UPDATED Sunday, April 5, 2020, 11:43 a.m.: Closing in the time of coronavirus is onerous but not impossible.
Developers are agreeing to a variety of contingencies, attorneys are personally ferrying dossiers between parties, and staid institutions including banks and co-operatives are being surprisingly flexible.
“I’ve become a $650 [per hour] messenger, but, you know, whatever it takes to get it done, we’re trying to do,” said Jeffrey Schwartz, managing partner and head of the real estate practice at Schwartz Sladkus Reich Greenberg Atlas. “We’re pulling out all the stops.”
Schwartz said he’s spent hours driving around to drop off and pick up original signed documents.
Though listing inventory and contract signings have dropped off dramatically since the pandemic brought in-person work to halt, closings are still happening — mostly on properties that went into contract weeks if not months ago.
Replacing the customary in-person closings is a challenge, but the desire to close a deal is proving strong enough to overcome barriers related to the pandemic. What’s more, some would like to see virtual closings become the new norm — though some attorneys seem to shudder at the thought.
Sellers’ urgency to close underscores the strong headwinds they were already facing in New York and concern over how long the pandemic could last.
“The fear for the seller is if they lose a deal now, and the buyer walks away, the odds of a new buyer [coming in] are essentially impossible,” said Pierre Debbas, partner at Romer Debbas. He was working on his firm’s first set of entirely remote deals late last week.
Starr Associates, which specializes in representing new development projects, has closed 15 deals remotely over the past two weeks, according to managing partner Samantha Sheeber.
That included the final sponsor unit — for a cool $19.5 million — at World Wide Group and Rose Associates’ 252 East 57th Street. Starr represented the developers, while Douglas Elliman’s Tal Alexander brokered the deal. Halstead’s Marina Bernshtein represented the buyer, pulmonologist Dr. Angelo Acquista.
“It was a completely virtual closing,” said Alexander. “I’ve never been part of something like that.”
How it’s done
The way deals are getting done despite the state’s stay-home order isn’t new: It’s closing in escrow.
Shaun Pappas, a partner at Starr, said the firm has established best practices of how to do that.
About a week before the scheduled closing date, Starr will initiate an email thread with all parties involved. Virtual copies of documents, messages and questions are all sent and answered on that thread.
Meanwhile, the physical documents with the seller and buyer’s ink signatures will travel back and forth via FedEx, or courtesy of the parties’ various lawyers when messenger services aren’t available or fast enough.
After every signature notarized with the buyer and sellers’ attorneys on a video call, a scan is made and sent to the thread. Once physical copies are sent and received, confirmation messages are emailed.
For the final walkthrough, in many cases a worker on site will use a video call to guide a buyer through their unit. Construction sites in New York were open until last week, so at new developments someone was on site to film. In many cases, Pappas said, the buyer and sponsor would also sign a “post-closing survival agreement,” which allows buyers to do a physical walkthrough later.
Developer Michael Stern said he has been using a similar approach at The Fitzroy to move forward with closings.
On the actual closing day, Pappas said “the faster ones are a few hours. The longer ones are five to six hours.” He recalled one $6 million deal that ran until nearly midnight and resumed at 8:30 a.m.
“Our office hours are now 24/7,” he said. “You’re going to have to be available throughout the day.”
Dorian Lam, a principal at title company Cornerstone Land Abstract, said closing in escrow has become the way 95 percent of his firm’s residential deals are closing now. That said, he noted that deal volume has dropped about 50 percent over the past two weeks.
The remaining 5 percent of Cornerstone’s residential deals are continuing to close in-person, which is legal because financial services were deemed essential under Gov. Andrew Cuomo’s stay-at-home order.
In those cases, Lam said, closings occur with each party in a different room. Each party uses their own pens, and wears gloves and masks. He attributed those cases largely to attorneys who are uncomfortable with technology.
“There are still people with AOL accounts and insist on us faxing,” he said, but he argued that closing in escrow should become the industry norm for residential deals. “We’ve been doing it this way for years.”
Stern agreed. “A lot of the residential buyers like a physical closing, or they’re just used to it, but it’s not actually necessary,” the developer said.
Banking on the future
Debbas said some banks and mortgage brokers have also been slow to adjust.
“Most of the banks are box checkers and if it doesn’t fit the box, they can’t do it,” he said. However, he is optimistic that most will figure it out shortly because “it doesn’t seem like this situation is going away anytime soon.”
Pappas admitted that the process is “trickier” when lenders are involved, but noted that about a third of Starr’s remote closings had financing.
When Debbas is negotiating for buyers who need to borrow, he reverts to strategies he relied on following the 2008 crash, notably what he calls a “funding contingency.”
“[The deal]’s contingent upon the bank having the money on the day of the closing to show up with the funds,” he explained. “We’re trying to protect buyers from an absolute worst-case scenario of a total economic collapse.”
He said one developer agreed to a funding contingency last week on a $3 million unit in Brooklyn Heights.
Some lenders have adapted to virtual closings, though. Samantha Gordon of Wexler & Kaufman represented Citibank on two remote closings at Magnum’s 196 Orchard Street.
Now, Gordon is working on five other remote closings for lenders, sellers and buyers — and reports seeing “a lot of flexibility” as they prepare to close. She recounted one deal where the buyer and seller agreed to close but keep payment in escrow until the final walkthrough could be completed in-person.
Schwartz reported similar accommodation from an unexpected source: co-op boards.
Co-ops are known for particularities. Alan Rosenbaum, the head of mortgage lender Guardhill Financial, and Citizen Bank’s Ace Watanasuparp, both recalled in a TRD Talks webinar experiencing challenges when working with co-op boards on remote deals during the pandemic.
Schwartz said his firm has sometimes gotten around this by taking on the tasks usually performed by managing agents. As of last week he had closed two co-op deals in escrow.
In one, involving financing, his firm took over the managing agent’s duties. In the second, the managing agent decided to scan board minutes and upload them to a Dropbox folder for a 12-hour window to allow Schwartz’s team to do due diligence. Usually, co-ops require that minutes be read while physically at the building. The Dropbox method is the only part of the remote closing process that Schwartz said he hopes will stick around, and some lawyers seem to agree.
Even Lam, from title insurer Cornerstone, admitted that the remote closings can have drawbacks. For instance, if a last-minute adjustment is made to any terms, initializing won’t suffice; all documents must be reissued and signed.
“It’s just a much more tedious process,” said Schwartz. “Unless we can perfect it a little bit better, I don’t see it continuing.”
Write to Erin Hudson at [email protected]
Editor’s note: Halstead broker Marina Bernshtein’s role in the deal at 252 East 57th Street was added.