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Top 10 Real Estate 'Deal Killers'

Brokers these days have coined a term for a lawyer — or anyone else — who ruins a perfectly good real estate transaction: “deal killer.”

Despite the recent pickup in sales activity, the lingering recession and tough lending climate continue to kick up obstacles for both buyers and sellers — from obscure zoning problems to 11th-hour mortgage glitches.

This month, The Real Deal looked at these and other “deal killers” in the marketplace, examining the obstacles most likely to sabotage otherwise on-track transactions. Below is our list of the top 10 deal killers currently plaguing sales in New York, and a look at how real estate professionals are fighting back.

1. Inaccurate appraisals

Industry professionals overwhelmingly named appraisals as the biggest obstacle they face in getting deals to the closing table.

As The Real Deal has reported, rule changes under the new Home Valuation Code of Conduct have created a flood of out-of-town appraisers who, many complain, routinely undervalue properties. That, in turn, threatens buyers’ mortgages, and makes them think they’re overpaying.

But some brokers have now started providing appraisers with reams of information to prevent unexpectedly low appraisals.

“It’s important that you get proactive and provide as much information as possible,” said Jane Greenberg, a vice president at Halstead Property. She gives appraisers “an enormous amount of information” about recent comparable sales and the neighborhood, even pointing out special features that might impact the price, like a Viking stove.

Jonathan Miller, president and CEO of Miller Samuel Real Estate Appraisers, said agents should “always assume that the appraiser knows nothing.”

“You help tell the story by providing them with recent sales, recent listings, contracts you know of and condition information,” he said. He also recommended telling appraisers about bidding wars or multiple backup offers.

Appraisers must verify the information provided by brokers, he noted. But agents can make that process easier by providing sources as well as phone numbers for agents involved in comparable sales.

2. Deal-killing attorneys

Buyers and sellers sometimes don’t put much thought into who does their closing, often hiring a family friend or relative. It’s also common these days for price-conscious buyers to seek out attorneys with low fees.

But in the current climate, closings are incredibly complicated, and the wrong lawyer can spell doom for the sale.

“There are a lot of attorneys [who] can kill deals,” said Kathy Braddock, the co-founder of Charles Rutenberg Realty in Manhattan.

It’s important to hire a New York City attorney who “does closings day in and day out,” Braddock said. “If you only do one a year, as brilliant as you are in law, you sometimes miss what you should be looking for.”

Attorneys need to be able to spot potential problems with a building or apartment, but not get so overzealous in representing their clients’ interests that they harp on insignificant details, or try to re-negotiate the deal.

“I’ve had attorneys kill deals based on things that, in my mind, didn’t make any sense,” said Scott Klein, an associate broker at Prudential Douglas Elliman. For example, in one transaction involving an all-cash buyer (a graduate student with a trust fund), the co-op board asked the buyer to put a year of maintenance in escrow, which Klein thought “was totally reasonable.”

But the seller’s attorney then asked to increase that to two years, which did not go over well with the buyer. The attorney “almost killed the deal,” Klein said. “If the co-op was okay with one year, what does he care? It was ridiculous.”

Brokers should always be ready to recommend a good local attorney to clients, Braddock said.

3. Spooked buyers

Buyers today are much more likely to get cold feet than in the past, even after a bidding war or accepted offer, brokers say.

Thanks to low interest rates and low prices, buyers are now confident enough to re-enter the market and even make aggressive offers. But they still get nervous about job losses and the economy when it’s time to sign on the dotted line.

Ric Swezey, a vice president at the Corcoran Group, said he’s had a number of deals fall apart recently when the buyers backed out at the last minute.

“There’s a fear of pulling the trigger,” Swezey said. “I think they want to be more comfortable than they are.”

Antonio del Rosario, president of the sales division at A.C. Lawrence & Company, said one of his firm’s deals is delayed because the buyer is flying his mother in to see the property, even though his offer has already been accepted.

Even after bidding wars, “anybody who gets accepted is still going to take their time,” del Rosario said.

The best ways to assuage these fears, he said, is to crunch the numbers, using recent comparable sales figures to make buyers confident that they’re getting a good deal. In so doing, brokers must establish their credibility with clients, rather than being focused solely on their own commission.

4. Mortgage snafus

Even if a buyer is well-qualified and is purchasing in a financially sound building, there are plenty of ways that a mortgage — or lack thereof — can derail a deal in today’s market.

For starters, in order to close a deal or even sit for a co-op board interview, a buyer needs a commitment letter from the bank officially stating the amount and terms of the mortgage.

In the past, that letter was as good as money in the bank. But these days, commitment letters often arrive with conditions the buyer must meet, or the deal’s off, said Debra Guzov, an attorney at Manhattan law firm Guzov Ofsink. Sometimes the requirements are “very benign,” such as a signed copy of a tax return, she noted.

But at other times, the conditions can be more difficult to meet. For example, if the buyer is selling an apartment, the bank might require the sale to close before the new mortgage can go through. As a result, “even if you get that letter, you may not get a mortgage at the end of the day,” Guzov said.

If both the buyer and seller want the deal to proceed, they can usually find a solution, such as allowing more time for the buyer to find another bank. If not, they can end up in court, she said.

Today’s tight-fisted lending climate can even ruin deals where the buyer plans to use all cash.

Some buyers — even all those not planning to get a mortgage — are using now-ubiquitous mortgage contingencies as a sort of escape hatch.

Corcoran’s Swezey said he’s working with one buyer who plans to pay cash for an apartment, but insisted on a mortgage contingency anyway. The buyers don’t want the apartment unless banks will do mortgages in the building, because “they don’t want to be stuck in an apartment that they can’t sell,” he said. Plus, “they want an ‘out’ in the contract.”

Sellers often have little choice these days but to allow mortgage contingencies. But, lawyers said, they can protect themselves somewhat by wording contingencies very specifically so buyers can only back out under a limited set of parameters.

5. Greedy buyers

Today’s purchasers are fanatical about getting a good deal. In response, many sellers have finally cut their prices to levels appropriate for the market.

But in their haste to get the steepest possible discount, buyers sometimes push these sellers over the edge by making additional demands after the initial meeting of the minds.

“If a (buyer) says, ‘Now I want you to pay a year of maintenance or I won’t take this apartment,’ that can really turn someone off,” said Maggie Kent, a sales associate at the brokerage Core.

Sometimes, if a seller has accepted an offer lower than the asking price, “when the contract comes before him, he says, ‘Wait a minute, don’t I really deserve more than this? I’m not signing,'” said Noel Berk, co-founder of boutique brokerage Mercedes/Berk.

In one instance, a buyer noticed a scratch on the floor during a walkthrough of the apartment and demanded $10,000 from the seller to fix it, del Rosario said.

Buyers today “want to (save) as much money as they can,” he said. But while $10,000 may seem like a relatively small amount of money, a request like that in the current climate “could kill the deal.”

To defuse the situation, he recommended getting a contractor’s estimate of how much it would realistically cost to fix the scratch, and asking the seller to pay that amount. “You have to calm them down with logic,” del Rosario said.

6. Zoning

In the current climate, zoning problems that might otherwise have gone unnoticed are becoming insurmountable obstacles.

“Buyers’ attorneys are pickier because banks are pickier,” said Soho-based real estate attorney Margaret Baisley.

Guzov said her firm has recently encountered a number of real estate deals that have gone awry because of zoning. In one case, a family was in contract to purchase a maisonette in a co-op building that the seller was using as a residence. They didn’t realize until they conducted their title search that the property had previously been used as a doctor’s office, and was not zoned for residential use.

The seller had changed it to a home without getting the proper approvals, but that meant the buyers couldn’t legally live there as they had planned.

“It put the kibosh on the deal,” Guzov said.

Zoning issues are particularly problematic in Soho and Noho, which are still zoned for manufacturing, not residential use, Baisley said. For years, these rules weren’t enforced, but a recent crackdown by city officials combined with buyers’ increased vigilance is now causing many transactions to run aground. Baisley said she is currently working on two multimillion-dollar deals that have run into trouble because of zoning problems.

“More people are scrutinizing deals more thoroughly,” she said. “Buyers are nervous that their apartment will lose value, or they will not be able to resell them.”

To head off these difficulties, Guzov recommended that buyers check the zoning on a building’s certificate of occupancy before signing a contract.

In many Soho buildings, homeowners must have an “artist in residence” certified to occupy the space. “It just makes life more difficult,” Baisley said.

7. Fluctuating stock market

The worst of the financial crisis may appear to be over, but memories of wild gyrations in the stock market — and the painful monetary losses that went along with them — are never far from buyers’ minds. Faltering European economies don’t help.

Brokers say they dread stock market fluctuations because they cause even the most eager buyer to panic and pull out of the deal.

“Everything’s done and the contract comes to them and all of a sudden the stock market may go down 200 points and they get nervous and they back out of the deal,” Berk said. The problem is most acute with buyers in the finance industry, who are most attuned to these shifts.

So what’s to be done? A broker can’t do anything about the stock market, but they can spend time making sure their client feels very comfortable with the purchase before these fluctuations occur.

“This is where good brokerage comes in,” Berk said. “The broker has to educate the buyer and the seller constantly to make them feel that they’re making the right decision. Unless the broker makes them feel comfortable, it’s going to be a very rocky road.”

8. The bonus stigma

Working on Wall Street used to be a golden ticket when it came to real estate. But as The Real Deal and others have reported, reliance on bonus income can now sabotage a co-op board interview. Even as the market has improved, the stigma of working in finance has stuck, largely because of the large fluctuations in bonuses over the past few years.

“A lot of people had a drop in income last year because their bonus was lower,” said Richard Grossman, an executive director of sales at Halstead Property. “We’ve had to deal with that as an issue.”

Because of this dip, boards are now suspicious about assurances of future bonuses.

“They want real proof of real income, and really liquid assets,” said Aaron Shmulewitz, a real estate attorney at Belkin Burden Wenig & Goldman.

Bonus income can also be a problem for banks. Core’s Kent said she worked on a transaction where the bank was concerned because the borrower wasn’t able to show proof of at least two years of consistent bonuses.

Wall Streeters can often solve this problem by putting more money down, going to a different bank, or getting a different type of mortgage product.

Still, it’s a little tougher to overcome in co-ops.

“If (buyers) are in finance, they should consider condos,” Shmulewitz said. “If they really want a co-op in a fine prewar, they should have a lot of liquidity, and be prepared for a board demand for a large escrow.”

9. Bank delays

One of the biggest killer of deals these days is time itself. Many deals are falling through not because a buyer isn’t qualified for a mortgage, but because it takes the bank too long to approve it.

The process of getting a mortgage now takes much longer than it did in the past, with banks requesting reams of additional information.

During the boom, a delay likely wouldn’t have killed the deal. But since most buyers now have mortgage contingencies in place, they can pull out of the deal if they don’t get their financing within a specific amount of time.

“If the buyer has second thoughts, they’re well within their rights to say ‘I didn’t want to do this deal anyway,'” said Guzov.

The seller’s attorney can avoid this problem by giving the buyer more time to secure a mortgage. Guzov said she generally puts a mortgage contingency period of 60 days in the contract, but even one additional week makes a difference. After all, a buyer who really wants the property should welcome the extra time.

10. When the building doesn’t measure up

It’s a familiar story at this point in the downturn — a well-qualified buyer loses out on an apartment because the bank is concerned about issuing a mortgage in a certain building. Luckily, agents are starting to find ways to head this problem off at the pass.

Juliet Clapp, a sales manager at Citi Habitats, tells her agents that the moment they sign an exclusive sales contract, they should contact the major banks to find out if the building is on their approval list. If not, the broker can request that the bank start the process of approving it.

Approval may still not be possible — the building may have too many sponsor-owned units, for example, or too small a reserve fund. But if the broker finds out about these problems ahead of time, he or she can find solutions — like warning prospective buyers that they’ll need to put down 40 percent — before a contract is signed.

“At least you know what you’re dealing with,” Clapp said.