Deflation Buyer Strategy: Buy To Renovate
A: Its been a while since I spoke out loud about a buy side tip I will be giving to my clients these days. I apologize as I focused content on the credit crisis and deteriorating macro fundamentals. As the world around me changes rapidly, I adapt to it and consult my clients accordingly. For most of my buyers, that means exercising patience and using the forces to our favor. It also means utilizing the changing world around us to target a buy side strategy that you may not have had before. Lets discuss.
In real estate markets where buyer confidence is declining, job insecurity rising, and loans are harder and more expensive to get, what type of product do you think will be very hard sells? In my opinion, the hardest sells these days are properties that:
a) are cookie cutter with no distinct characteristics
b) lack natural sunlight
c) lack a view
d) in need of a total renovation
e) undesirable location
...and a combination thereof. Lets focus on (d) in need of a total renovation!
In boom times, I would say that for every $1 you put into renovating, you could probably get back $1.25-$1.50 depending on the deal you got for the work and the quality of construction that was done. In boom times the perfect buyer would willingly pay up for a XXX mint renovated apartment that is just what they wanted, except without the headaches associated with a total renovation project.
Today, as buyers low ball and price in downturn risk, renovations will not pay off as well as it did in the boom times and unrenovated properties will be even harder to sell. This is especially true for properties that lack light, views and a desirable location. So, lets use the time/cost of renovating a property to our benefit and price in accordingly on top of the discount that should be received due to general market conditions.
Now lets move on to material and labor costs! From 2006 to mid-2008, commodity prices surged pretty much across the board making material costs more expensive for the end user. In addition, the demand for good contractors rose as home prices quickly appreciated and stocks rallied, allowing a positive wealth effect to take hold. Fast forward to today!
The commodity bubble popped, stocks plummeted 40% from peak levels, Manhattan housing started its downturn, job security has become a very real concern, and the negative wealth effect has slowed excessive spending while credit deflation helped to put renovation projects on hold. The world has changed drastically! So how do I take advantage if I was in the market to buy an apartment at more attractive prices than just 12 months ago?
One strategy would be to target an apartment that is selling at a discount not only because of the distressed macro economic environment and decline of buyer confidence, but also because it is in need of a TOTAL RENOVATION! Which leaves us to finding the desired property that is also in your price point, and willingness of the buyer to take on a complete renovation product. I think this strategy will be a recipe for success in the end for anyone buying for all the right reasons.
Get the discount on the property that will come anyway, and get a renovation for a total price that is likely noticeably less expensive than only 12 months ago. In the end, you bought a cheaper house, did a cheaper renovation, and end up with 'more product for the buck' that was designed exactly to your needs! Not a bad scenario for the serious buyers out there!
Posted by anonymous
Mon Nov 10th, 2008 01:53 PM
A total renovation requires a LOT of cash that could be placed in the market for an almost assured appreciation over the next few years. Even though a discount on a reno is now possible in comparison to 12 months ago, a total reno would still cost a fortune. How many buyers are you seeing willing to go all cash like this?
Posted by Noah
Mon Nov 10th, 2008 02:07 PM
a few that I discussed with. Except they expect a further discount, and in essence, price in the reno work very aggressively on top of the discount because of the general market conditions. While unrenovated still sold at discount in boom times, in todays market the discount is likely even more enhanced because most get turned off from this kind of work!
Posted by jj
Mon Nov 10th, 2008 03:52 PM
How do you find places that need total renovations? Are there any industry "code words" to look out for?
Also, would you figure out the cost of the reno, deduct that from the asking price and then price in a market discount? How much is too much in terms of looking for a discount? 50% for a wreck?
Posted by Noah
Mon Nov 10th, 2008 04:09 PM
jj - only code words I can think of are 'needs TLC', 'blank slate', 'create your own dream home', etc..Brokers are advised by internal writers how to make a description sound better. My english sucks so I would just be like, 'wreck'. That wouldnt fly!
Anyway, the point is that in this difficult market, buyers are turned off by a complete reno job making it even harder for the seller to move the property. You never know what someone's desperation point is, but if the property is vacant, and in need of a lot of work, I would price in the work needed + 3-5% additional on top of what you thought the property would sell for if it didnt need the work!
Start low and work from there. You never know when a seller just wants a bid, and they should know that their place needs a ton of work if its need of it. Plus listing history should tell some of the story as well in terms of depseration.
more of an art to this than a science, but you should be able to get a nice discount in addition to one you are getting due to market conditions, becase of the work needed to do
Posted by Noah
Mon Nov 10th, 2008 06:35 PM
my main point here is that I bet you there are NOT many people out there looking to do this right now. You kow your price point, you know your needs, you know your willingness to renovate if you are seeking to buy as the market corrects.
A totally unrenovated place will be harder to sell. If anything, get the bigger discount, get the place, the space, the location, the whatever, know your budget and price it in, and include what it may cost to renovate. Get more bang for the buck, if possible and drive a hard deal with contractors after interviewing at least 3+ for quotes! And price the materials on your own time and quote the labor only to compare!
Posted by Willing
Mon Nov 10th, 2008 06:47 PM
I saw an apartment listed at $580000. Bomb shelter 3 bedroom that needed one helluva lot of TLC. On an express stop in a not so desirable but given 5 years may be an up and coming area in NYC; sunlight it had, a view of sorts and 3 bedrooms with 1 and a half bathrooms.
I have no idea what renovations cost or where I would go to educate myself. Both bathrooms and kitchen needed gutting. I could get away with paint but the floors were old as well. Only part of one wall needed to come down - kitchen. Any ideas what I should be thinking a renovation could set me back? What would you throw out as a first offer?
Posted by Jose R
Mon Nov 10th, 2008 09:12 PM
@Willing
~$150* per sqft is how I would price it.
Good contractors costs $$. Bad contractors cost even more $$$. Knowing the difference is where you can save money.
*up and coming area in NYC* what does this mean in the current fiscal situation with NYC?
Harlem has been up and coming for 30 years. And will see a pretty severe retraction for the next several years.
*Note you can do renovations for alot less for less quality or with your own elbow grease.
Posted by paul.b
Mon Nov 10th, 2008 10:32 PM
Good to see you write about buyer tips again Noah! If you can find the perfect product that fits into this criteria, sure, it is an opportunity. But I think it will be hard to find it. For any renovations, you should drive a hard bargain with the contractor, as material costs for general apartment renovation probably didn't fall so much where you save that much money. Saving the money on the contractor is the key in a slowing market.
Posted by mh23
Tue Nov 11th, 2008 08:07 AM
Noah, from an investment strategy, your theory is all wrong. In times like these, you want to get the best property, with the best light, in the best location you can. Unless your proposed buyer is an unemployed hipster that wants a project in a flexible condo (because I am sure that you are well aware that renovating a coop and most condos is pure torture when dealing with boards), the strategy is bad based on investment principles as well as quality of life principles.
Now, if you are referring to a multi-million dollar unit that needs work, and your buyers are flush with cash and can live elsewhere while the renovations are getting done, then you do have a point.
You have some good ideas, but sometimes you over think the situation. In times like these, if you have a buyer that is ready and able to pull the trigger, they should be looking to buy the best product they can, because those products will be the most valuable when this thing turns around. Taking on a project is not for everyone, ad in this market, with so much product available, it is really a hassle that people can avoid.
Posted by Noah
Tue Nov 11th, 2008 08:37 AM
mh23 - always respect your comments. Thanks.
But what if the market is selling for 70 cents on the dollar, right now, lets just say, and an unrenovated unit can be had for 40 cents on the dollar...whereas in a good market it would go for more like 60 cents on the dollar, below the market because of work needed.
Of course though if the place is dark, dungeon like, no view, etc..you need to use judgment. The point is that right now, unrenovated properties, that have light and maybe an OK view, are HARD TO SELL and likely can be had for a steep discount.
But thanks for your opinion. Clearly its totally dependent on the product and how it meets the needs of the buyer and desire to go in and customize yourself to your dream home.
Posted by Noah
Tue Nov 11th, 2008 08:45 AM
let me give a real life variety of this topic. A buyer is seeking space to grow his family into. They want 1250-1400 sft, hopefully more, and a budget of about 1.2M. After looking for a year, most products in the price point were on smaller side, still not renovated to their taste, and didnt offer the best view/light. Understandable.
Now an opportunity arises where a 1800 sft wreck comes available for 1.395M, down 700K from original asking price because of unique features of the property that I cant get into here.
Eyes light up. The unit is real, although the numbers here are tweaked as to not disclose the listing, and actually are a better deal than I state here (more size, more features). But the place needs work, not total gut, but reconfiguration job and good amount of work! I would say 150K-175K would do it.
In this market, this place is not selling and was on market for almost 10 months now. Price cuts are aggressive and clearly a deal is going to be had bu someone. Place has light, and so so view but not dark by any means and not a view of a brick wall by any means! In this situation, the work needed is making it especially difficult to sell. The amount of space that can be had near the price point is no where near the other deals that are out there.
Posted by The CAT
Tue Nov 11th, 2008 02:19 PM
In my opinion, buyers shouldn't buy anything right now regardless. If you think there are discounts now, wait another 2-3 years and I'm sure anything you buy today in N.Y. will be worth less than your paying today. Don't underestimate how terrible this market is and how much worse it will get.
With our current government as it is, expect them to make things far worse hiding losses. How many kitchen sink quarters have you seen so far only to have another after? don't be foolish, N.Y. as well as the rest of the U.S are going the route of Japan as their strategies in dealing with these bank losses are similar. Prices in Japan real estate dropped almost 80% from their peak in the 80's. It's almost 20 years later and those prices still haven't recovered. Do you think the U.S. is special and can't have losses like these?
You have to look at the Macroeconomics of our country. We have 10 Trillion in debt and rising, a government that's dumber than dirt and a stock market with a mixture of overinflated or cooked book assets. With that said, how in the world is N.Y. real estate going to be immune?
Posted by Noah
Tue Nov 11th, 2008 02:26 PM
CAT - well I never said immune. And readers of this site know my take on this situation, so dont mis-interpret this piece as a BUY SIGNAL.
Posted by Bondale
Sat Nov 15th, 2008 09:58 AM
We are interested in buying the 'total wreck' next store--a sponsor unit, one of the last in our coop prewar building. It is a 2 bedroom, 1 bath 1,000 sf space; good light, desirable NYC neighborhood. It is not yet vacant but will be soon.
Last summer the sponsor offered it to us for 1.5 -- probably 2x what the place might be worth. The downturn has hit. In addition to waiting to see how sponsor might price the place given the downturn, what suggestions do you have for bringing sponsor to realistic price?
Posted by Bondale
Sat Nov 15th, 2008 09:59 AM
Oops. For posting above, I meant "next door."
Posted by anonymous
Tue Nov 18th, 2008 06:21 PM
Renovation: I'm about to begin one. Bought in a coop that fits the description above. Pluses: very good location/nabe, spacious, quiet, great character and vibe to space, historic coop building, some outdoor space. Negs: no views, some but not a lot of direct sun and only in the summer months, mostly brick wall views about 10 - 20 ft. away. Still the light is diffuse and cool. Price was reasonable, and / because it needed work: early 80s loft conversion, a couple of generations of owners did a lot of work themselves, leaving quirks. Baths need updating, as the NYT likes to say, kitchen too. Floors v. good; paint job good. We bought planning to renovate, setting aside cash to do so. We can't afford to do everything we want and we're planning to stay for the long haul, so we do some now, some later, concentrating now on basic structure of rooms and adding central A/C. Phasing it this way can work well - permits are more or less indefinite, and once you're permitted for the whole enchilada, you can do it in pieces as long as you keep the permit current (for a nominal yearly fee). I think it is worth it in the end, esp. if you are planning to live for a while in the space. I've always heard that you can expect to get 60-75% of what you spend on renovation back in a sale, so I would disagree with the 1.25 calc in original post. In this market I think the renovation will help keep the value afloat a bit. But get ready: it is way more $$$ than you expect. Plan on more like $200 + sqft, including costs of getting drawings done. Permitting takes forever. Board approval also. The drawings can be the hidden bite (and you have to have them in a coop). Contractor seems great and reasonable, but we didn't get a huge discount, so I wouldn't count on that in this climate. Things cost what they cost. Plan carefully and think about every $.
Posted by anonymous
Tue Nov 18th, 2008 06:22 PM
Renovation: I'm about to begin one. Bought in a coop that fits the description above. Pluses: very good location/nabe, spacious, quiet, great character and vibe to space, historic coop building, some outdoor space. Negs: no views, some but not a lot of direct sun and only in the summer months, mostly brick wall views about 10 - 20 ft. away. Still the light is diffuse and cool. Price was reasonable, and / because it needed work: early 80s loft conversion, a couple of generations of owners did a lot of work themselves, leaving quirks. Baths need updating, as the NYT likes to say, kitchen too. Floors v. good; paint job good. We bought planning to renovate, setting aside cash to do so. We can't afford to do everything we want and we're planning to stay for the long haul, so we do some now, some later, concentrating now on basic structure of rooms and adding central A/C. Phasing it this way can work well - permits are more or less indefinite, and once you're permitted for the whole enchilada, you can do it in pieces as long as you keep the permit current (for a nominal yearly fee). I think it is worth it in the end, esp. if you are planning to live for a while in the space. I've always heard that you can expect to get 60-75% of what you spend on renovation back in a sale, so I would disagree with the 1.25 calc in original post. In this market I think the renovation will help keep the value afloat a bit. But get ready: it is way more $$$ than you expect. Plan on more like $200 + sqft, including costs of getting drawings done. Permitting takes forever. Board approval also. The drawings can be the hidden bite (and you have to have them in a coop). Contractor seems great and reasonable, but we didn't get a huge discount, so I wouldn't count on that in this climate. Things cost what they cost. Plan carefully and think about every $. AND get ready to move out: you probably will have to, so think about that in terms of added $ for a sublet. It really makes a difference and it's very hard to avoid.
Posted by Totalrenovering
Wed Feb 4th, 2009 12:52 AM
thanks for sharing!
Posted by Mbt
Wed Jun 2nd, 2010 11:35 PM
I think another reason fees are not being paid and free months not offered is that prices have come down. Apartments are moving but part of the reason is that prices came down to a point at which they will move.
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