Sunday, February 8, 2009
Putting together the pieces of making an offer and the contract of sale to buy a Manhattan home
We're getting back to basics again today with a post that first time buyers will find very helpful. Real Estate Attorney Keith Schuman reviews for us the process and considerations of 'going to contract' on a home in New York City. He defines the terms and contingencies which you'll need to think about and negotiate. Its a long post, with a lot of information, made just a bit longer by my introductory comments here.
As Keith points out, the process often starts with someone like me helping to identify a home, then submitting an offer, and advocating for your interests. Right now the market complexion has shifted to a buyer's market in Manhattan, and a changing market is the most difficult kind to bring about a meeting of the minds between the principals. Both parties are often overreaching. Many sellers are in denial about how their home values may have changed. Yet many buyers are equally unrealistic and hesitant in their approach to negotiating a deal. There are some good reasons to be a buyer right now which I covered in my post Reasons to buy an apartment in Manhattan in 2009. Low interest rates, incentives, and in many cases, some real horse trading are driving the deals.
I read a lot lately from real estate market pundits, and the press, about the macro economic environment in which the deals are happening. It does, of course, have bearing. Like everyone, I listen carefully and read the data. I even cover some of it here too. It may sell newspapers and influence Web site traffic, but I sell property. I'm hired to do transactions, not economic trend analysis. The devil is in the details. The value of a broker's experience on your deal is more granular and personal. It's like constantly twittering the question, "What's the best deal for my client on a specific parcel of property?" Neighborhoods, buildings and the individual apartments within them, can have significant differences. I've not seen a marketplace that is changing as rapidly as this one. The guidance is crucial for closing the most successful outcomes, and there is little substitute for market knowledge that comes from having feet on the ground, and one's sight set ahead of the generally lagging indicators of sold and closed sales.
Keith's piece follows; feel free to email us with questions or leave a comment below.
NegotiationOnce you have found the home that you would like to purchase, you will be ready to submit your offer. If you are working with a real estate broker, he or she will submit your offer and will usually be involved throughout the negotiation process. Many purchasers feel more comfortable negotiating through a real estate broker rather than dealing face-to-face with the seller.
In most cases, the seller already has stated an asking price. You do not have to accept this price. In fact, the seller typically expects some negotiation of the price and the other terms of the contract. Usually a contract is determined though a series of offers and counteroffers until both parties agree on the price, the closing date, the loan amount, if any, and the length of time to obtain a loan if the seller has agreed to a financing contingency (defined below), any repair work, the condition of the property, and the inclusions or exclusions of personal property within the home. Once the seller accepts your offer, you should immediately inform your attorney.
Contract of SaleA real estate contract is written evidence of the agreement between a purchaser and a seller. The contract will specify all of the terms and conditions of the transaction and will describe the parties’ respective rights and obligations. The contract also will contain contingency provisions and representations of the purchaser and seller that describe what will happen if things do not go exactly as stated in the contract. As soon as your offer is accepted, the seller’s attorney will prepare the contract of sale and forward it to your attorney. Your attorney will explain your rights and obligations under the terms of the contract and will negotiate any necessary changes to the contract with the seller’s attorney. After all of the terms in the contract are agreed upon, your attorney will send you four copies of the contract for you to sign and return to his or her office along with a personal check for the down payment as specified in the contract. This check will be deposited by the seller’s attorney in an escrow account until the actual closing date.
Basic Terms and ContingenciesThe contract will identify the purchaser and seller, their attorneys, the house or apartment to be sold, the party who will hold the contract deposit (usually the seller’s attorney, also referred to as the escrow agent), the names of the real estate broker(s), the current real estate taxes (if a condo or house), common charges, or maintenance fees, and any assessments that may be levied against the coop or condo apartment, whether or not there is a flip tax (transfer charge levied by the cooperative corporation), and the party who is responsible for making this payment. The contract also will state if the purchase is contingent on the buyer obtaining a loan (i.e., the financing contingency), and if so, the amount of the loan. The contract will identify the proposed occupants of the home and if there will be any pets.
Following are definitions for several key terms which typically will appear in the contract:
- Contract Deposit: The contract deposit generally will be ten (10%) percent of the purchase price. It will be held by the seller’s attorney in a non-interest-bearing checking account.
- Flip Tax: A flip tax is a charge levied by a cooperative corporation on the transfer of ownership of an apartment. A flip tax is used as a means of generating income for the building and is customarily paid by the Seller. The flip tax is generally a percentage of the sales price or a dollar amount per share transferred. Not all cooperative corporations impose a flip tax.
- Occupants: If the occupants of the home will not be the owners (e.g., family members or tenants), this will be detailed in the contract.
- Pets: If the building permits pets, the contract will state the type and number of pets to be kept in the home. Some coops prohibit certain types of dogs or limit dogs over a certain weight.
- Price: The purchase price will be stated, and the terms of the payment will be defined in the contract. The terms are customarily a ten (10%) percent deposit to be paid at signing with the balance due at the closing (usually 60 to 90 days from the contract signing) in certified funds. Customarily, a purchaser can get a 15 to 30 day extension of the closing date. Extensions beyond 30 days, however, are solely at the discretion of the seller.
- Personal Property (also known as personality): Since real estate is defined as “land and anything permanently affixed thereto,” personal property is everything not permanently affixed to the apartment, including: hardware, kitchen appliances, cabinetry, air conditioners, lighting fixtures, wall-to-wall carpeting, washer and dryer, window screens, and window treatments (drapes, shades, and blinds). The contract will provide a list of those items of personal property, which will be included or excluded in the sale. You should assume that nothing is included, unless the contract expressly states that it is.
- Condition of Property: Generally, contracts for the sale of coop and condominium apartments will stipulate that the apartment will be sold in its “as is” condition, unless otherwise stated. Most contracts for coop and condo apartments are not contingent upon a home inspection, and purchasers generally do not have an inspection performed based upon the knowledge that the coop corporation or condominium association is responsible for the cost of repairs to the building’s structure and operating systems. If, however, you and the seller have agreed that the seller will perform some repair to the interior of the apartment prior to closing, this must be included in the contract. Since condominium bylaws and coop proprietary leases generally will state that the owner is responsible for the maintenance and repair of the interior of the apartment including the plumbing and the heating and electrical fixtures and systems within the apartment the contract should contain language requiring that these fixtures and systems must be in working order at closing. You will be responsible for all repair expenses to the home and its appliances after the closing, so it is important for you to be familiar with the condition of the home or apartment before you sign the contract. The contract also will state that the seller deliver the premises vacant and broom clean at closing.
When buying a house, it is advisable that you obtain an engineer’s inspection to determine the condition of the heating, plumbing, electrical systems, appliances, and roof, since as an owner, you will be solely responsible for the maintenance and repair of the home, both inside and out. The contract of sale will likely contain a provision which stipulates that the home is being sold in its “as is” condition, and the seller will not be responsible for any repairs to the home discovered after the contract is signed. Generally, the contract will not be contingent upon the purchaser obtaining an acceptable home inspection report, so a seller will generally insist that the purchaser arrange for a home inspection prior to signing the contract, if at all. That way, if the purchaser is dissatisfied with the results of the inspection, both the purchaser and seller can walk away from the deal without having spent money on legal fees for the negotiation of the contract. Of course, the purchaser is free to negotiate with the seller to repair any of the problems that are discovered in the home inspection or to obtain a reduction in the purchase price. It is recommended that you accompany the home inspector during the inspection process. He can point out any problems with the home as he discovers them, and you will not have to wait for a written report. Some tests take longer to perform, and in these instances, the contract will be contingent upon the receipt of acceptable results. Tests for water potability, fuel tanks, radon, and termites can take up to two weeks to complete. If the results of any of these tests are unsatisfactory, the contract will generally state that the seller has the option of correcting the problem prior to closing. If the seller chooses not to correct the problem, the purchaser will have the right to cancel the contract. Legislation recently passed requires a seller to deliver to the purchaser a form disclosing any known defects in the home, but a seller can, and usually does, as permitted by law, give a $500 credit to the purchaser at closing in lieu of providing this disclosure.
- Closing Date: The contract will state a date for closing. This date is only an estimated or target date, because there may be many conditions that a purchaser must satisfy between the contract signing and the closing date. The timing of many of these conditions – including obtaining a loan commitment, a lien search or title report, and obtaining coop board approval – is mostly beyond a purchaser’s control.
- Financing Contingency: A financing contingency provision in a contract permits the purchaser to cancel the contract if the purchaser is unable to obtain a loan. The provision describes the maximum amount of financing a purchaser is permitted to apply for and the term of the loan. Generally, the provision will allow the purchaser 30 days to obtain a loan commitment letter and will permit the purchaser to cancel the contract and to obtain a refund of the contract downpayment if the purchaser has not obtained a loan commitment letter within the stated time period.
- Coop Board Approval: In cooperative corporations, the sale of an apartment will be subject to approval by the board of directors. The purchaser must submit an application and any other documents reasonably required by the board within 10 days of signing the contract or within three days of receiving a loan commitment and must attend a personal interview with members of the board of directors. If the purchaser is rejected by the board, the contract will be canceled and the downpayment will be returned to the purchaser.
- Lead-Based Paint: Several years ago, the U.S. government passed legislation that requires a seller to disclose to a purchaser any knowledge of, or information regarding, the presence of lead-based paint or lead-based paint hazards in their home. Although lead-based paint has not been used since 1978, small children who ingest lead-based paint chips or inhale particles of lead dust may suffer neurological damage. Although lead-based paint still may exist in older homes, it is not considered a hazard if the home’s surfaces are properly maintained or covered with non lead-based paint.
- Condominium’s Right of First Refusal: Although it is rarely exercised, the sale of a condominium apartment is subject to the right of the condominium’s board of managers to purchase the apartment on behalf of the condominium when the seller has entered into a contract of sale. The contract will provide that the condominium’s board of managers must waive its right to purchase the apartment as a condition to close. The waiver will be delivered at the closing.
- Marketable Title: The contract will generally state that the sale is conditioned upon the seller transferring the premises free and clear of all judgments, liens, coop loans, mortgages, real estate tax arrears, or other encumbrances against the property – otherwise know as marketable title. For a condo or house purchase, your attorney will order a title report once the contract is signed and will arrange to have copies sent to the seller’s and your lender’s attorneys. If the title report reveals defects in the seller’s title, the seller’s attorney will be required to clear the defects prior to the closing. Once the defects have been removed, the title company will issue a title insurance policy at closing which will assure you and your purchaser’s lender that the property has marketable title. You will pay a one-time premium for title insurance, which guarantees that the title company will defend, at its own expense, the property’s title for as long as you own the property.
For a coop purchase, your attorney will order a judgment and lien search against you, the seller, and the coop corporation to determine if there are any recorded judgments, liens, or other encumbrances against these parties. The contract will state that the seller must remove any judgments, liens, or encumbrances against him and/or her prior to closing. Although the lien search does not insure the transaction, you may obtain coop title insurance for a separate fee, which will be paid at the closing.
About the author: Keith A. Schuman, Esq. is the founder of Schuman & Associates, LLC, a full service real estate firm that provides legal services to its clients, through all aspects of their transactions. Keith is a frequent contributor to comitini.com. Contact him at firstname.lastname@example.org or phone 212.490.0100.
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