New York Times: Attention, First-Time Buyers

By Michelle Higgins

After renting a one-bedroom for seven years, Catherine and Peter Bertazzoni had saved enough for a down payment and were ready to buy their first apartment together. They knew it would be a challenge to find a move-in-ready two-bedroom on the Upper West Side within their $1.5 million budget, but with a baby on the way, they needed more space.

It wasn’t until they made their first offer, about $1.3 million for a two-bedroom one-bath listed for $1.25 million, that they realized just what they were up against.

“We came in at what we thought was significantly above ask and ended up sixth out of 11 bids,” said Mrs. Bertazzoni, 31, a tax manager at an asset management company. “It was a real wake-up call.”

Buying your first home in New York City is a daunting task. The median price for a Manhattan apartment recently reached nearly $1 million, with reports from major brokerage firms placing the price at $999,000 and $998,000, sums that would buy a mansion in many parts of the country. Competition is fierce, and bidding wars are practically the norm for anything that is halfway decent. Not to mention the level of scrutiny buyers must endure if they want to live in one of the city’s co-op apartments, which make up roughly 75 percent of Manhattan’s nonrental housing stock.

Mrs. Bertazzoni, along with her husband, Peter, 36, who also works in finance, visited nearly 40 apartments and lost two bidding wars during their intensive four-month search. “We learned quickly that there really are a lot of all-cash offers out there, and it made it important that we, as buyers who needed to finance, have our financials in order and be ready to move quickly,” she said.

In May they made an offer on a two-bedroom, two-bath listed for $1.395 million. When they closed in August, it was just in time. The paint had barely dried before their son, Oscar, came home from the hospital.

“It is extraordinarily challenging,” Mrs. Bertazzoni said of buying in New York. “You might not hit everything on your wish list, but in the end it can work out even for a first-timer.”

Here are some of the steps you need to take to buy an apartment in New York.

SAVE, SAVE, SAVE

Buyers should plan to put at least 20 percent down in order to be taken seriously. That’s right, for a $500,000 apartment, you’ll need a down payment of $100,000, and that does not include closing costs.

Be prepared for other charges large and small. Among the larger is the 1 percent surcharge on sales of $1 million or more in New York City, known as the mansion tax. Among the smaller incursions on your wallet: the co-op lien search fee (roughly $300), the board package fee ($500 to $2,000), the appraisal ($300 to $1,500), the condo municipal search ($350 to $500) and so on. Brokerage firms including Douglas Elliman and Town Residential offer a laundry list of estimated closing costs on their websites.

CLEAN UP YOUR CREDIT

Unless you are sitting on a substantial nest egg or are being financed by a benevolent relative, you will need a loan to afford your first place in New York City. Banks use credit scores, also known as FICO scores, to evaluate the potential risk of lending to individuals. The higher the number, which runs from 300 points to 850 points, the better your credit score.

Knowing your score well in advance will give you time to clean up any mistakes, like tax liens that were paid off many years ago or parking tickets that should have been expunged, said Peggy Dahan, an associate broker with Siderow Residential Group. “Sometimes it takes months to clear it up, and by then the seller has sold your dream apartment and we are back to Square One.”

Knowing your score will also give you time to boost your number by paying down credit card debt if your balances are on the high side. The three major credit-reporting bureaus, Equifax, Experian and TransUnion, generate their own FICO scores based on the data they collect. To find out where you stand, go to annualcreditreport.com, which offers a free report annually.

GET PREAPPROVED

Not to be confused with a prequalification, which is essentially a crude calculation of how much of a loan you might qualify for, a preapproval is a written estimate from the lender stating how much you will likely be able to borrow based on an initial review of your credit and financial information. The application often requires submitting pay stubs, bank statements, tax returns and other financial documents. Most lenders charge nothing for the application, since they are hoping to win your business, but you may be socked for around $100 to cover the cost of a credit check.

Why not wait until you’ve actually found a place to get a preapproval letter for a mortgage? Because it will help you determine how much you can afford. (You will also need it when you’re ready to submit an offer to provide assurance to the seller that you will be able to secure financing.) Preapproval letters typically expire between 90 and 120 days, but can be quickly updated with a phone call to the lender.

START SEARCHING

Once you have a sense of your budget, you can start searching for an apartment in earnest. Websites and apps from nytimes.com/realestate, StreetEasy and Trulia eliminate some of the work by automating the search. The sites will email you new listings that meet your requirements, save them and notify you when there are open houses or price changes. You can type in an address in StreetEasy to find out what else is for sale in a given building and how much apartments sold for previously.

CO-OP VS. CONDO

Apartments come mainly in two forms in New York City — co-op and condo. In a co-op, short for cooperative housing, you are buying shares in a corporation that will give you a proprietary lease in the building.

When you a buy a condo, you own the unit outright. In both cases, buyers will be asked to submit financial information including net worth, liquid assets, annual income and other financial documents. Co-ops tend to subject potential shareholders to more rigorous scrutiny, often requiring reams of personal as well as financial information.

“They’re going to undress you and you have to really reveal yourself,” is how Robert Dankner, the president of Prime Manhattan Residential, explains the excruciating process to first-time buyers. “It’s the price of entry and a rite of passage to buying in a co-op in Manhattan.” A co-op can turn down a sale for any reason it pleases as long as it does not discriminate illegally.

Co-op financial requirements can prove difficult for first-time buyers. Some co-ops don’t allow financing; others require buyers to show they have a year’s worth of mortgage and maintenance fees in the bank.

“Who can do that, really, as a normal person, while paying rent?” said George Sholley, a 29-year-old executive producer at a New York advertising agency. In the end, he opted for a condo.

“I had been trying to buy a place since 2012,” he said, noting that he was outbid three times by buyers with more cash on hand. Earlier this year, with the help of his agent, Scott Sobol, a salesman at Compass, Mr. Sholley bought a studio for $670,000 in a condominium conversion in Hell’s Kitchen. “It was a bit more expensive than I was hoping,” he said, but compared with the co-ops he had tried to buy, “it was a smoother process over all.”

HIT THE STREETS

It’s helpful to visit a range of open houses in order to narrow your preferences, including how far you really want to be from the subway when it snows, how out of breath you are on the third flight of a sixth-floor walk-up, and what is meant by loft, railroad flat, Junior Four and so forth. Neighbors may have information on individual buildings and neighborhood goings-on.

And open houses can also be a good way to meet real estate agents with whom you might consider working. If you like a particular building, a broker who does a lot of business there might be able to alert you to an apartment coming on the market. The doorman may be able to guide you to an agent in the know or to the soon-to-be-available apartment.

ASSEMBLE YOUR TEAM

Look for an agent and a real estate lawyer who have established track records working with buyers in your situation, and who will get back to you promptly.

“There’s not much of a barrier to entry to becoming a real estate agent,” said Jessica Cohen, an associate broker with Douglas Elliman who frequently works with entry-level buyers. “You want to feel like you’re working with someone who has done this countless times and isn’t learning the process on you while you’re on this emotional roller coaster.”

If you are gravitating toward co-ops, for instance, you want a broker who has put together many a co-op board package, and a lawyer who understands the accounting methods used by co-ops and can mine the minutes of its board meetings for red flags.

Ultimately you want an agent who can help you come up with a sound offer based on market analysis and who will put together a well-rounded application package on your behalf. “Your broker is there to market you,” Ms. Cohen said. “You have to sell yourself as a candidate to get the apartment. It’s almost ironic.”

Keep in mind that your agent’s commission, typically 5 or 6 percent split with the seller’s agent, will ultimately come out of the sale proceeds. Lawyer fees range from $1,500 to $5,000.

KILL YOUR DARLINGS

Know that during your search you will fall in love, have your heart broken and, if you are lucky, end up with the plain one with the nice personality, not the gorgeous but temperamental one.

Jacob Mondry, a 27-year-old musician, fell for the first place he saw when he started looking for a Brooklyn apartment last year.

“I was smitten,” he said, describing the exposed brick, tin ceilings and other charming details of a place in Gowanus. “I really thought I wanted this kind of romantic apartment.”

But the neighborhood lacked a residential ambience, and the attraction faded after his agent, Robert Dowling, an associate broker at Halstead Property, pointed out the additional investment that would be required to replace water-damaged floorboards and to make necessary updates. In hindsight, Mr. Mondry said, “I was happy to surrender that darling.”

Ultimately he bought a place in Park Slope, Brooklyn, a three-bedroom walk-up now shared with a roommate, for just under $1 million. While the apartment may not be as stunning as the first place he saw, “it’s quiet and charming and close to the park.”

BID EARLY, BUT NOT TOO EARLY

The amount of time that listings spent on the market in Manhattan fell 20 percent to a record low of 73 days in the third quarter of this year, according to a report prepared for Douglas Elliman by the appraiser Jonathan J. Miller.

Being the first to make a solid offer can give you a leg up.

For instance, if a subsequent offer comes in at a higher price, the seller may give you a chance to match it. But don’t bid before the first open house.

“Brokers will almost always let other agents and buyers know when they have offers in, and it will be a part of the agent’s pitch at an open house when speaking with prospective buyers,” said Ari Harkov, an associate real estate broker at Halstead.

With that in mind, Mr. Harkov recommends buyers wait until the Monday following the open house to submit their offers. “This can help keep the bidding process a bit calmer,” he said, as the listing agent won’t be able to flash your offer to every buyer who comes through the door at the open house.

Set a price limit so you know when it’s time to walk away if a bidding war ensues.

BE THOROUGH

Prospective buyers can research the history of a property, including construction projects, violations and complaints with the New York City Department of Buildings website by plugging in the address. PropertyShark offers one free property report that pulls similar data and more from public records, including information on assessments, flood maps, crime statistics and the names of neighbors.

After the first free report, you can sign up for a monthly subscription ranging from $39.95 to $79.95 a month, depending on the number of reports and the kind of data requested.

It’s also important to scrutinize the building’s finances.

Shawn Cassidy, an area sales manager with Wells Fargo Home Mortgage in New York, points out that few banks are willing to lend if the management company still owns a majority of the apartments, as there is a risk that the sponsor could default. And it’s a good idea to hire a home inspector, especially if you are buying in a small building, where building maintenance and repair is the responsibility of a handful of owners.

“Let’s say there are three apartments in a townhouse. Each co-op shareholder would bear a third of the cost of addressing any issues,” said Aaron Shmulewitz, a real estate lawyer. “The potential economic risk is larger.”

After putting in more than a dozen offers on various apartments without success, Megan and Michael Bartolomeo were becoming desperate. So when their offer of $702,000 was accepted for a duplex basement apartment with a big backyard in South Park Slope, Brooklyn, they were ready to move in the next day.

“It was on the same street we lived on and had an awesome backyard,” said Mr. Bartolomeo, 34, a television editor. “We were like, ‘We love this place.’ ”

But for due diligence, they decided to pay $1,200 to hire an inspector who was recommended by their broker, Porter Hovey, a saleswoman at Halstead. “He came down,” Mr. Bartolomeo said, “took one look at the basement and said, ‘When was the flood?’ ”

It turned out that poor drainage was causing problems when it rained, and an incorrectly installed sewage pump seemed like a disaster waiting to happen, Mr. Bartolomeo said. “If we hadn’t used him, we wouldn’t have known.”

Shortly after, they made an offer of $729,000 on a two-bedroom walk-up in a prewar building nearby. They closed three months later.

BE PREPARED FOR DISAPPOINTMENT

Repeat: Heartbreak is part of the game.

“I tell my clients not to fall in love with a place,” said Bo Poulsen, a salesman at Town Residential. “It’s a heartbreaking experience when you go into a ‘best and final’ and you don’t get it. So you have to distance yourself from the property until the contract is signed.”

Keep in mind that even if the seller has verbally accepted your offer, sellers can still entertain and accept other offers. Even after the contract is signed, a co-op board could decide to turn down a sale.

For all these reasons, Victoria Hagman, the broker-owner of the Realty Collective in Brooklyn, always tells first-timers: “The buying process is a marathon, not a sprint.”

Copyright 2015 The New York Times Company.  All rights reserved.

Exceptions to discharge in bankruptcy

Here at Shenwick & Associates, the magic word for our debtor bankruptcy clients (we represent creditors, too) is "discharge." When a debt is discharged in bankruptcy, the debtor no longer has any personal liability for the debt and the creditor can no longer communicate with or take legal action against the debtor for the debt. This is the primary reason why debtors file for bankruptcy.

However, not all debts are dischargeable in bankruptcy. Section 523 of the Bankruptcy Code specifically lists many exceptions to discharge, including debts "obtained by–false pretenses, a false representation or actual fraud . . ." (§ 523(a)(2)(A)) and any debt "for willful and malicious injury by the debtor . . ." (§ 523(a)(6)).

This section of the Bankruptcy Code dates back to the Bankruptcy Reform Act of 1978, and since then, the federal courts have had to interpret the statute. For example, in Kawaauhau v. Geiger, the Supreme Court held that to be excepted from discharge under § 523(a)(6), an injury had to be deliberate or intentional.

In Husky Int'l Elec. v. Ritz, the Supreme Court will resolve a circuit split and determine whether the "actual fraud" bar to discharge under § 523(a)(2)(A) applies only when the debtor has made a false representation, or whether the bar also applies when the debtor has deliberately obtained money through a fraudulent transfer scheme that was actually intended to cheat a creditor.

In this case, appellant Husky sold and delivered electronic devices to Chrysalis Manufacturing Corp., an entity that was controlled by appellee Daniel Ritz. Chrysalis failed to pay Husky for any of the goods delivered, and incurred a debt of approximately $164,000. During this time, Ritz transferred much of Chrysalis' funds to various other entities that he also controlled. Husky sued Ritz in an attempt to hold him personally liable for Chrysalis' debt.

Ritz filed for personal bankruptcy, and Husky filed an adversary proceeding (bankruptcy litigation) seeking to except his debt to Husky from discharge, based on §§ 523(a)(2)(a) and 523(a)(6), as well as § 523(a)(4) (which excepts debts arising from fraud or defalcation in a fiduciary capacity, larceny and embezzlement). The bankruptcy court denied all of Husky's requested relief, and held that Husky had not established that Ritz had perpetuated an "actual fraud" on Husky, because Husky failed to show that Ritz made a false representation (one of the elements of an "actual fraud" under Texas law, which may be made by written or spoken words or by conduct) to Husky. The district court affirmed, and Husky appealed to the Fifth Circuit Court of Appeals.

The Court of Appeals reviewed the case law, including McClellan v. Cantrell, a Seventh Circuit Court of Appeals case that held that actual fraud under § 523(a)(2) is not limited to misrepresentations and misleading omissions. However, the Fifth Circuit relied on its own precedents (which held that representations were a required element of fraud and that exceptions to discharge were to be construed narrowly) to affirm the district court.

However, this past July in In re Lawson, the First Circuit Court of Appeals cited McClellan in holding that "actual fraud" also includes debts incurred as a result of knowingly accepting a fraudulent conveyance that the transferee knew was intended to hinder the transferor's creditors.

Although these issues seem esoteric, they demonstrate the complex and fact intensive nature of bankruptcy law. In a recent case, we had to analyze wage claim actions against a food vendor as a possible exception to discharge. For your toughest bankruptcy questions, please contact Jim Shenwick.

Debtor/Creditor Issues for Small Business Startup

1. Observe your form of organization.

• Make sure your form of entity is properly set up and continues to remain in existence, or the principals will be personally liable
• Pay your annual filing fees so your entity remains in existence, or the principals could then become personally liable. 

      2. Pay attention to details.

• If you set up a corporation as your business entity, make sure that you sign the documents with your title as an officer (i.e. as “President”, “Vice-President” etc.).  Do not sign a business document personally.
• Keep records, on site and off site, of business events such as issuance of stock, bonds, notes and capital contributions
• Ex. If a friend or family loans money to your entity, do you have an executed promissory note which states the interest rate, who is the borrower, the repayment terms, etc.?
• Have you set up an accounting system/program such as Quickbooks and do you know how to use it?
• Do you have a budget for your venture?
• Do you know your “burn rate”?
• Have you prepared and reviewed an Income Statement and Balance Sheet? 

      3. Guaranties

• There are two types of guaranties that small businesses will usually enter into: (a) a general guaranty and (b) a “good guy” guaranty
• A guaranty is a written agreement by a third party or entity to pay the debts of an individual or entity (primary obligor) who fails to pay its debts as they mature
• As an example, if the entity wants an American Express corporate credit card, the principal(s) will need to guaranty payment to American Express if the entity does not make that payment.
• “Good Guy” guaranties are generally used for office leases. It is a limited form of guaranty that provides that the principals agree to pay the debts for the Tenant, if the Tenant fails to pay base rent or additional rent, until (i) the Tenant pays its rent arrears, (ii) vacates the space in broom clean condition and (iii) gives the keys back to the Landlord.

       4. Responsible Person Taxes are sales taxes or employees’ share of employment taxes (FICA and FUTA) that are collected by an entity and not paid over to the tax authorities

• The responsible person is generally an officer of the corporation and the taxing authorities will conduct an audit to determine who the responsible person(s) are after the business closes or fails.
• Responsible Person Taxes are also not dischargeable in personal bankruptcy
• Note the principals of a defunct entity are not liable for general corporate income tax liabilities that were not paid by the defunct entity.

      5. Fraudulent Conveyances

• NYS Debtor and Creditor Law and the Bankruptcy Code provide that if an individual or a business does not have sufficient capital to conduct its business, then they cannot transfer property for no consideration (gift) to family, friends or third parties. If they do, a creditor or the bankruptcy trustee can commence litigation to unwind the transaction.
• Hint: The best time to do “asset protection planning” is before one gets into trouble!

      6.  Small Corporation and LLC Wages for Employees

• Section 630 of the New York Business Corporation Law renders every privately held corporation’s ten largest shareholders personally liable, jointly and severally, “for all debts, wages or salaries due and owing to any of [the corporation’s] . . . laborers, servants or employees other than contractors, for services performed by them for such corporation.”  N.Y. Bus. Corp. Law § 630(a)
• Limited Liability Company Law § 609(c) provides similar treatment to laborers, servants and employees of a LLC
• Accordingly, if you are running a small business that is failing, make sure that you pay monies due your employees before the business closes or you may be personally liable for those monies.

       7. Closing a business (letting it go inactive or in windup mode) v. a Chapter 7 bankruptcy filing

• Closing a business benefits:  Lower administrative costs and possible to do without the help of professionals.
• Closing a business detriments: Belief by vendors or creditors that assets or inventory were not properly sold or accounted for, lawsuits, no accounting by a bankruptcy trustee and no “automatic stay” which results from an entity filing for bankruptcy protection 
• Chapter 7 bankruptcy filing benefits: Protection from creditor actions via the automatic stay, orderly payment of creditors if assets are available for distribution, and an orderly liquidation of company assets. The business closes after the Chapter 7 bankruptcy petition is filed with the bankruptcy court.  
• Chapter 7 bankruptcy filing detriments: Filing fee ($335), administrative cost for professionals, preparing schedules and reports for the bankruptcy trustee and meeting with the bankruptcy trustee (341 hearing) and possible bankruptcy trustee litigation (adversary proceeding).