For Co-op and Condo Buyers, Due Diligence Matters More Than Ever

The deadly collapse of the Champlain Towers South condominium in Florida has put a spotlight on the need for due diligence by co-op and condo buyers. For one thing, experts agree, the collapse did away with the notion that buyers should rely on their professionals to ascertain the fiscal and physical health of a property. Buyers need to roll up their sleeves and get involved in looking beyond the walls of the apartment they’re hoping to buy.

Some staples of due diligence have been around for years. Others are the direct result of the Florida collapse. Here are some of the most critical things to investigate:

Financial statements.

“I never look at less than three years,” says veteran real estate attorney Arthur Weinstein. “What you find there is a good history of the monthly maintenance, borrowing, arrearages, store income, as well as the mortgage structure and whether or not it’s coming due. It’s a good starting point.”

Minutes of board meetings and annual meetings.

This is another area that has been traditionally investigated by the buyer’s attorney. “You want to gather as much information about the unit and the building as possible,” says Ingrid Manevitz, a partner at the law firm Seyfarth Shaw. “A buyer’s lawyer should look at minutes going back several years.”

The minutes will likely reveal if there have been discussions about major capital projects, structural problems, disputes among neighbors, litigation and, possibly, problems with the unit the buyer is hoping to purchase.

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Reserve fund.

The size of this rainy-day fund will usually be revealed in the financial statements. “You want a strong reserve fund,” Manevitz says, adding that even a robust reserve fund may not be enough to cover looming expenses. At Champlain Towers South, for instance, the association had $700,000 in reserves, according to a letter sent by the board president to unit-owners – while the building needed $15 million in repairs.

Bylaws.

Which brings us to a possible contributing factor in the Florida collapse. Unit-owners at Champlain Towers South balked at paying assessments that would have been needed to fix structural problems, which led some board members to resign in frustration. “You can’t fault the board,” Manevitz says. “The lesson to learn here is that some bylaws require the approval of a high percentage of unit-owners – sometimes two-thirds – to make repairs over a certain number of dollars. Condos, especially, should revisit those provisions in their governing documents and consider amending them if they’re too restrictive in permitting necessary structural work. It’s usually a little easier for the board to maintain the building in a co-op.”

Buyer, beware – and be busy.

“I wouldn’t put all of the due diligence on the attorney,” Manevitz says. “The purchaser should get involved, too. There’s a lot of free information available online.” On the DOB website, for example, it’s possible for anyone to learn about outstanding violations at a building. Other searches might reveal construction defects in a new building, litigation by unit-owners against the developer and the developer’s track record on other projects.

Weinstein, the attorney, advises his board clients to exercise caution when buyers make requests for information about the building. “Some buyers’ lawyers give elaborate questionnaires,” he says. “We will not give out anything that’s in the public record.” 

The broker, last line of defense.

“We do not advise our buyers to get an engineer’s report on the building,” says Daniele Kurzweil, a licensed sales associate at Compass. “The reason is that if the roof has problems, that’s not a resident’s issue, that’s a co-op or condo board issue. Besides, in New York City there’s constant maintenance and inspection of buildings, so it’s very hard to hide blatant structural defects. As a broker, we check the apartment. If we smell something or see evidence of a leak, sometimes we bring in inspectors. At a recent sale in Brooklyn, I brought in a mold specialist.”

The city’s Facade Inspection and Safety Program requires co-op and condo boards in buildings taller than six stories to inspect and repair their facades every five years. Since such envelope inspections are unlikely to detect structural problems, Weinstein has a word of advice for his board clients: “You ought to have your engineer look not only at the skin but also at the structure of the building.”