To Inspect or Not to Inspect: That Is the Question
Among the most frequently asked questions of buyers of cooperative and condominium apartments is whether they should engage a professional engineer to inspect the apartment before buying. Like many issues in New York real estate, the answer is not always straight-forward.
When evaluating whether to hire an engineer, or professional home inspector, let’s first re-examine the basics of why we engage one when buying a single family home. Buyers inspect because whatever might physically go wrong after buying a home is the buyer’s financial problem. Rarely will a seller retain liability for a water heater that breaks down after the closing, or a roof that starts to leak and needs replacement. The analysis is easy: since all the problems of homeownership become your problem once you close, it makes sense to hire a professional to evaluate the systems of the house to see how things look, and figure out what might be on the horizon.
Buying an apartment in a large, professionally managed complex presents a different analysis. While an inspector can examine within the boundaries of the apartment itself, there is not a lot they can see from this examination. Most of the issues that have a financial impact on the building arise out of problems with building systems, like the roof, the façade, or the elevators. And a comprehensive engineering analysis of those systems is typically quite expensive, and makes such an investigation cost-prohibitive. Moreover, getting access to these systems in a large building is not always easy, with building management reluctant to have “outsiders” probing the systems of their building, as the very act of investigation can itself cause problems if done improperly. So, instead, most buyers of apartments opt instead to rely on an examination of the professional management of the building. Due diligence is the process by which an attorney examines the board minutes, the financials, and offering plan, often issues written questions to management, and sometimes even interviews members of the board or managing agent. This process should reveal problems that management is aware of, as well as the plans to resolve them. Even if costly, the expense of a new roof spread over 200 unit owners is far more palatable than the cost of a roof to a single family homeowner.
But like many things in New York real estate, there is a gray area. When buying an apartment in a small building offers a more challenging analysis. If you are buying in a 4 unit condominium, for example, and all the apartments have the same percent common interest, then 25% of all the expenses of the building are yours. So if the building needs a new roof at $100,000, you do the math: $25,000 comes from you or the reserve in the building if they have one. And doing an engineering analysis on a 4 unit building is far easier than performing one on a larger project. Due diligence should still be conducted, whether professional or self-managed, but in a small building it’s not uncommon that an engineer uncovers an issue with the building that management was not even aware of. So complete due diligence would not have uncovered that which an engineer would.
Finally, a note on new construction. The first 4 or 5 years of a buildings life after construction or conversion can present issues relating to the construction. While most developers are committed to providing a quality product, some are not. Due diligence on these buildings might not always reveal issues, as the managing agent for recently constructed / converted buildings is typically related to the developer, having been chosen by it in the offering plan. Such “captive” management is not always transparent about issues with the building, as sponsors may have unsold units whose marketability would be adversely impacted if problems become known. As such, engaging an engineer on these projects makes sense.