Self-Managed Buildings: Tips for Brokers, Bankers, and Clients from a New York Real Estate Lawyer

December 12, 2018

Self-management helps smaller buildings save on the expense of retaining a management company. In exchange, unit owners (or the shareholders of a coop) take on the responsibility of performing building related tasks. These can range from repair and maintenance work to accounting and record keeping services. While self-management can help buildings balance their budgets, self-managed buildings also pose unique challenges to New York City brokers and real estate attorneys.

We’ve identified some common pitfalls, along with tips on how to navigate them.

1. The building may not have a point person to answer diligence: Identify one early to be available throughout the transaction. Bonus if they use (and are responsive by) email.

The Purchaser’s real estate attorney, and any lending institution involved, will need diligence questionnaire(s) completed. Find a person on the inside early on that can properly answer questions, and line up a backup contact in the event of work conflicts, holidays, or vacations.

2. Board minutes are scattered or unavailable and Financials are not audited: Ask Seller’s side to make sure the minutes are compiled, along with at least 2 years’ financials for review.

Self-managed buildings may only have unaudited financials or excel balance sheets with no accountant opinion at all. In those instances, real estate lawyers and brokers must carefully guide the process through the buyer’s bank to avoid an unnecessary underwriter denial.

Brokers and real estate attorneys can further recommend an experienced, responsive banker for the specific type of transaction (condos/coops/new construction/resale). This is especially helpful when expecting diligence to be returned in unorthodox formats.

3. Building is not pre-approved by major lenders: Brokers can check which lenders have closed in the building; bankers can be advised to start their diligence process as soon as possible.

Building approval tends to be easier if the lender has already approved a loan in the building. If the lender is not familiar with the building, the banker should try to submit their questionnaire as soon as possible to help determine if the bank will lend in the building. Brokers and real estate lawyers who forget this step can find themselves in a situation where the buyer is initially approved but the bank raises a last-minute issue preventing the loan from closing (e.g., insufficient reserve funds or inadequate insurance).

4. Building Lacks Common Form Documents: Brokers can confirm that the building has commonly needed items: master certificates of insurance, a standard purchase application (or a set purchase process), waiver letter with common charge letter (condos), or a coop attorney or coop closing agent ready to coordinate closing.

Self-managed buildings often lack a set of commonly used form documents, and this is especially true if transactions infrequently occur. During one of our recent transactions, a building did not answer the bank’s repeated requests for the building’s proof of insurance. Following up and pushing for answers did not help because the building’s contact didn’t know what the banker was requesting. We helped the building secure an insurance broker and obtain adequate insurance to get the transaction closed.

There is no exhaustive checklist for this problem, but it’s important to have the right mindset: everyone is a team player getting the parties to close. Sometimes this means going above and beyond your job description.
Armed with the tips above, brokers, bankers, buyers, and lawyers can help the process move smoothly from due diligence to closing. Remember that the point person for a self-managed building is ultimately a busy New Yorker volunteering their time to help manage the building. Empathy, along with your own arsenal of sample documents, can go a long way – hopefully, all the way to a successful closing!

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