Looking Into Due Diligence, Coop Boards, and the Financing Process
I was recently featured in an article by Murray Hill’s real estate brokerage, The Bamberger Group. We discussed the mortgage pre-approval process, the value of an attorney, and how to talk to your new co-op board. You can find the full article on their blog, Bamberger Answers, and excerpts of our discussion below:
[The Bamberger Group] What are some basic ways you’d recommend a first time buyer exercise due diligence?
[Jerry Feeney] “I think their due diligence is better spent finding an experienced lawyer. One of the mistakes that first time buyers often make is that they think that the lawyer is sort of a commodity, and they just shop for whoever has the cheapest price. They don’t realize that there’s a whole skill set and a large range of services that are offered. And they just assume that lawyers put together the paperwork for the closing, and that everybody does the same thing. But where they differentiate tremendously is in how robust their due diligence program is [when] representing buyers. It’s always shocking to me how many lawyers don’t review board minutes for co-ops and condos. Or maybe they’ll send their clients to review the board minutes, but clients don’t know what to look for. It’s bizarre.”
[TBG] Do you have any advice for prospective purchasers or new shareholders who are inexperienced in dealing with a co-op board?
[JF] “You hear a lot of the time brokers say things like, ‘Never tell the co-op board in your interview that you’re going to renovate,’ even if it’s your intention to renovate. And I really discourage that tactic. First of all, you’re not being candid and truthful. And if they approve you and on Day One you come in and submit an alteration package for a gut renovation, you immediately begin your relationship with that board on a deception. Moreover, if it’s an apartment that hasn’t been updated in 40 years and it’s an estate deal, then obviously you’re going to renovate it; they’re not stupid. So coming in and lying to them and saying, ‘I’m not going to renovate’ is absurd. And I tell brokers, it’s not really serving their client’s interest. What I’d rather have the buyer say is, ‘As I’m sure you’re aware, this is an estate apartment. It hasn’t been updated in a number of years, and we do plan to make some improvements to the apartment. We’ve reviewed the building’s alteration policy requirements and we plan to comply with them to the T, and we won’t start anything until it’s approved. We do want to make some updates to modernize the apartment and make it a prettier space.’ I think that’s fine. I think a board appreciates that.”
[TBG] You also represent lending institutions, is that correct?
[JF] “Yes, I do.”
[TBG] Can you speak a little about their perspective on a first time buyer? What are some ways buyers can prep/organize their application to keep the lender happy through till closing?
[JF] “The financing process is the trickiest part of real estate deals these days, and it’s definitely the part that I think generates the most frustration for buyers, and for first time buyers in particular. The level of detail and documentation that banks require on a mortgage is staggering. Banks will inevitably ask for the same documents that they’ve already asked for before. People will sometimes melt down about this and get really angry. And I say to them, ‘Look. There’s a lot of documents flying back and forth. People make mistakes. If they need a copy of this document and you’ve already sent it, you’ve already got it scanned– just send it over, rather than getting into a big to-do about it.’ You want the banker to be your ally. You want the banker to be your friend in the process. You want to make their life as easy as possible so that they are more inclined to work on your file as opposed to somebody else’s.
So first time buyers have a big misconception about: What does it mean to get ‘approved for the loan?’ When I talk to people about financing contingencies, and how the case of risk in a contract shifts between buyers and sellers depending on the contract language, buyers will inevitably say, ‘I’m not going to have a problem with the mortgage; I’m already pre-approved.’ And educating them about terminology, and understanding what pre-approval means, what pre-qualification generally means, what a loan commitment means, what underwriting additions are, what clear to close means… just explaining to them the language of banking, can really manage expectations. You could have two buyers that are similarly situated, and they both end up closing on the same day… one of whom, their expectations were not managed properly; the other, their expectations were managed… they’ll have a completely different take on the transaction, even though they both closed within the same timeframe.”