages are missing are upside down or not legible, it makes the job of the purchaser’s attorney that much more difficult.
4. Too Much Chit Chat at the Closing Table
The closing is the culmination of a lot of hard work, but there is often business to attend to or issues that come up at the last minute. Mindless chit chat by the brokers and other guests at the closing table, drives the attorneys nuts and is very distracting. Save the convo’s for the post closing lunch or cocktail. Read the paper, relax and wait for your check.
5. Uncooperative Managing Agents
Recently, I had the pleasure of working on a deal where the property manager for the condo was incredibly helpful. I felt like I had time traveled to a galaxy far, far away. In today’s practice, managing agents charge big fees to answer an attorney’s due diligence questions, and some property managers often refuse to answer any questions. It is hard to convey to a purchaser that information about the building may be quite limited. We’re talking about some significant price tags, yet a buyer is often forced to go ahead with a purchase without a clear picture of the financial or physical condition of the building. The buyer’s attorney is forced to rely on the Board minutes, which can be stale, poorly written or sanitized to prevent disclosure of any material information. This practice is just wrong and should stop.
6. The Curious Case of the Sponsor Punch List
Despite the many years that I have been involved with new construction purchases for clients, I still find it inexplicable that the New York State legislature and the New York Attorney General’s office allow developers to force the sale of apartments even though there can be an extensive punch list of items in need of repair or replacement. Developers are not required to post an escrow to insure completion of open items, and in most cases, the offering plan only requires that open items be completed within a “reasonable time”. I’ve even seen some plans over the years, where the AG did not even require a pre-closing inspection. How can this be allowed? It literally makes no sense. In all fairness, there are developers that attend to the punch lists in a reasonable time and complete the work as promised. Unfortunately, there are many deals where the developers do not complete open items and issues can continue for many months after the closing.
7. Special Risks Should Not be a Get Out of Jail Free Card
All offering plans contain a section at the beginning of the plan entitled “Special Risks”. That section of the Offering Plan contains a series of disclosures by which the sponsor reveals possible problems that could arise with the development, as well as a series of disclosures that the AG requires based upon issues and problems that have arisen over the years in previous offerings. This list of special risks can run 20 or 30 pages. Although many of the disclosures are “boiler plate”, meaning that the disclosed information is basic information that a purchaser may already know, there are many disclosures that are complex, hard to understand (sometimes intentionally) and very difficult to explain. At the end of the day, the special risk section serves to protect the sponsor from possible claims under the theory that there has been full disclosure. Since the offering plan has been approved by the AG’s office, the sponsor is in a very good position to shield itself from liability. I can’t tell you how many times I have asked the sponsor’s attorney for a clarification of a special risk only to be told, “read the plan”. Which leads me to my next item on the menu.
8. You Can’t Sue the Sponsor
They say nothing clears the mind like a hangman’s noose. Why bring up the wild, wild west? Sometimes dealing with sponsors is like being back in Dodge City. It can feel like there’s no sheriff in town. It is a zero sum game: sponsor’s control just about everything and your average purchaser has no control and no leverage over anything. If I could point to one reason why sponsors retain so much power over potential purchasers, it’s this: under New York’s securities statute, called the “Martin Act”, a purchaser can’t sue the sponsor for material misrepresentations or omissions in the offering plan. Only the AG can sue the sponsor for failing to comply with the terms of the offering plan. Yes, there are often lawsuits brought by a co-op or condo against the developer of a building, but those claims usually revolve around post-construction defect claims and don’t arise from promises or representations made by the sponsor in the offering plan. The courts, however, have consistently held that an individual has no “private right of action” against the sponsor under the Martin Act for failing to fulfill its obligations under the offering plan filed with and approved by the AG. Since the AG does not bring an extraordinary number of actions against sponsors, developers and their hired guns know that it is very difficult for a purchaser with a problem to get relief. Back to my hangman. On the other hand, if the sponsor knew that an aggrieved purchaser could have his or her day in court, one could argue that the sponsor’s approach to disclosure and completion of its obligations could change radically. Once the sponsor can be held liable for bad behavior directly by the purchaser, we may actually get a more level playing field. Of course the other side will argue that allowing a private right of action will bring an onslaught of meritless litigation and perhaps that’s true. However, the pendulum has swung so far in favor of the developer in New York, that the statutory rules of engagement are due for a major overhaul.
9. Brokers AWOL at Closing
Over the past few years, a new trend has developed. Brokers have decided it’s not necessary to show up at the closing and don’t feel obligated to send anyone to pick up their check. Invariably, the absent broker asks the attorney representing their client or customer, to hold the check for delivery after the closing. I realize that we all have busy lives and obligations. Sometimes sitting at a closing table for 2 hours just is not possible. Considering the size of the brokerage fees payable in connection with most apartment transactions, I think it’s fair to say that someone should be present from each side, just in case anything comes up, and to pick up the check when the closing is concluded. If the principal broker can’t make it, send someone from the broker’s “team”. I am confident many attorneys would agree…
10. Post Closing Hell
This concern is equal parts annoyance and avoidance. Here's the rule of thumb: If at all possible, avoid post closing obligations. Sometimes an issue arises that can't be completed at the closing table. Perhaps an appliance is not in working order, a leak occurs somewhere in the apartment, or a Department of Buildings permit is discovered to be open. The bigger the issue, the bigger the concern and complexity of getting it handled after the closing. Parties will usually agree to a monetary escrow, to be held by the seller's attorney, and a period of time to get the matter resolved. What happens if the matter isn't addressed as promised, varies from escrow agreement to escrow agreement. The buyer will want the largest escrow possible and the seller the exact opposite. Post closing matters are almost always a hassle as the seller has very little incentive to get things handled on a property he or she no longer owns and for which he or she has already been paid almost in full (except for the escrowed funds). It's always a judgment call as to whether a purchaser should agree to an escrow or simply delay the closing until the problem is resolved. Sometimes the purchaser has no choice but to work out an escrow as an interest rate may be expiring or because the purchaser needs to move into the apartment as there is nowhere else to live. All understood. If at all possible, avoid post closing issues. You'll be happy the transaction concludes at the closing table.
That Feels Better...
Completing a real estate transaction in New York City these days can get quite complicated. I don’t expect my top ten list to get handled any time soon, but the real estate community would be well served to consider making a few changes so that sellers and purchasers can have a smoother journey to the closing table.
