Notwithstanding the huge gains in wealth which so many people have experienced as a result of the prolonged boom in the stock market, the purchase of a home still represents the largest single investment that most of us will make in our lifetimes. In fact, the increased wealth resulting from the stock market boom has only exaggerated this effect since equity returns have allowed people to buy homes who otherwise could not afford them, while allowing others to trade up to residences that would have been beyond their reach.

The irony is that, while the financial means to purchase residences has increased, the anxiety about the purchase decision and the process of Closing has increased as well.

This article will serve as a primer on the residential real estate closing process and give an example of typical costs attending a common residential purchase in New York City.

 
While there are many differences between a Coop and Condo on a variety of fronts, the most important things to remember when deciding between them concerns controls, costs, and tax deductions.

In a Coop, you are not really buying an apartment, but, rather, shares in a corporation which owns the building and which gives proprietary leases to its shareholders for apartments, the value of which are represented in the number of shares allocated to them.  In effect you are leasing your apartment from the Coop.  In a Condo, you actually purchase your Unit.

As a result, Coop boards have much more control over the rights of Coop lessees than is the case in a Condo. The most notable one is the right to approve transfers. Under New York State law, absent discrimination or bias based on statuses such as gender, race, religion, sexual preference, etc., the courts will not second guess a Board's decision of whether to approve or disapprove a prospective purchaser.

People who buy Coops do so because they like the idea of buying into a vertical "neighborhood" and do not mind ceding some control over their destiny in the name of the common good.  Despite a few well publicized "celebrity" rejections,  the reality is that most financially and socially responsible purchasers are approved, even in Coops, so long as they show they can afford the carrying costs of the apartment and will not be a nuisance.

Notably, this is approval power of the Board is different from a Condominium where, typically, the Board of Managers does not have such power and, at most, has the rarely invoked right of first refusal, a right to purchase the apartment at the same price as agreed to by the purchaser. Thus, Condo purchasers, usually want maximum flexibility and control and pick condos over coops largely for that reason.

Partially as a result of this perceived control and transferability advantage, condominiums also usually command a higher price in the marketplace.

Another big difference between coops and condos is in costs. Coop buildings can carry underlying mortgages which shareholders must pay off, pro rata, as part of their monthly maintenance obligations. In return, they get an equal share of the mortgage interest deductions which accrue to the Building.

Condominiums, on the other hand, generally do not carry building wide mortgages, so monthly maintenance or "common charges" tend to be lower than their Coop counterparts. So, too , do their tax deductions.

Houses, of course, are more closely aligned with condominiums than with coops. with the owners generally absorbing their own expenses, enjoying the associated tax benefits, and being able to sell to whomever they wish. 

Sometimes, however, houses may be located within a Homeowners Association where dues are paid to take care of things like snow removal and so on, and where there may be some limits on certain major design or decorating decisions, like the size of Satellite dishes.

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The most common fixture of the real estate purchase decision is the consultation with a broker. The broker serves as the agent of either the buyer or the seller and is the intermediary for the negotiations between the parties.

Typically, the Broker acts as the agent of the Seller. This means that the Broker gets paid by the Seller, usually as a percentage of the sales price of the home.  In New York State, brokerage agreements need not be in writing, but you should insist that your agreement with a broker be in writing. In fact, the majority of reputable brokers will not only agree to a written agreement, they will insist on it for their own protection.

At a minimum, it should spell out the terms and conditions under which the broker will be paid, the amount that the broker will get and, most important, the period of any "exclusive" given to the broker. If you are a Seller, the term "exclusive " refers to the fact that the selected broker will be the only person through whom all inquires for your house, coop or condo will be received and

passed along to you.  It usually also provides that no commission will be earned until and unless there is a closing.

Does this mean that no other brokers can show your house? No, since New York, like most states, participate in multiple listings, a system in which all brokers and real estate salespeople have access to new listings as they hit the market. The effect of the exclusive brokerage agreement in this context is that the exclusive broker will get a piece of any brokerage commission flowing from the sale of the residence, even if the buyer was found by another broker. In that case, the originally agreed upon commission would be split between the exclusive broker and the other or participating broker. The net amount of the commission is the same in both cases.

When a broker is retained by the Seller, the broker is the Seller's agent. As such the broker has a fiduciary relationship, or a relationship of trust and fidelity to the Seller. Accordingly, in any negotiation, the broker will be trying to get the best deal for the Seller.

If you are a Buyer, and wish to even the odds a little, most states allow you to enter into a written agreement with your own broker in which the broker would be designated a "buyer's broker". Even though the broker's ultimate compensation still gets paid by the Seller, a buyer's broker owes his or her duty of loyalty to the buyer and will strive to get the best deal for the Purchaser rather than the Seller.

The last main point about brokers is that virtually all states license them. Brokers must go through required education, pass certain licensing examinations, and first apprentice as a licensed salesperson, before becoming an actual broker.

Often, the term broker is used generically to cover real estate salespeople as well. They are, however, different. While a real estate salesperson must also be licensed, they have to work under the umbrella of a licensed broker.

While there are many talented real estate salespeople in the market, remember that they usually have less actual experience and, accordingly, you may want the comfort of the personal involvement of an actual licensed broker in negotiating your particular transaction.

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What happens when the long search ends and a buyer has finally found the house they want and the Seller has agreed to the offered price?  Basically, this is the point when the parties may sign a binder and when lawyers step in to the process.

In order to confirm the fact that the parties have a basic or "handshake" understanding, sellers and/or buyers may wish to enter into a short memorandum confirmation called a binder. The binder should not serve as a contract but, rather, merely, as evidence that the parties intend to contract. In this situation, the Buyer will usually give the Seller a check for a small amount, perhaps a few hundred dollars, and the seller will agree not to sell to anyone else for an agreed period of time while the parties and their attorneys presumably will negotiate and enter into a formal contract. The binder is usually refundable when and if a contract is entered into between the parties.

In many states standard real estate transactions are handled by brokers and title companies but in New York, the contract process usually involves an attorney.

Once the parties are at the contracting stage, in states like New York, it is highly recommended that each party retain an experienced real estate attorney to represent their interests.

It is the attorneys who will ensure that the Seller makes no more promises than he or she intends and that the Buyer be protected from the falsity or inaccuracy of promises which the Seller does agree to make.

It is the same contract that will spell out any contingencies which may be needed, such as the most common, the financing or mortgage contingency, a clause which allows a Buyer to escape the contract if he or she is unable to obtain the necessary financing.

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On the subject of mortgages, another increasingly common player in the real estate closing scenario is the mortgage broker. The mortgage broker is different than the sales broker discussed earlier in that this broker negotiates on behalf of a potential borrower with available lenders so that buyers can obtain the financing they need. Here, too, the broker's compensation comes from someone other than the client, in this case, the lender. While some borrowers hire mortgage brokers to help grease the wheels of the borrowing process and help in placing loans where there might otherwise be some problems, many others hire them in order to gain access to lenders who will lend at more favorable conditions than the borrowers might have otherwise known about.

Since the Broker's fee is indirectly reflected in the rates offered to the borrowers, it is still generally recommended that, before hiring a mortgage broker, they should spend a little time familiarizing themselves with the types of mortgages that are commonly offered in the  newspaper, so that they can have confidence that they are indeed being offered a superior loan package.

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Once the contract is finalized and signed, the attorney will usually arrange for a title search to ensure that the Seller has the legal capacity to make the sale and that there are no impediments to the Buyer acquiring the title to the property free and clear. In a coop context, this search will encompass any issues concerning the legal status of the underlying cooperative as well.

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Whether you use a mortgage broker or not, if you need financing to buy the property, it's most likely that there will be a lender.

A Lender can be institutional, that is, a bank, or it can be private, such as the Seller itself, or even your Uncle Harry.

In most modern transactions, however, the Lender is a Bank or some other financial institution, to whom an application is made, approved and funded. Institutions normally lend based upon an appraisal of the value of the property

(which may not be as high as the contract price) and an analysis of the financial ability and credit of the borrower.

Pre-paid interest, or points, are often required in connection with a loan, although many institutions offer no point loans at slightly higher interest rates.

A Lender's approval of a loan is expressed in a written commitment, which confirms the terms upon which the loan will be made. Lenders also furnish a disclosure statement with a good faith estimate of some of the typical costs of the Purchase Process.

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Finally, the contract is signed, the loan is obtained, all required approvals have been granted and now the parties are ready to "close".

What exactly happens at a Closing?  Basically, the Closing is where all the necessary paperwork is signed and funds transferred to transfer title or legal ownership from the seller to the buyer.

In the case of a house or a condo unit, a Deed is signed by the seller over to the buyer. In a coop, the proprietary lease is assigned and a new stock certificate is issued in the name of the buyer.

If the transaction involves financing, a mortgage or some other loan security document will be signed, evidencing the security interest which the lender has in the property, its collateral.

Apportionments, or expenses which cover time periods during which the day of Closing falls, are split between the seller and buyer according to the number of days in which each owned the property or according to whether or not the Buyer will continue to benefit from them.

So, if the seller paid real estate taxes for a period which began before Closing but expires after Closing, the buyer would reimburse the seller for that portion of the taxes already paid which accrue to periods after Closing.

Similarly, if there is fuel left in a tank, already paid for by the seller, the buyer will reimburse the seller for the value of the remaining fuel.

To illustrate the common expenses faced by a seller or a buyer when a residential property is sold in New York City,  typical coop and condo financial summaries are included below as illustrations.

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