Due Diligence Can't Predict All Problems in Co-op and Condo Buildings

The deadly collapse of the Champlain Towers South condominium in Florida earlier this summer sent shivers all the way to New York City. It rattled co-op and condo boards, potential apartment buyers and the people responsible for ensuring the physical integrity of buildings. It also generated questions. Here's a big one: How can a prospective buyer of a co-op or condo apartment find out what repairs the building might need in the next for or five years? 

Through due diligence, replies the Ask Real Estate column in The New York Times. After a buyer's offer for an apartment is accepted by the seller, they negotiate a contract. During this time, the buyer's lawyer should do due diligence, asking for at least two years of board meeting minutes and sending a questionnaire to the managing agent. The questionnaire should ask about things like how much money is in the reserve fund, the history of assessments, which capital improvements are on the horizon and how much debt the building is carrying. The answers to these questions and the board minutes should offer you a clearer picture of what kind of building you are going to live in, and how it is managed.

The minutes of board meetings are crucial. They should show you the issues facing the board. Perhaps there have been discussions about repairing the elevators, or maybe there have been multiple burst pipes on the line where your apartment is. You’d want to know that.

Unfortunately not all boards keep thorough minutes. “Sometimes you don’t have that much detail,” says Andrew Freedland, a partner at the law firm Herrick, Feinstein. “Sometimes you have to ask questions.”

But even with all this, you’re limited to what you can see — you’re looking at a snapshot of recent history. No amount of research will tell you what could happen tomorrow. You could move in and three months later, the building discovers that it needs facade repairs to comply with local laws, triggering an assessment. A major storm could flood the parking garage. Cracks could be discovered in the sidewalks.

“There is zero assurance that you can know what the case will be in four or five years,” says Pierre Debbas, a founding partner at the law firm Romer Debbas. “You can close, and two months later there’s a major problem that just popped up.”

Not very reassuring, perhaps, but due diligence conducted correctly can give a picture of how the building has been maintained and whether or not the building has funds on hand to deal with unforeseen problems. This, while it's no guarantee, will minimize the chance of unpleasant surprises.