- The Mortgage
- Prospectus, Amendments and Financials
- Condominium Rules for Purchasing
- Estimated Expenses
- Selecting an Attorney
- The Process
- Terms in a Contract of Sale
- The Closing
The purchase of any real estate is a serious investment and the purchase of a residential apartment (condo), often referred to as “unit,” is no different. When you purchase a condo, you are buying the apartment, but also a percentage interest in the common elements of the project. A condominium apartment is generally located inside a building, but it could also be a townhouse inside a development or an apartment in a small building which is part of a community development. In the latter case, you may own the apartment, but also a percentage interest in the roads, the street lamps, sidewalks, etc.
Condominiums are real property. The units get fictitious lot numbers, just as a parcel of land would have a lot number, and these lots are taxed by the local authority. Because your apartment is part of a whole, it is important to know what you are getting into. The following are some steps to follow.
The Mortgage
Before you decide to purchase, you should consult a mortgage professional to find out what is the maximum mortgage amount you qualify for, what your mortgage payments and your closing costs will be.
Prospectus, Amendments and Financials
Every condominium has a prospectus, also called an offering plan or “black book.” An offering plan is a book containing information about the formation of the condominium. A condominium may be formed by converting an existing rental building into condominium ownership by subdividing the building into “units,” assigning to them a lot number and selling these units, or apartments, separately. It could also be formed upon the construction of a new structure. In either case, the “sponsor” (the company that created it) will prepare a prospectus containing information about the terms of the offer for the sale of the units. This prospectus gets amended every year that the Sponsor has at least 10% ownership of the project, and these amendments may contain important information and a history of events that may have changed terms after the initial offering.
More important than the prospectus and the amendments is the review of the financial statements. Although condominiums don’t have an underlying mortgage, as do most cooperatives, they have common expenses that are shared by the unit owners through the payment of common charges. It is very important to analyze the income and expenses of the condo, the assets, the reserve and/or working capital fund(s) and other valuable information that may affect the value of your investment and/or the potential for maintenance increases or the imposition of special assessments. Keep in mind that expenses increase (think of your personal expenses) and, thus, common charges should also increase to meet that increase in costs. By analyzing the last few years of the financial statements you may be able to identify the average percentage increase in expenses and calculate how charges will increase over the next several years. As you do this, don’t forget to take into consideration past repairs, improvements, and how much more the complex may need in the future.
It may also be fruitful to examine the condominium board minutes of the meetings. You may find important information about future increases in charges or special assessments, possible changes in house rules, potential repairs or improvements. Board minutes can usually be viewed by making an appointment with the managing agent of the condominium. If you see something “fishy” it may be worthwhile for you to pay your attorney to go review the minutes.
Condominium Rules for Purchasing
Although purchasing a condominium unit is a less involved process than purchasing a cooperative unit, most condominiums now require a purchaser to submit financial information in order for the board to waive its right of first refusal. When a unit owner is ready to sell, the condominium board has the right to purchase the apartment at the price that an outsider is willing to pay. This is called the right of first refusal. The unit owner must give the board the right to purchase at that price and the board may exercise the right or decline it, in which case it issues a waiver.
Upon requesting the condo application, also request the “house rules.” The apartment is yours, but it is also part of a community and you have to abide by the rules imposed by the board that manages that community.
Estimated Expenses
If you are obtaining financing the lender must give you an estimate of expenses. But you may also have expenses relating to the board application and these may not be included in the loan estimate.
In general, this is a list of expenses that you will encounter on a condo purchase:
- Bank fees: appraisal, credit report, origination fee, charge for the interest rate selected, tax service fee, bank attorney (or settlement agent) fee, flood certification fee and miscellaneous others;
- Deposits with the bank to pay real estate taxes and insurance in the future;
- Insurance premiums for the first year;
- Title insurance for yourself, but also your lender, searches for violations, taxes, etc. (for more information see our post Tips for Purchasing a Home);
- Mortgage tax: see our post Tips for Purchasing a Home;
- Mansion Tax: applicable to sales of $1,000,000.00 and more.
- Recording fees;
- Your attorney’s fees;
- Adjustments for taxes and common charges paid by the seller in advance;
- Condominium fees, if any.
If you are obtaining financing that requires private mortgage insurance or FHA mortgage insurance, you should look at these additional upfront costs and monthly premium fees paid to the lender.
Selecting an attorney:
If I was purchasing a condominium anywhere other than downstate New York, I would hire a local attorney to represent me. Experience is important. The dedication of an attorney to a particular field of law is more than important. I think that when it comes to condominiums and cooperatives, experience in this field of law is essential. The mechanics of the process may all be similar, but the substance of each transaction will probably be different.
Ask a relative, a friend, a co-worker who has purchased a condominium before, for a recommendation, so long as the experience with the attorney was positive. If not, consult the local bar association. Each county in New York State (at least downstate) has a bar association. Just Google the county name followed by “bar association” and the contact information will pop up.
The Process
Once you know your qualifications for financing, have retained an attorney and have found a unit that you would like to buy, it is time to make an offer. Once your offer is accepted by the owner, you should obtain the prospectus, the amendments, the financial statements, the house rules and the application. You should review them, but you should also have your attorney review them and go over the most salient details with you.
The owner’s attorney will send a contract to your attorney for review, possible changes and signature. If all is well, you will sign a contract and issue a check for the contract deposit. This check is payable to the seller’s attorney and it gets deposited into an attorney trust account. No one can touch that money until closing, when the seller becomes entitled to it, or until it is released to either party pursuant to the terms of the contract. The seller then signs the contract and both parties are bound by its terms.
Terms in a Contract of Sale
1. Address of the property with the name of the condominium, the date of formation and the percentage interest the seller owns in the project.
2. Price of the unit, representation of the cost of common charges, special assessments (if any) and real property taxes.
3. The contract deposit and who it is payable to. It should be paid in trust to the attorney for the seller. The deposit should not be released to the seller, except at closing.
4. The mortgage contingency: the contract should be subject to you obtaining a mortgage within a specified period of time, in the amount you are applying for and, if denied through no fault of yours, the contract deposit should be refunded to you. But, make sure that this provision is explained to you, as it may not be as easy to obtain the refund as you may think.
5. Title clearance contingency: title to the property should be delivered to you free and clear of any liens, such as mortgages, judgments, outstanding property taxes and many other possible “clouds” on title.
6. The contract should be subject to the seller obtaining the waiver of the right of first refusal from the condominium board.
7. Contingency for violations: local government agencies that have jurisdiction over the property may issue violations for non-compliance of codes and ordinances. The responsibility for removing them falls on the seller.
8. The contract should include the representations that the seller is making regarding the condition of the interior of the apartment, such as heating, electric and plumbing systems, as well as appliances that are included in the sale.
9. The contract should spell out who is responsible for the payment of the transfer taxes, a burden generally imposed on the seller. However, the purchaser pays the “Mansion Tax” when the price is $1,000,000.00 and more. Keep in mind that parties can negotiate who pays these taxes.
10. Federal law provides that a purchaser has the right to conduct an inspection of the unit to determine the presence of lead paint. The seller must also provide the purchaser with any information or reports that the seller may have about the presence of lead paint in the apartment.
11. The contract should specify the damages that either party will face if that party defaults in performing the terms of the contract of sale.
12. The contract should provide the names of the realtors involved in the transaction and who’s responsible to pay the commission, generally the seller.
13. The closing date: a most important term. As a purchaser, you should make sure that you are given some flexibility in the closing date, as lenders may take a long time to process your mortgage application and give you a final approval. You want to make sure that the contract gives you the flexibility to use additional time in case you need it. The most desirable term in a contract is a closing date of “on or about…” which gives both sides the freedom to prolong the closing for a period of time. As a purchaser, you should never accept a closing date that states a “time is of the essence” closing date. This may expose you to losing your contract deposit if you cannot close by that date. If you accept it, make sure that the possible consequences are explained to you.
14. Possession of the apartment after closing is to be negotiated and included in the contract. Most sellers may need to stay in possession of the apartment for a few days after closing. Generally, this time frame is five to ten days. During that time the seller pays the interest on the purchaser’s mortgage, the property taxes and the common charges, all on a pro-rated basis. Generally, some money will be held in escrow after closing by the seller’s attorney to insure that the seller moves out within the negotiated time. The agreement will also provide that if the seller does not move out within that time, the seller will pay a substantial sum of money for every additional day that the seller stays in possession beyond the initial period.
The above are customary terms in a contract. There may be special provisions that apply to a specific transaction and those should be included in the contract.
The Closing
Once you are ready, the seller has cleared title objections, the condominium has issued its waiver of the right of first refusal and your lender has cleared the file for closing, the transaction can be scheduled for closing.
At the closing you pay the seller the purchase price, and the seller gives you a deed to the property. The title company is responsible for recording that deed with the local recording office. You become the owner of the property and obtain the keys to the apartment either at closing or, if the seller is staying in possession of the apartment as negotiated, at the time that the seller moves out.
Congratulations!
The Trillo Bylines 