Beyond the obvious differences—taxicabs versus cacti, towering high-rises versus wide-open spaces, big business versus big-sky country—there’s more separating the New York real estate scene from the rest of the country than just geography and climate. Approaches to home sales in New York and the urban East differ markedly from sales in the West for a score of reasons. Because of land scarcity, New York and other eastern urban areas have built upward into high-rise apartment buildings, while the West has historically spread outward into private homes, taking advantage of cheap and plentiful land. This fundamental difference underlies the other significant dissimilarities between the regions in the closing process.
New York Co-ops vs. Western Condos
Consider the co-op, for instance. Unique to the East (and nearly 90 percent of New York housing stock), co-ops were conceived in the 19th century by the gentry—wealthy people who wanted to live in town in buildings share-owned by other wealthy people. Courts in New York have long upheld the right of co-ops—now somewhat more egalitarian than their predecessors—to provide in their governing documents that a board has the right to deny a buyer the right of entry to their building for “no reason or any reason whatsoever,” with the exception of obvious civil rights violations. The government also provides co-op owners with a major tax break—one other property owners’ associations and condo owners don’t get. The healthy tax write-off can go for interest payments on the building’s underlying mortgage, which is, in turn, part of shareholder maintenance. There are no underlying mortgages on those condos which typically dominate the West.
Condo associations differ from co-ops in that they issue deeds instead of stock shares. Condos monitor sales and rentals with the “right of first refusal” invariably found in their governing documents. This right of first refusal permits a condo board to meet and pay a seller’s sale or rental terms, and thus control occupancy in its building. This unique style of home ownership flourishes in New York City because it obviously fits the needs of the city’s residents.
By contrast, the West was settled some two centuries after the East, and has developed its own real estate practices and landscape. Co-ops are rare, condos and houses freely transferable, and high-rise apartments are mostly super-luxury buildings confined to downtown commercial areas where space is at a premium.
The principal form of home ownership in the settled West is through membership in a homeowners association. Members own their houses but contribute to common areas, landscaping, and amenities like clubhouses, tennis courts, and swimming pools. Condos in the West are usually attached houses or two-story apartment buildings with similar amenities. Both types of home ownership have governing documents known as Covenants, Conditions, and Restrictions (CC&Rs) which are the equivalent of a co-op’s proprietary lease and by-laws.
The Escrow West vs. Title East
California and Nevada are part of a group of Western “escrow states” which includes Arizona, Texas, New Mexico, Wyoming, and Montana. Escrow states are so- called because their laws permit brokers and escrow-title companies to prepare legal contracts, title documents, hold moneys, and close real estate deals. New York and its sister Eastern states are called “title states” because they allow only lawyers to prepare title documents, hold deposit money, and close deals.
Escrow states developed their system of real estate transfers because in the early days of western expansion, the settlers who moved into what would one day become Montana, Arizona, and the rest were more concerned with day-to-day survival than with legal wrangling. The shortage of lawyers on the frontier led lay-people in the West to draft their own documents and negotiate their own deals—well into the 1930s in some places—while in the East, legal talent had been on the scene before the Revolutionary War. By necessity, the brokers who brought parties together and did the necessary paper work became ad hoc lawyers. Popular acceptance led to political clout, and today brokers in escrow states are calling the shots in residential sales transactions.
In both East and West, brokers prepare the buy/sell agreement called a “Real Estate Purchase Agreement and Earnest Money Receipt.” Each brokerage company crafts its own six to 12-page purchase agreement. Nevada purchase agreements, which are representative of other escrow states, are wordy and drawn-out—they’re designed to protect commissions and shield brokerages from liability as much as to outline the actual buy/sell-terms. Language such as “advice and opinions are for marketing and sales negotiations only” is commonplace. Despite this disclaimer, brokerages uniformly carry malpractice insurance.
Earnest Money vs. Contractual Deposits
In the West, an “earnest money” down payment—sometimes called a “good faith deposit”—of a few thousand dollars or less firms up the transaction. A title company holds the money in escrow while the broker usually takes the property off the market until title closing or “closing of escrow.”
Additionally, Nevada and other Western states have developed property disclosure forms which place a burden on sellers to disclose known property and systems defects (virtually non-existent in the East). For example, Nevada’s Seller’s Real Property Disclosure Form obligates the seller to check the condition of some 29 systems and appliances, including garage door openers, showers, and plumbing components to verify that they are free from defect. Failing to provide an accurate, truthful Disclosure Form can potentially void the sale and allow the purchaser to seek damages. Disclosure also involves telling the buyer about litigation by or against the involved homeowners’ association, especially for construction defects in the subject home, or in related association structures.
Brokerage sources in Nevada claim that 25 percent of home sales fail at first, or “fall out of escrow.” The earnest money is returned without penalty. This is due primarily to the relatively small size of earnest money deposits and to loopholes in the massive seller disclosure requirements. (That is, if one negative detail is overlooked in the seller’s disclosure, the sale can fail.) Anecdotal evidence from the other escrow states—most notably California—indicate similarly high numbers of failed deals for like reasons.
In New York and most other title states, the buyer and seller have more or less reached a meeting of the minds by the time their lawyers draft a binding sales contract. New York has a standardized, easy-to-read contract form a couple of pages long, developed by various bar associations. Brokers are acknowledged on the forms, but their commissions are “as provided in a separate agreement.”
Earnest money is not used, and is rarely recognized in New York. The deposit and signed contract cement the deal in the East. Most significantly, in a typical New York home sale the deposit accounts for between 10 and 20 percent of the purchase price. Buyers therefore may have five to six figures at risk—taking into consideration substantial added legal fees—if they fail to close, and sellers can face suit for specific performance and damages if they don’t conclude their part of the bargain. New York co-op sales seldom fail, simply because both parties have too much at stake.
In New York, lawyers do all the paperwork. They research the building’s finances, governing documents, engineering studies, and escrow the deposit money with seller’s attorney until closing. While co-op contracts are generally considered “as is,” the due diligence of the buyer’s legal counsel protects his or her client from buying a pig in a poke, as it were. As a rule, I have found that when dealing with residential sales, lawyers in title states are more experienced compared with brokers in escrow states.
Getting a mortgage, or “trust deed,” is the biggest hassle a buyer faces in escrow states. Mortgage brokers shop the deal around. Then the broker—or mortgage banker—writes the mortgage itself. Multi-state lenders without knowledge of local customs may cause logjams in the process of lending and closing. Home appraisals are necessary along with extensive financial disclosure. When it comes to mortgages in the West, caveat emptor should be the word of the day. By contrast, New York lenders usually have a good handle on co-op buildings and apartment values, making the loan process quicker and easier than in the West.
The Final Analysis
Despite the easier loan process, a typical New York co-op closing can be long and contentious. Nearly a dozen people may be involved, including the buyer (or buyers), the seller (or sellers), their lawyers and bank representatives, the co-op lawyer, the title company, and the broker. Closing adjustments are made, title and mortgage documents explained to clients, and checks exchanged for the purchase price, sellers mortgage payoff, service and filing fees, transfer and “flip” taxes, and broker’s commission. The deal is only done when the co-op lawyer passes the signed stock ownership certificate and proprietary lease to the buyer, and the seller hands the buyer the keys to the apartment.
Western closings are somewhat less complicated and far less expensive. The only persons present are the title company representative and the buyer. The buyer gets a deed, the mortgage, copies of documents not in hand, a title insurance policy abstract, and closing, or “settlement” statement. The proceeds of the sale being held in escrow by the title company are distributed to the seller and broker, and title papers filed with the appropriate governmental agencies. Buyers pay about 20 percent of the fees and costs charged in a typical New York co-op sale.
So, what is the summation of the western mode of closing versus that in New York? No lawyer. Cheaper costs. More buyer protection. And, in many cases, less professionalism. But, in all due respect, remember your New York closing? If it resembled a Marx Brothers comedy, you’re part of the majority. It’s a case of the cowboy versus the suit.
Mr. Apfelberg is a former New York co-op/condo lawyer, who resides in Nevada, where he serves as mediator-arbitrator in homeowner association disputes.