Real Estate During the COVID-19 Crisis: ‘The Good, the Bad and the Ugly’

John Dolgetta, Esq. | September 2020

No one could have ever imagined all that has transpired over the past several months. The COVID-19 virus began to spread throughout the world earlier this year and within weeks and months, it overtook the world and has taken, and continues to take, countless lives. Our hearts go out to all of those who have been affected by this deadly virus and to all who have lost friends and loved ones. The COVID-19 Pandemic has fundamentally changed the way people interact with one another and the way businesses interact with consumers. People have been forced to rethink how they go about their daily lives. While many businesses have been forced to shut down and go out of business, the real estate industry has been, at least for the time being, one of the bright spots in an otherwise dark and difficult period in our history.

The Good: The Start of the Mini-Housing Boom

In New York, except for those businesses deemed to be “essential”, many businesses were required to shut down and were prohibited from operating. Real estate agents and attorneys, as well as many others, were among those businesses which were not deemed to be essential. From mid-March to early June, the real estate industry in New York was basically at a standstill. However, a small number of real estate transactions involving refinancing and purchase transactions dependent on mortgage financing were able to close because lenders were deemed to be an essential business. In addition, attorneys representing lenders were afforded a limited exemption as well. This relatively minor exception allowed some pending real estate transactions to close rather than be terminated or allowed to fall apart. In retrospect, it was important that these limited transactions were able to close. This gave the New York real estate market (at least outside of New York City) a weak pulse.

In late May and early June, when the attorneys and real estate agents were slowly being permitted to open their businesses, albeit with strict restrictions in place, this allowed one of the most important industries to take off. Within weeks, memories of the pre-economic crisis period (i.e., prior to 2008) soon came back—multiple offers, bidding wars, limited inventory, waiving mortgage and inspection contingencies, etc. It was a mini-housing boom, and within weeks hundreds of closings began to take place. One area that did not recover as quickly was New York City, which was among the hardest hit. In fact, many of those that lived in New York City began looking for housing in other areas such as Westchester, Putnam, Rockland, Dutchess, Orange, Long Island, to name a few. Many real estate brokers and attorneys have indicated that the past several months have been some of the biggest volume and revenue months they have ever experienced. As a result of the exodus from large population centers, sellers are getting significantly higher prices for their homes.

The Bad: Waiving the Mortgage Contingency and Inspection

During times like these, when inventory is low and demand increasing dramatically, especially due to unforeseen circumstances, buyers are sometimes forced to do things they would not ordinarily do. Multiple offers on a single property are commonplace and many buyers are increasing their bids drastically just so that their offer is accepted. Lately, even when an offer has been accepted, and contracts have been prepared and forwarded to the opposing counsel, a new buyer comes in and offers more. Unfortunately, what results is a buyer waiving mortgage contingencies, waiving inspections, and agreeing to contract terms that may not be favorable to the buyer, among other things.

The Inspection

Two very important items when purchasing a home are the home inspection and the mortgage contingency clause. In southern parts of New York State, such as Westchester County, Putnam County, Rockland County, Orange County, Dutchess County, New York City (the five boroughs), and Long Island, the inspection is usually done prior to the seller and purchaser entering into a formal contract. Upon acceptance of the purchaser’s offer by the seller, the purchaser will conduct an inspection to ascertain that the home is structurally and environmentally sound. Purchasers, upon the advice of their real estate agents and/or their attorneys, will ordinarily conduct a series of inspections, including, but not limited to, engineer’s inspections (e.g., roof, foundation, plumbing, appliances, structural, asbestos, etc.), radon inspections, well inspections, oil tank inspections (for above and underground oil tanks), septic inspections and others.

Over the past several months, many purchasers have elected to proceed with a transaction without having any inspections or have waived their right to conduct some of the abovementioned inspections. New York State is a “Caveat Emptor” or “Buyer Beware” state, which means that if a purchaser waives his or her right to conduct an inspection, that purchaser will take the property subject to any issues which may exist unless specifically included in the contract. Many contracts, unfortunately, contain strict “as is” provisions, which New York courts have uniformly upheld. (See https://bit.ly/3hhLG1v and https://bit.ly/33bx3rD). The fear of losing a home is causing purchasers to agree to things that are not recommended and not wise. Sellers use this as added leverage against a purchaser who does want to conduct inspections, but which will take additional time. It is important that purchasers understand what they are giving up and need to be dissuaded from waiving their inspections rights.

The Mortgage Contingency

Another important element of the real estate transaction and real estate contract is the mortgage contingency. Lately, more purchasers are waiving their mortgage contingency and appraisal contingency because they do not want to lose the deal. Normally, waiving the mortgage contingency is a straightforward determination. Most purchasers who waive the mortgage contingency understand that if they do not obtain a mortgage commitment, they will have to complete the transaction on an all-cash basis.

This is a simple decision, if a purchaser has the liquid funds available to purchase the home, then waiving the mortgage contingency is not a big deal. However, recently, the values of homes have been rising fairly rapidly and if a buyer waives the mortgage contingency, then they would be also waiving the appraisal contingency (an integral element of the mortgage commitment contingency provision). Therefore, the value of the home could be considerably less than what they are willing to pay, but purchasers will have no recourse since an appraisal contingency will not be included in the contract of sale. Purchasers should be aware that they could be potentially paying considerably higher than the actual value of the home.

The Ugly: Tenants Causing Real Estate Transactions to Fall Apart

Another important issue that has become an increasingly common impediment to the closing of a real estate transaction due to COVID-19, is the existence of tenancies with respect to the property that is being sold. If there are tenants at a property, then the parties need to address whether the tenant will remain or vacate the premises prior to the closing. Unfortunately, many tenants are not paying rent as a result of losing their employment due to the pandemic and the shutdowns. Attorneys representing a purchaser will normally require that up to the date of closing all rent is current or, in the alternative, will require that the premises be delivered vacant prior to closing. However, in the current environment, this may be impossible and must be addressed prior to entering into contract.

On September 1st, the Centers for Disease Control and Prevention (“CDC”), using the authority issued under the Executive Order issued by President Trump on August 8th (see https://bit.ly/3igNCbN), issued an order (“CDC Order”) (see https://bit.ly/2RckYwI) temporarily halting evictions through Dec. 31, 2020. Under the CDC’s Order, tenants who are able to meet certain conditions cannot be evicted provided they can show that they used their best efforts to pay rent and have exhausted all options, they must apply for government rental assistance, and are likely to become homeless due to an eviction proceeding. The CDC Order requires that tenants are still obligated to pay accrued rent or housing payments in accordance with their lease or contract. Landlords may still file an eviction proceeding if the tenant is “…engaging in criminal acts, threatening the health or safety of other residents, and damaging property, among other offenses.” (See https://bit.ly/33iArkk). In New York, the Office of Court Administration has also issued a temporary ban on evictions which is set to expire on October 1st, unless it is extended by the governor or the legislature. While these actions offer assistance to the tenant, the landlord is placed in a very difficult position when it comes to the sale of a property.

In light of the various federal and state orders, an attorney representing the seller should never agree to remove the tenant or agree that the apartment will be delivered vacant. Rather, a provision should be included that allows the seller to pay a sum certain for each tenant that is not able to vacate the premises prior to closing. Otherwise, if the transaction is contingent upon the tenant vacating the property, the transaction will likely fall apart.

On one transaction, a tenant had agreed to vacate the premises prior to closing. One week prior to the closing, the tenant advised the seller that the tenant would not be vacating the premises. In addition, the tenant stopped paying rent to the seller. The seller asked the tenant why she was not going to vacate and why she was not paying rent. The tenant had not lost her job. In fact, the tenant actually admitted she was making more money because she had received a raise, in addition to working overtime. Her response was simple, she did not want to pay because she feared the future and wanted to keep the money. She indicated that she knew she could not be evicted. Fortunately, the seller was able to convince the tenant to leave and pay her rent up to date, and the transaction eventually closed.

Difficult Times, But We Will Make It Through

In March, when the shutdowns began and the COVID-19 virus began its attack on New Yorkers, many did not know what the future would bring. It was eerily similar to the feeling many New Yorkers felt on 9-11. Many did not know if we would return to “normal” or if there would be a “new normal.” After several months, and much despair, we have come out of shutdowns and we are fighting back, like we did after that unforgettable day 19 years ago. And, while many businesses did not make it, and many individuals have lost their employment, the economy is recovering—slowly but surely. The real estate industry has been a small bright light during these difficult times and hopefully will help boost other areas of the economy. There are certainly difficulties members of the real estate industry must face in light of this “new normal,” but the focus must always be on coming up with the solutions necessary to tackle these “new” obstacles.

John Dolgetta, Esq.
Legal Corner author John Dolgetta, Esq. is the principal of the law firm of Dolgetta Law, PLLC. For information about Dolgetta Law, PLLC, please visit http://www.dolgettalaw.com. The foregoing article is for informational purposes only and does not confer an attorney-client relationship.”