How Much Time Is There Between Offer and Closing?
BY BERNARD KLEIN MAY 5, 2017
So your broker has put in an offer on your behalf and you’re already thinking about setting a closing date? Not so fast!
New York City real estate transactions are sophisticated and require both your broker and real estate lawyer to go through the purchase process with you one step at a time. While this may seem cumbersome and not as expeditious as you would like, the goal is to protect your interests from offer to closing.
So how long does that process take? It depends. Each transaction is unique, and since there are so many people involved, it’s never as straightforward as you might expect. Sometimes it can take a few weeks, other times it can take three months.
Accepting the Offer
Just because your broker submitted an offer doesn’t mean it gets accepted. Yours may be the only offer, or there may be multiple offers that need to be vetted. Either way, there may be some form of counter offer, unless you come in at full price or very close to ask.
Once there is a meeting of the minds for both price and conditions, the deal moves to the next stage of the process. But getting to the point where you and the seller agree to the same terms can happen within a day, or it can be prolonged over several weeks. It all depends on the aggressiveness of the negotiations and the required terms.
Contract Gets Sent to Your Lawyer
Once the deal sheet is shared between the brokers and lawyers, the lawyer representing the seller will send your lawyer a contract of sale, which is often accompanied by a rider. The rider often has specific terms relating to the terms and conditions of the transaction. Your lawyer will not just evaluate the contract of sale and provide edits, but they will also review the property’s offering plan, financials and board minutes to ensure you’re aware of all details pertaining to the building. This review generally takes place between lawyers for both sides and can be as quick as a week or as slow as 2-3 weeks. It all depends on the specific issues that arise during the lawyers’ evaluation.
Additionally, prior to signing the contract, you may also be advised to conduct a home inspection. This can usually be scheduled quickly — sometimes with hours. However, the actual home inspection report can take another day or two before you see it. If there are any defects that come up that were not expected, you may be in a position to ask for a price reduction or credit at closing. This negotiation may add hours or a day or two to the negotiation.
A Good Lawyer Is Critical!
In New York state, real estate transactions need a lawyer’s approval. And for real estate transactions in NYC, having a good real estate lawyer is a must-have.
The timing of a real estate transaction is often tied to the expertise and diligence of the lawyers. According to real estate attorney Lior Aldad from Aldad & Associates, P.C., it is “always critical to retain the services of local real estate attorneys who are well-versed in the type of transaction involved in order to have everything proceed smoothly and efficiently, as well as to make sure that parties’ vested legal interests are protected. Having the right attorney can make a huge difference on how smooth and error-free the transaction proceeds.”
It’s important to note that a real estate transaction takes two attorneys, the buyer’s and the seller’s, which means that even if your attorney is on top of every detail, a smooth transaction still requires that the seller’s side has an equally and efficient attorney on hand.
Receiving Mortgage Commitment
If you’re a cash buyer, then this section will not apply to you. However, If you’re financing the purchase, it’s at this point that you will pass your fully executed contract to your lender, with whom you should already have an established relationship, whether it’s a mortgage broker or a direct lender.
This is the point in the process where you go from being pre-approved for the purchase to following a series of steps that should result in a commitment letter from the lender that it will finance your purchase. You’ll need to submit bank statements, pay stubs, W2s, tax returns, outstanding liabilities and so forth so that the lender’s underwriter can conduct their audit. Similar to your lawyer, the underwriters will also be taking a look at the property’s offering plan.
In addition to conducting due diligence on your financial situation and the building’s, the lender will conduct an appraisal. The purpose of the appraisal is to ensure that the value of the property is actually in line with what is being loaned for the property purchase. Since the property you’re purchasing will be used as collateral, should you default on your mortgage, the lender needs to ensure the purchase price is justified.
Do apartments ever appraise below the value of the purchase price? Yes, they do! Once the appraisal comes back to the lender, and underwriting has completed its review, the lender will issue the commitment letter. This process in totality can take anywhere from 30-45 days. However, in extreme circumstances, it can take longer. It’s all dependent on the underwriting process and how many follow-ups are required.
The Board Application
Once you have a signed contract in place, you’ll want to start addressing the board application immediately, unless you’re buying a multi-family or brownstone. Your broker will help you through all the paperwork that needs to be filled out and supplied. It requires an application form, financial disclosures, account statements, professional and personal references, W2s and tax returns. Also, if you’re getting a mortgage, you’ll need to submit your mortgage commitment. Often times, that will be the last thing you’ll be waiting for to submit the board application. Turnaround on the board application can be as quick as a few days if you’re paying all cash for the property, or it can take as long as it takes you to get the commitment letter from the lender, which can be up to 45 days.
It’s important to note that there is also a fairly significant difference between condos and co-ops. Condos don’t have as much power to turn down an application as co-ops do. Condos only have the right of first refusal, meaning that the condo board has the right to purchase the property at the same price as you’re paying for it. Assuming you’ve provided all necessary paperwork to the condo management company, you’re simply waiting for a waiver that declines their right of first refusal. Condo boards can take a few days all the way to a month to approve the board application.
Co-ops are much different, as they generally act in a much more exclusive and restrictive fashion. Co-ops will review all the submitted paperwork in addition to requiring buyers to attend a board interview. These interviews are used for the board to evaluate the buyer’s character and ask any questions that have been left unanswered in the submitted board package. Co-op boards have a tendency to take a lot longer than condo boards to approve a buyer, and given that an interview has to be coordinated with numerous board members and the prospective buyer, this process can take anywhere from a few weeks to a few months. It really depends on the co-op.
Scheduling the Closing
When you receive condo or co-op board approval, your broker will inform you and your lawyer. Your lawyer will connect with the bank to ensure they’re providing clearance to close and ready to show up with checks. Additionally, your lawyer needs to coordinate with a title company to prepare a title report for the closing, which ensures that your property is free of any encumbrances or legal claims prior to being transferred to you. You can expect this entire process to take about 1 to 2 weeks to receive a firm closing date. Again, it all really depends on the availability of all the required parties that need to make themselves available for closing.
New Development Caveat
If you’re buying new development or pre-construction, this will change up the timing of everything. You may be able to get a property into contract 2 to 3 years in advance of any closings taking place. If there are construction delays, this time period can increase dramatically. Sometimes buyers might be tempted to buy into a project where the developer tells them that closings will take place in a few months.
Mr. Aldad says that buying into such a project may be risky, particularly for investors who are looking to flip from one property to another through the use of a 1031 Exchange. “Many buyers involved in a 1031 Exchange assume a great risk by signing a contract of sale to buy in a new development or a new conversion that has not yet filed its Condominium or Co-op Declaration and does not have a valid Temporary or Permanent Certificate of Occupancy. The risk is that they will need to close within the 180 days, as per the strict guidelines of Internal Revenue Code, from the date of their sale (the relinquished property), yet the project of their acquired property will not be ready.”
Even for buyers who aren’t investors, the uncertainty around closing time can have an adverse impact since the buyer also has other commitments they need to juggle, such as an existing lease or the sale of their current property.
As you can see, there are many factors involved in the process that takes place between submitting your first offer on a property until its closing. Are you buying cash or are you financing? How quickly can you get a commitment letter from your lender? Are you buying a condo or a co-op? How long are you negotiating the offer? All these nuances make a significant difference when it comes to timing. To be on the safe side, always estimate that it’ll take about 2 months before all is said and done if you are financing the property.