Trouble SELLING The Cielo...!
A: The Cielo needs HELP! The Cielo is a new development on 83rd & York Avenue that recently began occupancy which means a lot of new units being flipped by pre-construction buyers. Lets see how these investors are faring and why they need some serious help!
Its not the only new development whose pre-construction purchasers seeking to flip on occupancy are feeling the pain! Other buildings with new exclusives hitting the open market include One Carnegie Hill & The Arcadia, and thats in the UES alone.
The problem here is a math one. Buying a condo in NYC means high transaction costs. Add in the transfer fees that many developers PASSED ON to the buyer PLUS the transaction fees associated with selling (usually 6-8%), and pre-construction buyers looking to flip are in a world of hurt; i.e. expected to take a loss on the deal. If they do break-even or make a few bucks on the deal I give them props for a job very well done! Here is the skinny on The Cielo:
For sake of ease, I created an XLS file that includes 2 sections (SOLD & ON MARKET). Each section shows the apartment, size, price sold or asking price, and price per square foot calculation. The apartments that are ON MARKET have a url linking out to the exclusive brokerage agency instead of a contract signed date. Link to download file is below. Snapshot of file is beneath link.
APT 4E w/ Citi-Habitats
APT 4F w/ Citi-Habitats
APT 4J w/ Elliman
APT 4JK w/ Elliman
APT 7BCD w/ Elliman
APT 9C w/ Elliman
APT 12A w/ Elliman
LETS DO THE MATH
Lets take unit's 5J (SOLD) & 4J (ON MARKET) and see if we can do an anaylsis; size is 1 sft off so for sake of this discussion, the numbers should tell us something.
On the BUY SIDE, the purchaser of 5J paid $730,000 for the unit PLUS aproximately $35,000 in closing costs, give or take a few thousand.
5J COST - $730,000
Closing Costs - $35,000
TOTAL COST TO DO DEAL - $765,000
On the SELL SIDE, the seller of 4J (again we don't know the price paid but assume it is slightly less than what 5J sold for) is asking $749,000. Transaction costs for the seller will include 6% to brokerage firm, transfer fees, attorney fees, and other smaller fees. Lets say total fees equal 8% of the sale price. So, it will look something like this if we assume a very generous full ask deal:
4J SELLS FULL ASK - $749,000
Closing Costs - $60,000
TOTAL BACK TO SELLER - $689,000
Hmm. It doesn't take a math whiz to figure this out. After ALL costs and a full ask offer, the flipper of a low floor J line property at The Cielo will take on a loss of aproximately $76,000! Now I don't know what 4J paid for their property nor do I know how they structured the purchase or the sale, and if any money was being earned on the deal itself. But this anaylsis is if an average investor decided to experiment with flipping a new development and bought at The Cielo. I used the data I was able to gather to do this post. More data is sure to come but I expect more of the same.
CONCLUSIONS: Anyone looking to flip a pre-construction unit at The Cielo is looking at a loss when adding in total transactions fees on both the buy and sell side of the deal. It still remains to be seen what price the unit ultimately sells for and I'm very curious to see if any flippers out there will be forced to sell because they mismanaged their finances when they first bought in pre-construction and cannot afford to maintain the property.
I would also expect many flippers to consider renting out their units rather than selling to take advantage of the hot rental market in NYC. Good apartments are hard to find and many tenants are forced to pay top dollar for apartments that are not their first choice nor their preffered location. Perhaps new dev units will flood the rental market causing an inventory correction? Only time will tell, but I'll sure be on the lookout and will report to you what trends I see.
Am I being overly pessimistic in my anaylsis? Did I miss something? Your thoughts?
Comments (12)
Please comment on 7BCD which is not only about 1500psf BUT NEEDS TO BE COMBINED!
Are you willing to call an idiot an idiot or do you prefer the euphemism of "overly opimistic?"
Posted by Back in the market | October 17, 2006 12:16 PM
I prefer overly optimistic.
http://www.elliman.com/Listings.aspx?ListingID=777997&rentalperiod=&SearchType=quick
I guess if you have exclusive's for apartments 7B, 7C & 7D why not add in a 4th listing that combines all 3 units and tack on $300/sft to the asking price.
These guys at Elliman get a ton of listings. Mickey Roth was basically groomed to be a high end agent after growing up with a father who is a developer. He's a 16 yr veteran and a great marketer so I'm curious to see if he can move this one, either in pieces or combined!
I'm sure he has some tricks in his pocket!
Posted by Noah | October 17, 2006 12:39 PM
I have seen it argued that there will be a bounce in rental prices (increasing demand as buyers are priced out of the market), and I don't doubt this argument,
I would also argue that there will be a cooling effect quickly following: buyers priced out of the market = lower sales demand = lower selling prices. As flippers and over leveraged speculators find they cannot afford their properties, and the magnitude of the loss becomes aparent, many will opt to rent their units out- even at a negative cashflow- rather than take a massive upfront loss. This increases rental supply, cooling rent prices.
Which effect wins the race depends on how big of a correction the housing market takes, If the correction is big, I could see lots of 'investors' deciding to take a paper loss and rent their units out to stem the blood loss while waiting for appreciation to come back up.
Posted by drtomaso | October 17, 2006 5:35 PM
That sounds about right doc. Hard to argue that scenario as it looks like that will be the result if all the pieces fall as they should; that is housing continues to slow, sellers continue to add inventory, interest rates tick up making housing less affordable, rental supplies remain tight offering a nice alternative to a loss, etc..
I'd buy that!
Posted by Noah | October 17, 2006 6:00 PM
I don't get the logic of buying apartment 4E in April for 940k and trying to sell it in October for 980k. According to your numbers, the seller would still lose money on it, right? So why sell it at all?
Posted by Harriet | October 18, 2006 1:20 PM
yes! this purchaser will take a loss unless they made a commission on the deal (if they were a broker) and will make commission on the sale (again, if they are broker). If it was an average investor, it seems like a losing deal.
They must have a good reason to sell rather than rent.
Posted by noah | October 18, 2006 1:43 PM
People will realise a loss for all sorts of reasons - perhaps an amateur property investor overlooked the full costs of the purchase/sales transaction (it happens), perhaps they thought this was a "sure bet" and the capital appreciation of the asset would increase rapidly which would cover transaction costs and factor in a profit (not happening in the current market) or perhaps they had a sudden cash flow crisis. They could also be scared that the market downturn is only the tip of the iceberg before the proverbial hull is gouged open and the market up ends itself in a collapse of Titanic proportions and a small term loss now will be more palatable than a longer term, more severe downturn. Who knows, but i am also curious to find out about such oddities.
Noah - does your experience give you any insight into why people might do something like this?
Posted by Dave | October 18, 2006 3:34 PM
Dave - Could be any of the reasons you just mentioned. I do think the market is not going to be in for as much of a correction as people think, the nyc market that is, and thats not broker talk; its what I really believe.
I think the correction, or slowdown, will last a few years at most and then we will realize later on that we missed the bottom and the buying opportunity.
However, the psychology of new dev flippers might be much different leading them to think, 'cut losses'..
Your thoughts are pretty much right on.
Posted by Noah | October 18, 2006 9:35 PM
I would like to hear more about what is going on with Cielo and moreover the rest of the market. We are just getting set up here in New York and plan to "take it all" over the next several months. Is this a project specific problem? Neighborhood specific? Market specific? Or is it just the Press killing the condo market with non-accounted statistics? Woudl like to connect with you.
Posted by Condo Blog | October 21, 2006 2:48 PM
I met the owner of Apt. 4E when I visited the Open House a couple of months ago. Back then, it was listed at $1.075M. Now I hear he is down to $969K below what is listed here. The problem with the Cielo if you've ever been there is location. Superluxury on York Ave? Nowhere near the subway and priced 40% higher than any sq. footage comparable in the area. Sure, it's a nice building but not 40% nicer. Rumor is that many flippers are saying, "Make me an offer." Remember, this place started closings in the spring so flippers have had to sit on these properties and pay the mortgages for a while. And we're just getting into the dead season for transactions.
Plus 2 more superlux condos being built much closer to Lex coming on line in 2008. The Cielo, bottom fishers anyone?
Posted by Richard | November 5, 2006 3:40 PM
here's what i know....
4E bought for $940k, sold for $890k
4J hasn't sold yet... but bought for 585K
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