High Monthlys? Find The Discount...!
A: A MUST READ FOR ANY BUYER OF NYC REAL ESTATE! For the first 10 months of hosting UrbanDigs I have brainstormed and researched all the search logs and key phrases that users type in to end up at my blog in an effort to answer the questions that users really have. I have always did my best to think outside of the box and report what I honestly feel about the NYC housing market, even if it seemed anti-business to my colleagues. One of the items I have been stressing for some time now is to go out of your way to find the apartment with the 'low monthly expenses'. I'm beginning to think this strategy needs adjustment.
Monthly Expenses: maintenance Costs + Real Estate Property Taxes
Most buyers will learn that as they browse the available inventory of apartments that are in their price range, some have high monthlys and some have low monthlys. Generally speaking, the higher the monthly costs are for an apartment the less affordable the apartment becomes and the asking price will come down to compensate!
Some apartments w/ higher monthlys stay on the market so long that the seller must lower their price very aggressively to attract a buyer willing to bite. Perhaps this will become a more wise investment strategy? My thinking is this:
AS LENDING RATES RISE AND BORROWING BECOMES MORE EXPENSIVE, WOULDN'T IT BE CHEAPER TO CONSIDER A PROPERTY WITH HIGHER MONTHLYS WHOSE ASKING PRICE WAS DRASTICALLY REDUCED TO COMPENSATE?If I were to analyze what your monthly payment is for a $500,000 loan on a 30YR Fixed from 12 months ago, 6 months ago, today, and at 7% it would look something like this (obviously rates vary for different states or if you pay points; please use this analysis as a general one):
12 Months Ago @ 5.675%
Monthly Payment = $2,895.67
6 Months Ago @ 6.175%
Monthly Payment = $3,055.86
Today @ 6.625%
Monthly Payment = $3,203.21
6 Months From Now @ 7%
Monthly Payment = $3,326.51
So, we're looking at about a $300 increase using today's rate due to interest rate hikes from a year ago. While that probably doesn't seem like much I could have gone back to say March 2004 when 30YR fixed was at 5.2% or so and your monthly payment would be around $2,745.55/Month; some $460 lower than today's payment. Looking forward 6 months from now a buyer could easily expect to pay $3,325/month for the same loan.
Bottom Line: Money is getting more expensive to borrow!
What Do We Know? We know that the fed rate hikes take time to funnel down the economic system which would mean that lending rates probably will trickle higher over the next 6-8 months or so. We also know that the fed will probably raise rates today 1/4 point, and might even raise rates again in June by another 1/4 point. So, we can add on another few months to that trickle theory I just mentioned which would lead me to believe that lending rates will slowly creep higher over the next year or so.
Now lets take this train of thought and relate it to the real world of NYC real estate. Lets take 2 fictional identical apartments that are in neighboring buildings w/ the same level of amenities and service, whose units sell for exactly the same price per square foot. Lets also assume that every aspect of these 2 apartments are the same except for the monthly costs.
Apartment A - Low Monthlys
Size: 700 sft
Type: Condo
maintenance: $500/Month
RE Taxes: $350/Month
Total Monthlys: $850/Month
Asking Price: $625,000
Apartment B - Higher Monthlys
Size: 700 sft
Type: Condo
maintenance: $700/Month
RE Taxes: $450/Month
Total Monthlys: $1,150/Month
Asking Price: $525,000
WHICH SEEMS THE BETTER BUY? LETS DO THE ANALYSIS ASSUMING FULL ASK OFFER, 10% DOWN, AND 30YR FIXED AT 6.675%:
Apartment A - Low Monthlys
Monthly Mortgage = $3,622.23
Total Monthly's = $850
Total Monthly Payment For Buyer = $4,472.23
Apartment B - Higher Monthlys
Monthly Mortgage = $3,042.67
Total Monthly's = $1,150
Total Monthly Payment For Buyer = $4,192.67
CONCLUSION: The apartment that first appeared better because of the lower monthly expenses actually will turn out to be more expensive since you are borrowing more money to purchase that apartment at a time when money is expensive to borrow. Turns out, the apartment with the higher monthly expenses is being discounted to the point that it makes it the better value and saves you about $280/Month when all is set and done. Buyers are scared of high monthlys which causes the seller to endure longer time on market and slow open house activity; you never know how aggressive they will get with pricing to spur activity!
While this is just a simple analysis, you can do the same calculations based on properties you see. If you find a property whose monthly charges are having a negative affect on the asking price, then take some time to do the math and see whether or not the lower price turns out be a money saver for you in the end! As always, have your attorney review all building documents BEFORE you sign the contract of sale to be sure that the higher maintenance costs of the building are not a sign of worse underlying problems; i.e. low reserve, poor management, landlease, etc..
Posted by liz
Sun Aug 20th, 2006 01:28 PM
excellent entry! this is so helpful to me....
Posted by Bing
Wed Aug 23rd, 2006 05:57 PM
Um, did it ever occur to you that at some point this buyer might need to sell the place? In which case, you will be the one enduring the longer time on the market and having to lower the price.
You're looking at this entirely too much from the purchaser perspective and not the investment perspective. By buying a place with a $1000+ monthly costs, you're severely limiting the pool of available buyers when you sell.
Posted by Noah
Wed Aug 23rd, 2006 06:24 PM
Yes it did. Which is why I bolded:
Buyers are scared of high monthlys which causes the seller to endure longer time on market and slow open house activity; you never know how aggressive they will get with pricing to spur activity!
This post was a result of buyers asking me specific questions on how much should a property be discounted if its monthly's are higher than normal. If they are buying at a discount, obvioulsy I assume they know they will have to sell at a discount to market prices when time comes. If they dont understand this hten I cant help them.
The purpose of this post was to analyze whether or not a certian property with high monthlys is discounted properly; NOT if the buyer understands that they will need to discount at resale as well. That is assumed.
Posted by bean
Fri Jan 26th, 2007 12:57 PM
Not a great post. You need to include the equity that is put into the mortgage, tax deduction, etc. This is not a simple analysis.
Posted by Noah
Fri Jan 26th, 2007 01:18 PM
bean - of course there are variables in play that may alter the analysis, no one is debating that.
But for sake of argument, I had to compare apples to apples, and NOT apples to oranges.
FACT IS, in NYC real estate there are property's whose monthly expenses are fairly high, and the buyer needs to know how to price that restriced affordability into pricing evaluation on the open market. I think you are breaking down the post too much and trying to apply the point of the post to every situation. Which was not the point.