It’s one of the most frustrating aspects of the New York City real estate market: You could go through nearly all the steps of buying an apartment—finding a place, getting financing, and negotiating the deal—but until that sales contract is signed by both sides, the transaction could still fall apart.
That’s because in NYC, when you put in an offer, it is non-binding and does not (at that point) include the payment of a deposit, as it does in other parts of the country. You are only locked into a sales contract when it is signed and countersigned by both parties.
This means that until both signatures are in, a seller can take another offer and a buyer can walk away. And in the current market that favors sellers, where there are lots of buyers urgently bidding for fewer apartments, this part of the buying process can be particularly fraught—and brokers and real estate attorneys are seeing some changes as a result, such as shorter windows for due diligence and sellers moving on past the first or second interested party to buyers much further down the list.
Read on for what you need to know about buttoning up your contract in today’s seller’s market.
Buyers have less time to review contracts
With sellers in the driving seat, brokers and attorneys say buyers are being given smaller windows to execute contracts. In a slower market, a seller's attorney might expect the buyer to review and sign the document within 10 days to two weeks. Now it is closer to a week.
That's a very tight deadline when you are carrying out due diligence on a building. It is even shorter if you're buying in new development, where the window is three to five days, says Shaun Pappas, a partner with Starr Associates. "There's definitely a sense of urgency," he says.
Here's what's happening: Buyers are feeling pressure to make offers and have their attorneys send out term sheets to prepare contracts and have it all happen very quickly, because they know an apartment they saw yesterday could be gone within days.
"Speed is everything. If you do your Sunday open houses, most of our deals are getting made the same day and on Monday we'll get a bunch of term sheets," Pappas says.
In the meantime, sellers are getting multiple offers and want to know how solid they are or if they need to reach out to other interested parties.
The pressure from sellers is happening because of the market's dramatic upswing, says William Krooss-Tadas, director of sales for the Edry Team for Keller Williams NYC.
"It has gone up so fast, people are worried if they wait too long they are going to lose their opportunity," he says.
Sellers moving on to other offers
When there is an accepted best and final offer, the deal could still fall through; either a buyer's due diligence takes too long and makes the seller uncomfortable; the buyer might feel like they're rushing into something they had not prepared for; or they follow through on an offer elsewhere. That leaves the seller having to reach out to other interested buyers.
Krooss-Tadas says "deals are dying more in this market" than he's seen in a decade. David Kazemi, a sales agent at BOND New York, is seeing a similar pattern. He represented the seller of an apartment in Williamsburg that went to the third of 10 bidders and another deal for an apartment in Greenpoint that went to the fifth out of five bidders.
"In these frenzied markets, people can get cold feet and they can get cold feet faster because there’s so much pressure," he says.
Mike Fabbri, a broker at Nestseekers, is seeing the same. He's had three deals close in the last six months where his buyers were second or even third in line. "The [earlier] deals fell through and we were ready to go," he says.
Oliver Petersen, a salesperson at Living New York, has a similar story: "I haven't seen this phenomenon before of being still in the game despite being four, five, or six offers back," he says.
The takeaway: If you have the winning bid but due diligence is slowing the process, make sure your attorney and broker are communicating to the seller's team that you still want the deal: "Lack of communication is what kills deals where there's a deadline," Krooss-Tadas says. And don't give up on your bid even if it's not the seller's first choice. "Don't pay a dollar more than you want, but stay on as back up," Fabbri says.
If you're the seller, "be wary of people backing out of deals or the winning bidders getting cold feet," Kazemi says.
Why delays can derail a deal
When you make an offer in New York, you don't have to put down any kind of deposit or sign a contract with your bid. "You can literally make an offer via text," Fabbri says.
What happens next is the brokers will negotiate a term sheet with the generally agreed upon terms—including the purchase price and who is paying the different taxes—and that will go to the lawyer to draw up the contract.
Meanwhile, the buyer's attorney carries out the due diligence on the building. That would also be the time to do an inspection. Delays at this point can derail a deal, whether it's due to property managers being slow to provide information or a more significant concern, like a sizable assessment that changes the equation for the buyer.
There are mutual risks at this point; a buyer can miss out if due diligence takes time and the seller takes a higher offer from someone else. Brokers frequently cite the maxim that time kills deals. Equally, a seller can lose out on other offers if they decide to move forward with a buyer who then pulls out.
As the due diligence is completed, the contract is sent out, unsigned, to the buyer. The buyer's attorney reviews the contract and may provide an additional rider based on the due diligence or some other issue. "That's the middle negotiation stage," Pappas says.
Once that is agreed, the buyer will provide the deposit with the signed contract and send it back to the seller. Much of the time this is done online rather than with physical documents.
"That's definitely speeding up the process," Pappas says. If the seller is happy (and hasn't received a better offer during this period) they will countersign it and the apartment will be in contract. If the contract includes contingencies, they will obviously need to be met.
Both buyers and sellers may juggle multiple contracts
It's not unheard of for sellers to send out more than one sales contract. Sellers can do this because buyers sign the contract first and it isn't binding until both sides have put their signatures on the document.
What this means in practice is a seller can use your offer to spur other interested buyers. Typically, however, this happens prior to contracts being sent out.
On the flip side, the supercharged rental and sales market is prompting buyers to put in offers on multiple properties, with the intention of following through on just one.
"They don't want to get into a bidding war and overpay, and they have to buy something before their lease is up and the rent goes through the roof," Krooss-Tadas says.
In fact, brokers are encouraging this approach. "If you have options, then submit multiple offers and let go of the one where the seller is less amenable," Petersen says.
Backing out of a signed contract
Once the contract is signed by both sides, there will typically be penalties if you want to back out.
If there are contingencies—requirements that need to be met for the deal to go forward—there may be some wriggle room for a buyer or seller to walk away from the deal. The market conditions will often dictate which contingencies and whether they favor the buyer or the seller. In a seller's market, the buyer gets less leverage. If the final walkthrough reveals problems it may be difficult to cancel your contract.
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