Residential Realities April 2015
April 14, 2015—A Meditation on Doing the Right Thing...
Silly Season Has Arrived
Nothing like warmer temperatures to quicken the pulse of real estate activity. As the spring selling season kicks into gear, many of us wonder where this market is headed? There seems to be no price point or deal term beyond the realm of acceptability. Can this trend continue or is the sonic boom of prices dropping somewhere down the road...
The Canary in the Condo
So a deal sheet for a multi-million dollar co-op purchase was emailed to me last week, with the following note from the broker: "This contract has to be signed in twenty-four hours, no time for due diligence." In this case, I received the deal sheet before I actually spoke with the client. In fact, I hadn't spoken to anyone and hardly knew the broker who sent me the deal. That can happen. The phone rings. The aspiring potential client has been looking for an apartment for two years and is desperate to have this one. The Q and A: Have you owned real estate in New York before? "No." Are you getting financing? "Yes." Are you waiving the financing contingency? "Yes." Do you understand that you are waiving your right to conduct due diligence? "What's due diligence?" I took a pass...
Those Unknown Unknowns
I like the phrase "commercially reasonable". It implies that under a particular circumstance, one will do what's appropriate and acceptable in the ordinary course of business. Example: Let's say one was purchasing a UPS store that had a ten-year operating history. One might review the seller's tax returns, profit and loss statements, actually monitor traffic into the store over several weeks, require the seller to stay on for a period of time after the sale, as well as undertake such other investigations that were commercially reasonable under the circumstances. One would not simply sign a contract to purchase the business without making any inquiry at all. Yet, in New York City, time and time again, purchasers will spend containers full of money on apartments, with only minimal inquiry, or as in the deal referred to above, no inquiry at all. How can that be?
Life in the Bubble
Let's face it, there is a lot of real estate Kool Aid being consumed and it creates an unreal environment for the buyer. The buyer must confront a world where, realistically, not every deal should get done, but the voice of the collective sales machine demands that every deal must get done. Great for the brokerage community and sellers, not so much for buyers. That's scary.
The Timing of Due Diligence
As is often the case with commercial real estate, there is a due diligence period after the contract is signed, that allows the buyer to make whatever inquiries he or she deems necessary, before his or her obligations to purchase the property, are effective. That rarely happens with residential real estate in New York City. In most cases, the buyer and the buyer's attorney must undertake inspections, review minutes and governing documents, review financial statements and obtaining responses to managing agent questionnaires, prior to signing the contract. The seller continues to show the apartment while this due diligence is being undertaken, which only increases the anxiety of the buyer. As the never-ending emails and telephone calls from the buyer's broker will painfully emphasize, the deal may be lost to another party, if the buyer takes too long attempting to do what is commercially reasonable under the circumstances. In a seller's market, that can and does happen.
The above being said, buyers must do their best not to succumb to deal pressure and do the appropriate due dilly before the contract is signed. The deal weary buyer, who has been outbid two or three times, gets to a point where he or she is willing to sign almost anything to secure a piece of the rock. Yet, what one is willing to accept because of his or her emotional state today, can look quite different several years down the road, when market conditions change and unknown facts about the building or the apartment emerge.
Residential Reality: The Twenty-Four Hour Rule
Here's a simple rule, designed to keep you out of trouble. Never agree to sign a contract within 24 hours. Unless you are one of lucky few who have more money than sense, never allow market conditions to dictate a buying decision.
