Welcome back to Part 4 of Purchasing an Apartment in New York City. The goal of this series is to help home buyers formulate a sound game plan to successfully purchase an apartment in NYC. In this installment, I will focus on the first of three major milestones in the purchase process – an Accepted Offer!
Every sales transaction – no matter how straightforward or complicated – includes three major milestones; an Accepted Offer, Fully Executed Contract and Closing. Each gets a buyer one step closer to a successful purchase and brings with it various levels of excitement and anxiety. One of my colleagues, David Askler, has come up with a clever way to explain to clients the recommended level of excitement and celebration each of these major milestones deserves by attaching a celebratory beverage to the corresponding stage of the process. He calls it “Beer | Wine | Champagne.” As you’ve likely guessed, the Accepted Offer is “Beer.”
If that seems strange to you based on your prior real estate experience, rest assured you are not alone. In many markets across the country, an accepted offer is cause to pop the cork on the Champagne – or at least open a bottle of wine – as the deal is secure at that point with a binder or some other legal agreement. Unfortunately, that is not the case in New York City. In NYC, contracts are often negotiated over the course of a few days to a week, during which time both parties are in limbo – without any financial or legal protection – creating anxiety for BOTH buyers and sellers. In a “Buyers’ Market” sellers are more likely to want to “hook” the buyer quickly, while in a “Sellers’ Market”, buyers are the ones sprinting to the finish line to prevent another more attractive buyer (i.e., more money down, higher purchase price, better qualified in terms of DTI and post-closing reserves) from swooping in and wooing the seller to change course. Given the current market, I generally tell my buyers to slam a beer rather than sip it, and buckle up for the wild ride of due diligence, comments and mark-ups, and a race to a signed contract.
I am a huge believer in a thoughtful and thorough review of the building to give my buyer comfort with the investment they are purchasing. That said, achieving your goal (which in this case is securing the deal with a signed contract) depends on a healthy combination of accuracy and speed.
There is a limit to how fast we can go, but we can get a running start before the gun goes off and make sure we are sprinting all the way through the tape. Below are four suggestions on how to win the race and get to the “Wine” phase.
- Have Your Attorney Lined Up and Ready To Go
Many buyers do not understand the need to speak to or retain an attorney until after the seller accepts their offer. Although an attorney can generally be hired and retained in minutes, it can take hours if not days for a buyer to decide on one depending on the situation and how many attorneys you are “vetting”. If your offer has been accepted, the proverbial gun has gone off and you are now stuck on the blocks. Buyers (understandably) want to make an educated decision, understand the fee and what it entails, feel comfortable with the approach of the attorney, etc. Given the need for speed in the due diligence process, waiting to accomplish this step can be a costly error.
The first 24 hours after an accepted offer are critical from a timing standpoint, but also a psychological standpoint. The seller’s broker is measuring the speed of the buyer to gauge seriousness. The first test is the speed of completion of the “Deal Sheet”. This document is drafted by the brokers and includes such information as the “on or about” closing date, monthly maintenance or common charges, assessments, commission breakdown, inclusions, and attorney contact information for delivery of the offering plan, financials, and contract. As you can imagine, not having an attorney retained prevents the buyer’s broker from delivering the Deal Sheet to the listing agent, potentially raising questions about the purchaser’s level of seriousness. It also prevents the listing broker from completing the deal sheet, distributing it to the attorneys, and sending the due diligence materials (offering plan and financials). Until we have an attorney, we are stuck in limbo with the possibility of another / better offer coming in. At the same time, the buyer’s broker is also measuring the speed of the seller’s team to gauge their commitment to their buyer. If they are slow to complete the Deal Sheet, or do not quickly send the offering plan and financials to the buyer’s attorney, red flags begin to go up on their side as well.
- Do Not Underestimate the Importance of the Real Estate Attorney
Since the majority of the “heavy lifting” during the due diligence process is done by the real estate attorney, let’s talk about their role and importance.
There is a phrase you will hear in the real estate community, “Bad attorneys kill deals.” Now, the truth is attorneys likely have a similar phrase about real estate professionals, which just highlights the fact that “good ones” are hard to find in both professions. That said, the attorney must understand the market and the need for a focused, detailed, diligent, thoughtful and SPEEDY approach to the due diligence process. Their team should be ready to pounce on the first draft of the contract and send it back quickly with comments. They should be pushing the other side to reply with a final draft, hounding the managing agents to set up a minute review, and encouraging the buyer to be ready to sign the contract as soon as they have completed their work. Deal killing attorneys are tied up in court when they need to be reviewing minutes, let the contract linger on the other side’s desk for 4 days without asking for an update, make a big deal out of a small issue, and gloss over a huge issue rather than getting clarity and the facts. I am an advocate of a conservative attorney – one who tells you what you need to hear rather than what you want to hear – but they must get there quickly and should make you feel as if you are their only client (or at least their most important client).
- Work Concurrently Rather Than Separately
The arch of the purchase starts to widen once we have an accepted offer. Not only are you relying on your attorney to do due diligence in a timely fashion, you should be starting to put together the required board package documents and statements, as well as ramp up the mortgage process if you are financing. The more clarity you can get from the bank regarding an easy approval of both you AND the building (the building is healthy, has sufficient reserves, is on the Fannie “approved list”, etc.), the better you will feel signing the contract of sale. Conversely, if the bank identifies an issue with the building (pending litigation, low reserves, owner-occupancy issues, etc.), you can understand it and determine whether it makes sense to move forward or move on.
- Always Think One Step Ahead in the Process
While everyone else on your team is doing their job, you and your real estate professional need to anticipate the next steps – namely, ensure you are available to sign contracts and deliver your 10% contract deposit.
Failed accepted offers often fall apart at the 11th hour due to a scheduling crisis or an inability to produce contract deposit money quickly. Since the deal is not yet secure, the level of anxiety on both sides tends to rise with each passing day. If expectations are not met – or a last minute hiccup causes an unexpected delay (no matter how innocent it is) – a seller may get cold feet and move on. Therefore, it is imperative that the buyer is available to sign contracts (whether in person or remotely) and deliver or wire the 10% deposit check as soon as due diligence is complete and all questions and concerns are answered or addressed to the buyer’s satisfaction. In fact, letting the other side know when you plan to sign and deliver the deposit check can ease tensions and secure the deal. Just make sure you can come through on your promise!
My name is Eirik Davey-Gislason and I work in real estate in New York City. This blog is an opportunity for me to educate everyone who has a horror story or is on the verge of one. By sharing, preparing and advising my audience on what to expect, what is normal, what is right, and what is wrong, I hope to do my part to expose the wrong-doers and shape the future of this dysfunctional thing we call NYC Real Estate.