Pricing in Downturn Risk May Lose A Dream Home

A: I'm going to do a discussion here that will probably surprise many of you out there. The topic is the gap between where products seem to be trading out there and where buyers are comfortable doing a deal at considering potential downturn risk. Its mostly a psychological one, and less an affordability issue. Buying a home today, as opposed to during the credit/housing boom, is a decision that I think most people find relatively easy. They know the deal is more attractive than it was, they know they want to own rather than rent, and they usually know what their budget is. The question is of timing and motivation to pull trigger. This is a change in psychology from the boom years of 2003-2007, when a rising asset clouded some of those noted emotions. Who cares when you can sell at a 20%+ premium in a year from now right? Well, not anymore. When I look at today's marketplace, I see a savvier buyer pool that wants and expects a deal. But how much downturn risk can you get if the market isn't there yet? Lets discuss.

First off, while the buyer writes the check and determines the market value of any property out there, it is the seller that must agree to it! So enter a host of variables that may affect the transaction:

a) financial stability of the seller
b) nature of the sale - death, divorce, financial, personal decision, relocation, etc..
c) emotional attachment to the property - do not underestimate this!
d) general motivation or effect of anchoring on seller's psychology

...just to name a few! In most situations, these emotions and conditions really affect the seller and the price that the seller expects to procure for their wonderful and unique property. Sometimes it doesn't matter what the seller broker says to the owner when describing the current market and a likely range of where to expect bids to come in at; they don't want to hear it! Other times the seller is desperate to move the property, and will hit any bid that comes in within 15% of their asking price. It varies so greatly.

Which brings us to the other side of the equation ---> the buyer.

Knowing what I just said, how does this affect a buyers ability to get the property at a discount to where the market seems to be trading? What does "seem to be trading at" mean anyway? Well, a few months ago I told you all that the market seems to be trading in different ranges based upon price point - with the nature of this recession deeply affecting the higher end:

HIGH END ($5M+) - down aprox 25% - 40% from peak
HIGH/MIDDLE ($2M - $5M) - down aprox 25% - 30% from peak
MID END ($1M - $2M) - down aprox 20% to 30% from peak
LOWER END (Under $1M) - down aprox 15% - 25% from peak
*this was stated 2 months ago, and I would raise the range of the high/middle deals to down aprox 25% - 35% from peak levels - similar to high end range.

This is where deals seem to be happening. I tell you as soon as I am comfortable, and that was a few months ago. But when a new buyer sees this they immediately try to price in a downturn risk on top of where the market is trading. This is proving harder to do right now considering where we came from and the first wave down for our local market; a downturn that so many brokers and executives deemed highly unlikely only a few short years ago. Pricing in downturn risk was easier to accomplish before Lehman (recall my 'Low Ball Bids & Cold Feet' discussion on buyer behavior last July), when the market had not yet had this wave down.

The point here? Well, you need to look deep into yourself if you are a serious buyer in this marketplace right now and you happen to stumble upon your dream home! In the past few months, a few of my clients lost a property that they really liked because their confidence level was not high enough to warrant only paying the discount of where the market is trading now. Read that again if it didn't sink in. They were not wrong in their actions, it was just that their confidence level too depressed to raise their bids to a level where the property seems to be trading. Its a sign of the times and a look into how buyers are thinking about this market.

With the blessing of one of my buyer clients, I will explain in detail one of these situations. One of my clients bid on 155 Franklin, a TriBeCa condo loft that sold in mid 2006 for $3.05M. I estimated that this pre-peak sale probably rose another 10-12% before peaking, and then that this price point is down about 25%-30% or so from mid 2007 peak level deals. So I sent over the following simple assumptions just to see where this unit might trade for today (how high they bid to get he deal is another story):

$3.05M + 12% to peak = $3.416M peak valuation

$3.416 - 25% = $2.562M current probable if down 25%
$3.416 - 30% = $2.391M current probable if down 30%

As a broker, here is my advice to these buyers:

THE MARKET SEEMS TO BE TRADING IN THIS RANGE (2.4M - 2.56M) FOR THIS PARTICULAR PROPERTY AT THIS TIME. ANYTHING BELOW THIS RANGE SHOULD BE CONSIDERED DOWNTURN RISK PRICED INTO THE TRANSACTION. HOWEVER, YOU SHOULD EXPECT THE PROPERTY TO TRADE IN THE NOTED RANGE, GIVEN THE INFORMATION AND TRENDS I SEE FOR THIS PRICE POINT.

I see this trend across the board for most, not all, of my buyers. Which tells me that I don't think I am alone here. I would guess that most brokers out there are working with buyers that are not OK with buying a property where it seems to be trading today, but rather, would like to price in further downturn risk that has not happened yet - making it tough for us brokers to make the minds meet. This is absolutely fine and expected given the nature of this slowdown, the near term outlook, and what we have been through. Can you blame them?

That is where the variables affecting the seller come into play - is the property you are after owned by someone that is willing to sell at a level below where the market seems to be trading today? If not, you should expect the property to trade somewhere in the range I stated above. Every property is unique, with different characteristics affecting both demand and affordability, so its impossible to generalize the entire market as being down X%. So if you are ready & able and stumble upon a dream home where the seller is realistic to accept an offer somewhere in the range I stated above, you may not be able to price in downturn risk for the near term. Ask yourself, do I lose a dream home just because the property is trading where the market seems to be right now, and not where it might be in 12 months time.

If the market gets illiquid again (think 4th quarter 2008 after Lehman), all bets are off and a bid pricing in downturn risk can be hit at any time. Oh what a whacky market!

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Landleases: When The 'Worst Case' Scenario Happens

Picture this: you know that the land rent for your doorman co-op building will increase in 2009 but you don't know by how much. You know you bought your apartment for below the market value of comparable apartments in the neighborhood because of the uncertainty of being in a land-lease building. Since the land-lease has another 50 years, you're not that concerned about it and felt like the discount was priced in.

You go to a shareholder meeting about 18 months before the land rent is going to be renegotiated with the leaseholder and the "worst case scenario" presented is that the land rent will go up by 150%. The land rent of $500,000/year is 25% of your maintenance. So your understanding after the meeting is that the "worst case scenario" is that your maintenance could go up by 50%. It's a bummer, but only 2 or 3 people who attended the meeting put their apartments on the market because the outlook doesn't seem that bad.

Fast forward 18 months. You receive a notice that the land rent is going up to $2,500,000. Your maintenance is going to double! The entire building is in shock. Based on the research you did on land-lease buildings before buying the apartment, this kind of land rent increase is unprecedented for a land-lease building in Manhattan.

Property values in the building plummet:

Straight studios that once sold for ~$350K are now asking:
$290K

Alcove studios that were once selling for ~$400K are now asking:
$239K
$325K

Junior 4s that were once selling for $675K are now asking:
$555K

The only thing that the shareholders can do is to negotiate with the leaseholder to buy the land. Your maintenance will still be very high, but at least then you wont have to worry about the land rent increasing every 10 years or the landlease expiring (which has never happened in NYC to my knowledge). And at least the interest on the underlying mortgage will be tax deductible whereas I'm 99% sure that land rent paid to a private owner is not tax deductible.

What could have been done to prepare for this? Every few years, the board could have increased the maintenance to build up a reserve fund over time to buy the land when the 25 year fixed land rent period was up. Instead of planning for the renegotiation of the land rent, the board chose to keep the maintenance as low as possible for as long as possible.

What could be done now to lower the maintenance & increase property values? Allow everything: pied-a-terre and co-purchases are already allowed, and the building only requires 15% down. After two years you can sublet your apartment for two years - change the policy to allow unlimited subletting. Allow investors to purchase in the building. The pet policy is that only pets under 40 lbs are allowed - start allowing pets of all sizes. Right now there is a full time doorman - cut the doorman back to part time or eliminate the doorman entirely. Increase the supers salary and ask him to take packages and dry cleaning. Un-landscape the roof deck so it doesn't need as much maintenance. Find or create room in the basement to rent out storage. Sell the commercial space. There are still rent stabilized tenants in the building. Try to get anyone who doesn't meet the rent stabilization laws out of the building so the building can benefit from the flip tax when those apartments turn over in the future. Put a cell tower on the roof deck to generate monthly income.

NOTE: A land-lease owned by a private owner is very different from a land-lease owned by the City of New York. So if you live in Battery Park City and are reading this, please don't freak out!

To be continued...

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The Buyer - Seller Disconnect

A: Okay, for readers of this site for the past few years the current environment in Manhattan real estate is no surprise. I've downplayed the weaker dollar / foreign demand trade that so many brokers used as a reason this market will forever flourish, I've discussed the decline in buyer confidence since AUG 2007, I tried to explain the severity of the credit crisis since the beginning, and I explained why 2009's bonus season was the one to worry about + discussing how the wall street business model was 'game over'. If you missed these, go back and read the discussions and put yourself back into time & place. We are at now now, the downturn has started, and the market is fairly illiquid at the moment as an end result to everything just mentioned. The reason lies in a lack of buyer confidence which leads to a disconnect between buyers & sellers.

So, why is the market illiquid? Two main reasons:

a) sellers are anchored to peak pricing; yet to realize the significant decline in buyer confidence OR that their property is likely worth 15-20% below peak levels

b) buyer confidence has not only declined, but has been shattered; as prices fall and fundamentals deteriorate, more buyers have rushed to the sidelines rather than jump into the market to take advantage of deals. The sideline money theory (the argument, mostly by brokers, that there will be a floor on prices because buyers will flock to pick up deals from the sidelines on even the most minuscule of price adjustments) was proven wrong once again

...the disconnect is making the market illiquid. Lets discuss each.

SELLERS: Some of you guys really have to sell your property! I sure hope that you did not decide to work with the broker that promised you an unrealistically high price simply on the premise that the way they do business is so far superior to every other broker out there. If you did fall for this broker trick, you probably find yourself behind-the-curve, watching the market deteriorate in front of you, playing catchup with your asking price to try and re-stimulate traffic. If you have to sell, stop anchoring your price expectations to peak levels and comparable units that sold when buyer confidence was significantly higher. If you do anchor your property near peak levels and find traffic very slow, your only shot is to hope that a greater fool will show up at the next open house, and offer a bid near ask. This is quickly becoming wishful thinking that will put you even further behind-the-curve. If you have to sell, adjust your price accordingly to more in line with where deals are actually happening at right now; and trust me, they are few and far between!

If you don't have to sell quickly, yet you would like to sell, you have some decisions to make. Seller psychology goes something like this:

SELLER SAYS: Well, if I don't price my property near the top sale in my building 10 months ago, I will never know if I can get a better price! So, I'd rather at least try and test the market first, and then I'll lower my price late if I get no bites.

BUYERS: Oh, the buyers. Oh how they have waited for this. In my 4 years of real estate, so many buyers watched the market rise 10%, then 20%, then 30%, then 40% since 2004's transaction levels. Towards the end of the boom (I would put the peak at contracts/deals signed in early-mid 2007), buyers found themselves wondering 'when will it end'? It's funny how psychology works. Buyers who did not pull the trigger yet, get MORE INTERESTED when the media reports rising prices and LESS INTERESTED when media reports pressure on prices. Isn't that amazing? Not really, it's human nature. Buyers like to think they are putting money to work in an environment where their newest asset is appreciating. Nobody likes a depreciating asset. But if you buy when the market is pressured, the price you are likely to pay should be more attractive then if you bought at the height of the boom with prices rising. Don't people want a better deal? Yes, they do but buy side psychology is too ingrained on the direction of the asset as opposed to the price of the asset!

This is the reason why even with the market down 18-20% or so from peak levels, as I believe deals are happening at now, the market is still illiquid! If anything, buyers who have been waiting patiently, are now rushing to the sidelines to wait even more for a better deal as the direction of the asset's trend becomes more clear. This phenomenon is why sales volume will be very poor for the next few quarters here in Manhattan; with the root causes of this lying in deteriorating macro fundamentals (job losses, nationwide recession, negative wealth effect, etc.) and a severe credit crisis. Hence the disconnect reveals itself.

The distance between buyers and sellers right now are contributing to this illiquid market and the cycle feeds on itself. I wouldn't be surprised to see sales volume down 40-50% in the 4th quarter. Some brokers find themselves in awe, or shock to see that even with massive reductions their property is still not getting many bids. Other brokers are still up to their old tricks, promising the world to sellers trying to get as many listings as possible. For me, I think its all about the buyers; always have! Until buyer confidence returns, this market will be illiquid and that means those sellers that are forced to sell, are revealed. The knee jerk correction from peak levels is in process and its time to see who is overexposed. Adapt accordingly or risk finding yourself in a fierce sell side competition with other sellers who have to sell too, at a time when strong, quality bids are more of a rarity.

They say the deal happens when there is a 'meeting of the minds'. Well, in this market, it's the seller's mind that has to be more proactive to make the connection!

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Bringing in a Buyer Broker After Viewing a Property?

I'm getting busy right before Thanksgiving with buyer clients looking to pickup a deal that was trading near peak levels only 6-8 months ago. With time scarce, I just wanted to re-publish this post from April, 9th, 2008. I get approached by many buyers these days seeking services, and usually they have already seen a property or worked with a broker that they no longer want to work with; for whatever reason. Just so you know your rights, here goes. Just understand that if you have submitted a bid with a seller broker, and then try to bring in a buyer broker, it can get a bit hairy.

A: I won't go into details of my latest experience, but lets discuss a very common ethics situation that seems to pop up way too many times in the world of New York City real estate: can a buyer bring on buy-side representation AFTER they met with the seller agent? For all REBNY member firms and the exclusive listings they are marketing, the answer is 100% YES! However, the situation usually doesn't evolve as smoothly as one would think given REBNY's rules of conduct; leaving the buyer wondering if it's even worth it. Lets discuss.

You know, I must apologize on behalf of my industry to any buyer that has been put through a difficult and awkward situation because an agent at a REBNY firm won't allow you or makes it very difficult for you to change brokers and bring in buy-side representation! With that said, let me clearly point out what the REBNY rule of conduct is for member firms and their agents:

DOWNLOAD REBNY RULES OF CONDUCT HERE (.pdf file)

In the event that a customer has already visited the property the exclusive agent should advise a scheduling cooperating co-broker of that fact. This resolution is not intended to encourage buyers/tenants to willfully abandon one agent for another. Co-brokers must not attempt to persuade a customer to revisit a property with them rather than with the original showing exclusive agent or showing co-broker; a reshow with a different agent should only take place under circumstances in which a buyer/tenant has reason to feel abandoned or inadequately represented by the original showing agent.

In the event that this situation does arise, the second co-broker should obtain a letter from the buyer/tenant indicating that the buyer/tenant has viewed the property with one broker but wishes to return with (name of new broker). This letter should be directed by the second co-broker to the exclusive agent and the exclusive agent's manager. The exclusive agent, as the fiduciary of the seller/landlord, should do nothing to discourage or create awkwardness for the buyer/tenant.

The seller broker is probably going to do anything to convince you, the buyer, that you do not need buy side representation. It's true! Technically, you can buy a property without the use of a buyer broker. However, most buyers (especially first time buyers new to the buying & valuation process) seek buy side representation to get a trusted third party opinion of the property at hand, to get a unbiased property valuation given comps & current market conditions, and to have an agent working FOR THEM to advise on bidding strategy & negotiating leading up to accepting an offer. In addition, a buyer broker will guide you through the buying process up until closing.

In a perfect world, this situation would be accepted by all seller brokers as simply 'something that happens and is perfectly allowed' in the field. But in reality, seller brokers don't like the idea of having met the prospective buyer first and just handing them off to another broker who will come in and take half their commission away. Its understandable, humans work to make money, and in the Manhattan real estate world, vested interest often conflicts with ethical behavior.

For many first time buyers, buy side consulting is a service that is warranted. For others, it is sometimes deemed not necessary. Either event is fine by me, but what is NOT FINE is when a buyer requests buy side representation, and the seller broker makes it difficult or downright refuses to allow that to happen because they risk losing the full commission to a co-broker that would otherwise split the deal with them. That is where you see the seller broker's true intentions and I don't know who would want to work with a broker whose intentions are self-vested.

For any buyer that finds themself in this situation, you can ask your new broker to fill out the following
CHANGE OF BROKER REQUEST, you sign it, and then have your new broker fax it back to the seller broker. At that point, there is nothing the REBNY member agent can do to prevent you and your new broker from seeing the property and submitting a bid, just like you would if the new broker was there since the beginning!

ETHICS! It should be a good thing!

Douglas Heddings of TrueGotham.com has his Dirty Real Estate Tricks section especially for the purpose of discussing on an open forum the shady behavior of some agents that give rise to the overall negative reputation of brokers in general.

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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!

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Bidding in a Market That Buyers Feel 'Should' Be Fearful

A: Almost all other markets outside NYC are experiencing fierce seller competition where battles take place to be the most aggressively priced property on the open market. The result is asking prices some 20%-30% below peak levels. Yet in Manhattan, this is not the case. This leaves buyers wondering why the Manhattan real estate market is not filled with more fear, considering the events we are facing. It also leaves sellers in a state of 'wishful thinking' and 'hope' as their competition is priced at or near peak levels. This combination is likely to lead to the adjustment phase. Updated at 11:48AM

I can't stress enough the role that hope/anchoring & confidence play in a housing market in times like these. Anchoring affects the sell side while confidence affects the buy side. The combination of these two mental forces lead to real changes. When I say anchoring, I mean the psychology of sellers to anchor themselves to a fixed point (in this case a price, perhaps from a previous higher sale), even though that point has no more relevance in today's marketplace.

Case in point, while this time of year generally sees an uptick in inventory on the open market, the past 6 weeks has seen a dramatic 18% increase of inventory; from a level of 6,950 around in late August to a level of 8,200 or so today (chart below; click for all real-time charts here):

Given the state of the credit markets, the negative wealth effect from equity correction, an upcoming weak bonus season, high paying wall street job insecurity, and a decline in buy side confidence, this noticeable surge in inventory stands out from past seasonal upticks.

Buyers are wondering why asking prices have not softened to levels noticeably lower than peak levels? To answer this you need to go into the mind of the 'boss' in charge of setting the asking price; and that means the seller! Contrary to what many may think, most sellers set their initial asking price based on hope. They hope to get a certain price, and if they do not try then they lose any chance of getting that price! At least that is what goes through their heads. That, and the notion that their home is worth more than comparables because of the lasting memories and good times they experienced there!

One final dynamic that affects sell side psychology comes from interviewing multiple brokers that may possibly represent them to market the property. It is a well known internal fact that a successful sales pitch comes from executing a few things perfectly:

a) Look - a seller broker must appear to be successful. Dress professional. Act professional. And at all times, give the impression that you are busy, closing deals, and active in the marketplace.

b) Marketing Strategy - a seller broker must explain strategy that will be implemented to give the listing maximum exposure. After all, if a seller is going to agree to a 6% commission at closing, they should expect plenty of marketing from the seller broker and their employing brokerage firm

c) Presentation - the seller broker must PRESENT themselves and their sales pitch in confidence. A seller broker that is not confident, at a loss for words, takes time to answer a question, or simply doesn't know how present themself has little chance of getting that exclusive

d) Pricing - the key! The seller broker must NOT scare away the potential seller client with a sales price that they feel is too low, although that may be in line with current market valuations! This is so important and is the key element that dupes so many sellers into choosing their ultimate representation. Sellers will hear things like, "...your property is gorgeous and should not get less than X using my services" or "your property is easily worth X and I'm the guy that will get it for you" when in reality X is known to be significantly ABOVE current market valuations. Sellers want the highest price, and experienced brokers know the key to their hearts; quote a high price, get the listing, and work on price reductions after the first month! Many are fooled without realizing that other brokers are attempting to keep them 'ahead of the curve' by pricing correctly.

I can't tell you how many sales pitches I lost because I quoted a price that was realistic yet lower than competing quotes, and ended up seeing the property on the market with another broker at a price some 15-20% higher than my quote. It doesn't sell at that price, but the winning broker executed the sales pitch properly and the fish bit!

Understanding this, explains a lot about current property pricing. I have colleagues everywhere acknowledging that their listing is overpriced and in need of a reduction. Buyers who are perplexed that asking prices should be lower, need to realize that the price deals are occurring at is what counts; not asking prices. As long as sellers cling to hope and are not scared into pricing aggressively from the outset to move the property in a timely manner, inventory will rise and the setup for fierce sell side competition occurs.

Bidding in a market that the buyer thinks should be fearful is as simple as executing The Probe Bid correctly to gauge the sellers first response:

Assuming the seller is not testing the market and is really looking to sell, it will be the FIRST RESPONSE to your initial bid that will give you the best look at the poker hand the seller is holding.

First of all, in today's market the quality of the buyer is absolutely crucial when it comes to negotiating. With the mortgage markets distressed and the seller aware of this, it is vital for the buyer's broker to present the bid properly and in the best light. Giving assurance that the deal will close, financing secured and that a board will approve, means a heck of a lot more today than it did only 6 months ago.

Second, don't be in any rush to respond once the initial bid is submitted and a response returned.

Third, execute the 'back out' at the right time and for the appropriate period of time. You will only know if NO really means NO when the seller is faced with losing the deal.

Finally, understand what the property was valued at near peak levels and what downturn risk should be priced in. I am finding that most buyers expect a 7-10% downturn risk (as explained previously in my July post "Low Ball Bids & Cold Feet") as a premium in their bids:

"At the right price, buyers are there. At the wrong price, buyers are pricing in potential downturn risk via low ball bids. The true motivation of the seller comes out at this time."

The Manhattan housing market is not yet experiencing fierce sell side competition or a complete absence of buyers. How this changes as time goes on is on my radar. Until then, it is up to the buyer to be prudent if they know they are buying, but at the same time realistic in that finding the perfect property that also is distressed and willing to accept 20% below peak levels is going to be very difficult right now.

The turning point could be a few things but the dynamic remains the same; a complete absence of buyers that results in sellers being forced to dramatically lower their price to stimulate a sale. The spark that could lead to some form of this lies in Manhattan pricing reports. When it is showed that a decline has occurred across the board, buyers (even those that are on the sidelines waiting for a 5-10% decline) are likely to back off in a herd like fashion out of fear for catching a falling knife. Time will tell.

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Room Count: A Shady Science

A: Ever wonder how to actually count the number of rooms a property has? Ever wonder why so many brokers mis-represent their listings room count? Its probably because either they don't know what technically makes up a room OR they are pressured by the seller to market the property above what it actually is. Either way, in the world of New York City real estate it is up to YOU the buyer to know what makes up a room so that you don't waste your time visiting a property that isn't what you thought it was! Originally Published July 9th, 2007

Room Count

The number of 'rooms' in an apartment. A living area, a bedroom, and a walled kitchen count as 'rooms'. Therefore, a one bedroom apartment with a living room and kitchen has three (3) rooms. A studio with a separate kitchen has two (2) rooms. A studio with a Pullman Kitchen has one room.

Bathrooms, walk-in closets, porches, terraces and hallways are not rooms.

1. A windowless kitchen containing at least 59 square feet or a kitchen of any size with window. In either case, a kitchen must be enclosed by at least three sides, excluding the side(s) that contain(s) the entranceway; or

2. An enclosed area with window containing at least 60 square feet;or

3. An enclosed area without window containing at least 80 square feet.

1 Bedroom = 1 room
1 Living Room = 1 room
1 Walled Kitchen = 1 room
1 Alcove Space = 0.5 room
-----------------------------------------
Total = 3.5 Rooms

You may wonder why you see two of the same types of properties in the same building being marketed to the public so differently. This is a widespread issue and one that obviously won't get resolved by industry watchdogs like REBNY. Instead, it is up to you to understand and learn about these things so you are educated on what you are seeing and potentially purchasing. If you get duped, chances are you will have a hard time re-duping others when you eventually resell!

Here is a great real life example at 245 East 93rd Street; Astor Terrace Condominiums. Take a look at the difference between how unit 14J & 22J (both Junior 4's) were marketed to prospective buyers:

Both units enjoy this very same JR4 layout and are correctly quoting the property size as 960 sft! However, the measurements vary for the alcove space and the living room space which could be due to the converted 2nd bedroom installed in the higher floor unit. One must also take into account the premium for the higher floor unit which brings more sunlight and better views, as well as the renovations done when doing a pricing anaylsis. In short, 22J should be valued higher for work done and better light/views and NOT for having 4.5 rooms! I would consider a 4.5 room property to be a 2BR/2BTH with dining area plus separate kitchen; like this one at 392 Central Park West marketed by Lauren & Maria Cangiano of my firm Halstead; big difference!

The fact that both units are quoted at 960 total sft and that the layout is virtually the same makes this argument one of marketed room count and NOT one of misrepresentation of total size or # of bedrooms; technically the 2nd bedroom is absolutely fine and has a window, hvac, and over 100 sft of space. Apt 22J at most should be marketed at 4 rooms with the alcove space converted to a walled bedroom. The original JR4 layout is 3.5 rooms.

UrbanDigs Says: This is NOT a rip on any of the brokers or firms they work at in the above example! This is a common mistake in the industry (as agents are responsible for filling in their own listings data, with rare backup checks on accuracy) and since room count is generally NOT a criteria included in most of the online real estate search sites, its something that often goes unnoticed. The point of this post is to educate you on how the number of rooms is calculated so that you are savvy enough to realize when a error like this one is marketed to you. In my opinion, misrepresentation of total square footage or a certain type of view is much worse than misrepresenting the number of rooms. Its even rare that a buyer will ask for a certain number of rooms unless they are aware of this practice and want a true two or three bedroom property. But still a good topic to discuss and pass on to you.

A simple guide for you (Living room assumed):

Studio w/ Pullman Kitchen - 1 Room
Straight Studio w/ Separate Kitchen - 2 Rooms
Alcove Studio w/ Separate Kitchen - 2.5 Rooms
Straight 1BR w/ Separate Kitchen - 3 Rooms
JR4 w/ Separate Kitchen - 3.5 Rooms
2BR w/ Separate Kitchen - 4 Rooms
2BR + Alcove Dining Area w/ Separate Kitchen - 4.5 Rooms
2BR + Dining Room w/ Separate Kitchen - 5 Rooms
2BR + Dining Room + Maids Room w/ Separate Kitchen - 6 Rooms (Classic 6)
3BR + Dining Room + Maids Room w/ Separate Kitchen - 7 Rooms (Classic 7)
4BR + Dining Room + Maids Room w/ Separate Kitchen - 8 Rooms (Classic 8)

If you are looking for more than 8 rooms you are too rich to care if the listing is right or not!

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Contract Re-Assignments: A Sign of the Times?

A: For all you guys that want front line reporting. I just went through my first contract re-assignment closing for a buyer client of mine; so basically, a buyer goes into contract for a property but for whatever reason CAN NOT close on the deal. Likely culprit is inability to get financing. Instead of going through the headache of litigation over the down payment and who can claim it, the original buyer attempts to assign the contract to a new buyer. The positives for the new buyer include getting a deal that was in a previous pricing amendment or a unit that was in a sold out line. The negative is that the terms of the deal with the sponsor are non-negotiable and will be the same as the original deal; but that doesn't mean you can't work something out with the assigner on incentives for taking on the transaction!

Lets go back 5 1/2 months when I published a post titled, "New Dev Closings: A Potential Problem?", where I stated in an unbiased discussion:

"I want to discuss something that has NOT happened, is not even in the very near term horizon, but very well may impact the Manhattan marketplace at some point in 2008; buyers with expected new development closings amidst the new credit world.

What happens to all those new development buyers that are currently in contract, waiting for building completion to close, if the jumbo credit markets continue to be in distress and there is a much different lending world than when the original contract was signed?

What if the buyer doesn't have the doc's to get the commitment, if lending/underwriting standards have tightened so much in the past 3-6 months? What if the buyer gets a much higher interest rate than was originally anticipated? What if the bonus doesn't come in as expected? What if they lose their job? What if the property becomes unaffordable?"

Anyway, back to the assignment. What I discussed back in October is now reality; albeit a rare one at this point in time. There are actually a few other assignment requests in the same building that we just completed our deal for a few days ago. This was confirmed by the attorney who has done a number of deals in this building, and by this different ad in craigslist that I found this morning (all details, building, etc. were not included for privacy):

In an environment of tighter underwriting standards & credit quality based lending rates, contract assignments become a very real option for those that can't secure financing due to the credit crunch. I would expect this trend to continue, especially for those financially borderline buyers & speculative investors who signed new development contracts of sale BEFORE the credit crisis began in July 2007. Quite simply, it was a different world back then.

Now this is very important, I do NOT view this as anything that will take down our market; and is likely to be more of a rising 'pockets of distress' trend since contract assignments occur in strong markets too. It is just another sign of the times and tells you that the world we live in today is quite different than the world that existed during the boom times. For my client, they got to purchase a desired unit that was part of a sold-out line as of many months ago in a nearly sold out desirable building; plus a minor incentive by the original buyer to take on the assignment.

Anyone else hearing about contract re-assignments in their neighborhood/building? I would be interested to see how widespread this trend is at this point in time.

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Timing The Market: The Wait & See

A: Real estate is a personal decision. Timing the market is a fairyland. In a perfect world, one could buy Manhattan real estate at the bottom, sell at the top, rent for a few years, and upgrade after the market corrected a bit and some deals popped up. Now wake up! Timing the market is impossible to do, so don't even try it. It will make an already complex investment decision even more complex; yes, I view your house as an investment that you live in, and that should be a part of your portfolio. If you don't like the investment, rent. If you prefer to own, build wealth, and take advantage of tax benefits, then buy. But don't try to perfectly time it as that will cloud the overall decision. Instead, focus on what works for you and finding the best product in the price point that is out there and getting it for the best price possible! Originally Published January 28th, 2008.

This is for those that are looking for a new home to use as their primary residence. While I discuss what interests me here on UrbanDigs, including what is going on outside our walls, I don't want that to cloud your investment decision. Just because I made it my point to focus on the credit crisis since last July, and hopefully now you understand why, doesn't mean I expect Manhattan housing to crash 50%, I DON'T! Lord knows there are enough people out there that are making this assumption for me.

Deciding whether to pull the trigger should be a clear decision. A decision that is made after assessing four very important personal criteria:

a) Liquid Assets After Closing Costs
b) Salary / Debt-to-Income Ratio
c) Job Security
d) Timeline To Hold/Own

Assuming you made the decision to seriously consider buying, you must now figure out if you can afford it with your total salary, if you have enough liquid assets leftover after the transaction, if your job is secure, and if you intend to own/hold the asset for at least 4 years. Let me just briefly go into each one:

Liquid Assets After Closing Costs: Do you know what the buy side closing costs are going to be? Many brokers don't discuss this with their clients until they get very close to bidding, and for some buyers that # comes as a shock. So, better off knowing before hand how much OUT OF POCKET you will be to actually buy the condo or co-op. A rough estimate is about 4.25% of purchase price for a Condo, 5.75% of purchase price for a new-dev Condo (assuming pass down of sponsor costs), and about 1.75% of purchase price for a Co-op. This does not include points and is dependent on how much you are putting down as well so use as a very general guide.

Now, the down payment. After you add up the down payment + estimated closing costs, how much money do you have leftover in your liquid accounts; 401K/Retirement accounts not included. You can convert some retirement money into liquid money, but there likely will be a penalty for doing so.

QUICK TIP FOR USING ROTH IRA FUNDS PENALTY FREE: For those with a ROTH IRA account over 5 years old & plan to purchase their first home, you may use up to $10,000 penalty free for the down payment. Click the link for more details on qualifying for this distribution incentive.

Generally, you want at least 8-12 months of MORTGAGE + MAINT/TAXES leftover in liquid assets to buy a condo, and probably more to pass a co-op board. You can do it with less liquid for a condo, say 6 months total payments in liquid, but you really do want to leave yourself some security just in case when the deal is done.

Salary / Debt-To-Income Ratio: Now, take your total expected monthly payments and add in any minimum debt payments you currently have. Divide this total monthly expense by the total gross income you are bringing in each month (I usually add in bonus if its set in your employment contract, but acceptance of this trend is likely to change).

Here is a hypothetical to give you an idea:

TOTAL MONTHLY PAYMENTS ---> $4,000
TOTAL MIN DEBT PAYMENTS ---> $650
TOTAL GROSS INCOME ---------> $15,000
=================================

$4,650 / $15,000 ---> 0.31 or 31%

This person's debt/income ratio is 31%. Generally, you want to keep your debt/income ratio UNDER 28%! Anything over that may become a problem either for the lending gods or the board gods! If you do go over 28%, you may be able to still do the deal if you can offset this with bulky liquid assets leftover after closing. But, anything over 33% is probably going to be a problem for any co-op board. Condo's of course are less stringent leaving the buyer to gauge their own comfort level as opposed to the board's/lender's comfort level!

Job Security: Please make sure your comfortable with your job; both in keeping it and staying in this location. One of the biggest destroyers of wealth, besides divorce, is being forced to sell your largest asset because of job loss or relocation! If you have to sell quickly, you will have to be flexible on pricing!

Make sure your job is secure before making such a big investment decision!

Timeline To Hold/Own: General rule of thumb is 5 years. Its a good rule, although I can live with one less. If you are going to hold the property for at least 4 years, and you meet all the above criteria AND YOU WANT TO BUY AND OWN YOUR OWN HOME, then you have very compelling reasons to pull the trigger!

Since buying & selling real estate incurs transaction costs, you want to have time on your side to both build wealth and take advantage of tax benefits! Ideally, you want to be able to sell the asset when YOU choose to, not when you have to. A longer timeline to own gives you the freedom to pick & choose your exit points.

The wait & see attitude generally comes from those concerned about the economy, asset deflation, buying more then they can afford, or just putting most of their eggs into one asset class. For these people, buying may not be the best decision if it will result in large amounts of stress and a negative effect on the quality of your living standards. The last thing you want is to argue about the new apartment you bought that caused you to not enjoy life as much as you did before. If you don't qualify for the above 4 criteria to buy, then you shouldn't be buying in the first place! If you think you'll need a bigger place in 1-2 years and can't afford that larger property now, then you shouldn't be buying!

Happiness is still more important than money, so be sure you can find a place that not only you can afford, but one that makes you happy and hopefully is scalable so that you can grow into it should your family grow in the future!

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The Importance of Views

A: I want to re-iterate just how important views are when trying to get top dollar at resale. In my opinion, its #1 and ahead of location as the permanent feature worth going for when you look to buy; with the focus being on finding motivated sellers with a view apartment who doesn't have time to 'test the market' with a steep premium! Whenever I have a buy side deal that involves a property with spectacular views, I always am concerned that another bidder will come out of nowhere before we get a fully executed contract. I worry about this, because it has happened to me before.

The four permanent features that all buyers should focus on putting their money towards when deciding which product of the group to bid on continue to be:

a) views
b) location
c) natural sunlight
d) raw space

...as these property features generally do not change! The only item that can be changed is natural sunlight and views if you happen to buy a property with a view of a lot that may ultimately be developed; and therefore eliminating or altering your view and natural sunlight. Other than that one risk, your pretty safe. These are the features I focus on when I do consulting for my buyer clients.

But one feature stands above the rest in this fast changing marketplace: VIEWS, especially really good ones! I'm talking central park or river views here, as there is a larger concentration of properties that offer open city views. Having that park or river view really does put your property above the rest in terms of luxury and should allow you to price the apartment a bit higher than the group. The fact that it isn't easy to find these properties tells you something!

Now, this doesn't mean that views should demand $300/sft more than comparable listings in the building on a different line without views, it shouldn't. It does mean that a premium will be paid for the views and that marketing efforts should allow the selling broker to procure a much bigger and more serious audience; which in and of itself is something for getting more money in the end.

Your focus should be on finding these types of view properties that seem to be priced 'in-line' with other comparable line apartments in the building that do not have views! If you do find one, its a sign that the seller is probably ready to go, and advised the broker to skip the premium that is normally associated with view apartments because they want a quicker timeline to sell.

For example, lets say that the building has two main exposures:

Exposure A ---> gets park views
Exposure B ---> gets interior building / courtyard views

Now, lets say that there are similar property types (say a 1BR unit w/ same floorplan) on both sides of the building! One has Exposure A and the other has Exposure B. Now lets assume that these comparable, yet opposing units are around the same floor in height, thereby eliminating any significant premium for being on a higher floor. Pricing should be as follows:

1BR w/ Exposure A (park views) ---> aprox $900,000
1BR w/ Exposure B (interior views) ---> aprox $825,000

These numbers are for argument only to prove the point that the 1BR unit with park views should demand a premium over the similar 1BR with interior views. Your focus should be to find a property type that enjoys park views, but whose asking price is more 'in line' with the last comparable sale that did NOT have the luxury of that gorgeous view! Not an easy task, but a sign that the seller is motivated!

With that said, here are some apartments that I think exemplify what I mean by view apartments; yet don't necessarily mean they are priced to move! Having open city views are nice, but should be given a less favorable premium due to the higher concentration of apartments that enjoy this type of view. Add in more premium for river and park view properties! It's up to you to determine exactly how much premium is deserved.

635 West 42nd Street

PRICE: $1,850,000
SIZE: 1,017 sft
DAYS ON MARKET: 62 Days

45 East 89th Street

PRICE: $1,995,000
SIZE: N/A - 2BR/2BTH unit
DAYS ON MARKET: 7 Days

80 Central Park West

PRICE: $1,445,000
SIZE: 900 sft
DAYS ON MARKET: 13 Days

As always, if you want to see one of the above noted apartments, please contact the listing broker directly. Before bidding on any apartment, you should have your buyer broker do an analysis of where the building trades so that you can assign the proper premium to the property with views, in line with the most recent market values.

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The Seller's First Response: Probe Bid

A: After almost four years in real estate sales now, I have gone through my fair share of both buy & sell side negotiations. One thing that seems consistent with almost ALL the deals I do, is that the seller's first response to your initial bid is a reliable indicator as to where you might have to go to get a deal done! Lets discuss the seller's first response to your initial probe bid and whether this information gathering strategy may be right for you. Originally Posted February, 26, 2007

Its the most challenging part of my buy-side consulting for clients since I attempt to get the lowest price possible for my buyer, I have to hope the seller agrees to that price range. In the end, buyer clients must understand that it is not my decision whether or not the seller will respond to our low-ball bidding strategy. And it's not my decision how low the seller is willing to go to do a deal with you! If there is one thing I learned after 3 1/2 years it is this:

Every seller is unique and under a personal set of circumstances when selling their home. Just because a building's 1BR's are trading for $900/sft, doesn't mean the seller of the property you are interested in will sell it around that price point! If there is no time pressure to sell or the seller is just testing the market, then bidding $1,000/sft for the property still may not get the desired result.

Which brings me to this conclusion:

Assuming the seller is not testing the market and is really looking to sell, it will be the FIRST RESPONSE to your initial bid that will give you the best look at the poker hand the seller is holding

Probe Bet: A bet made primarily to gain information by gauging opponents' reactions, especially a small bet made in pot-limit or no-limit games.

In poker, I like to send out what are called 'probe bets' every once in a while to see if I can gather ANY information at all from my opponents as to the strength of their hand. Even if I am holding a weak hand and planning a bluff strategy, a probe bet can be very useful in either winning the hand right there or saving me from an eventual big loss.

In real estate, the initial bid could be considered a 'probe bid' to see where the seller stands as far as their need to sell. If you get a very quick and aggressive response, well then you know you have a seller who is looking to sell quickly and is taking your bid seriously; giving you a tactical advantage. If you get only a slight response two days after your initial bid, then you know the seller is looking for a certain price range and may not be as motivated to sell right now for a lower than expected price. If you get no response, then you know the seller is under no time pressure at all and is likely to be testing the market; or your bid was simply too far below the seller's intended 'acceptable range'.

In all situations, it was the first response to the initial bid that set the groundwork for what is to come next. Sometimes your strategy will fail, and you have to be prepared for that; especially if you are using a low-ball bidding strategy. Other times you will get a very desirable response and your only decision left is how to play the rest of the ping-pong game.

It's impossible to set up one formula or theory that applies to all situations, so I leave it up to you and your buyer broker to discover for yourself. However, if you have read all the way down to here and still don't get what I'm saying, maybe this chart can help you visualize the importance of the seller's first response.

APT X IS ASKING $500,000 (say $850/sft) AND IS PRICED RIGHT

Situation 1 - Low Ball: Your initial bid of $425,000 gets no response. Obviously the seller knows the property is priced right and has a tight range of 'acceptable price' that is needed to make a deal happen. In this case I would advise my buyer client that a bid of at least $475,000 or so is needed to get the property. Since the apartment is priced right from the get go, the seller is not interested in buyers who are playing bidding games or not-motivated to proceed to the next step.

Situation 2 - Fair Bid: Your initial bid of $450,000 (10% below ask) gets a response of $485,000. Again, the property is priced right and the seller is telling you that there isn't much more room for negotiations! While your bid of $450,000 is a bit low for a properly priced apartment, the seller acknowledges and respects your bid by providing you with a response. The response of $485,000 tells me that you will need to come up more than the seller will likely come down to get a deal done. I would probably advise my client to bid $470,000 next and expect a response of mid-way from the seller.

Situation 3 - Aggressive Bid: Your initial bid of $475,000 gets a response of $487,500 from the seller; halfway. While you may feel like you didn't leave yourself much room for negotiating and getting the lowest price possible, you did tell the seller that you are a serious buyer and that you understand the property was priced properly from the start. At this point you have 2 choices. Either you stand firm and tell the seller that your initial bid is your most aggressive bid that you are comfortable making with the hopes of them accepting it OR you move to $480,000 to get the deal done. I don't see how a seller who responds to your initial bid of $475,000 with a counter of $487,500 will say NO to your $480,000 2nd bid.

BIDDING UNDER ASK FOR NEW DEVELOPMENTS

A tough feat to accomplish, but not impossible. Most developers will not budge in their set asking prices for units, leaving the buyer with a decision to make. Either the buyer sucks it up and pays full ask + sponsor closing costs OR you try to negotiate an incentive on the passed down closing fees that the sponsor asks all buyers to pay.

This is not meant to discourage you from trying to bid below what a developer is asking for a particular property, only to tell you that in many situations you will not get the desired result. You are at a disadvantage in the sense that transparency comes in only one form; what is being told to you. The information regarding percentage sold, remaining units, future price amendments, previously negotiated deals, traffic activity of sales office, desperation of the developer, etc.. are all pieces of information that either you do not have or must trust what is told to you by sales representatives. This leaves you bidding blind, trying to get the best deal possible. I find that there is a better chance offering full ask, and working on an incentive with closing costs the better strategy. Of course, this assumes the price is OK with the buyer's comfort zone!

Like all negotiating situations, the only way you will know for sure if NO to your lower bid really means 'NO', is by backing out of the deal and leaving the seller with a few days of 'thinking about losing the deal' to see if they won't come back to you! You must be willing to play hard-ball and risk losing the deal as well, if you want to give your low bid any chance of succeeding after a 'NO' response was already given back to you. Hopefully the seller will cave first.

UrbanDigs Says: Use your initial bid as a probe bid to see what the seller's reaction will be. Many times you will be able to get a lot of good information from a solid probe bid that will give you an idea of where you might have to go to get a deal done. In the end, every deal ends up at one price that is suitable for both the buyer and seller. So the question is, are you comfortable with where the seller is looking to move the property at. Since it is no one's decision but the seller's to ultimately make that decision to move at a requested price, the buyer must do all they can to find out the range where that requested price falls into!

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Raised Limit Conforming Loan Explained

A: A great topic that is often misunderstood! With the new jumbo loan limit being raised from $417,000 to $729,750, expanding what counts as conforming and therefore a lower rate, cheers are being hollered that this will save the markets, yay! Not so fast. Now that the plan has recently took effect, some buyers who fit into the subset of this plan and can take advantage of the conforming raised loan limit, are finding that the rate is higher than normal conforming loans? What gives? The answer lies in a little 2 point fee that the GSE's are charging for this raised limit product and is being priced into the rate; therefore making the raised jumbo loan limit having a raised rate as well!

From one of my anonymous mortgage insiders that I know, trust, and works as a loan officer at a major bank:

Rates for the new limits vary depending on product. In this example, I will use a 30 Year Jumbo Mortgage vs. a 30 Year Raised Limit-Conforming Mortgage, in Manhattan with a loan amount of $700,000 - on a Purchase transaction.

30 Year Raised Limit - Conforming: 6.875% @ 0 points
30 Year Jumbo: 7.375% @ 0 points

Keep in mind that, under the new limits, CO-OP's are not allowed any financing; They have to be financed under traditional loan limits. For example, on a co-op purchase with a $417,000 loan amount, a conforming mortgage currently yields a rate of 5.875% @ 0 points.

The fee for doing a loan under the new limits is 2 points, but that fee gets built into the pricing of the rate.

No matter what the loan limits or products are, strict underwriting is a standard in the current mortgage environment. There is very little margin for error, and overall banks are taking a very conservative approach when it comes to lending money.

**Also please note that the rates quoted above are as of today, Tuesday April 8th, 2008, and are subject to change.

The new raised limit rate is better than the jumbo rate, but still misleading given the announcement of the stimulus plan back in January. This explains why the rate is higher for any buyer who tried to take advantage of the jumbo limit being raised! There is no such thing as a free lunch! Two points is in essence 2% of your loan amount that will be built into the interest rate (not sure of exactly how) over the course of the loan.

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The Importance of the Layout

A: I want to take a brief break from macro and discuss something that all buyer's should take into account as they seek to put their hard earned money to work in a new home; the layout. I've noted many times before here on UrbanDigs.com in the buyers tips section the importance of putting your money into the permanent features of the property that likely won't change until resale: location, light, views, raw space. Obviously light/views is the only thing that may change should the property be next to a future development site. After these four permanent features, apartment layout is one of a few factors that I like to focus on to get the most bang for the buck. Let me explain.

When it comes to layout, I think of two things that are very important in the buying process: time line to own and resale-ability. As most people have budgets that should definitely be adhered to, one of the goals in the buying process is to get a property that is scalable to the buyers' needs. What I mean is, does the property allow room to grow? Having a 5+ year time line to own is a must, but having a property that allows the potential for a few more years is even better. In addition, does the layout appeal to the masses for resale?

After spending more than 4 years in the field with many different buyers, I have come to understand what the masses look for and are willing to pay a little extra for come bid time. In no particular order, here are the things to look for in getting a desirable layout for most price points:

1. Scalability - In my opinion, one of the more important aspects of a layout! Does the layout afford the owner the luxury of scalability to meet the future needs of more usable space? The easiest way to explain this is a JR4 layout that is capable of being converted into a makeshift but doable 2BR; by converting the alcove dining/office area into its own bedroom. The key to scalability is having a room that offers its own window, at least 100 sft or so, room for a closet, and its own HVAC unit. Having a scalable layout does two things: allows the owner to live in the property for a few more years should they desire to do so + offer the future buyer the same luxury at resale.

2. Wasted Space - Does the layout make good use of space? I find that layouts with long hallways or very large bedrooms but small living areas are much less desirable to the masses. While this doesn't mean that you wont get a good price for this type of product at resale, it does make it harder to do so. Overall, having space wasted in long hallways or large foyers seems to have the biggest impact on buyers.

3. Formal Dining Room / Dining Area - A key element, especially at higher price points. Does the layout offer a separate dining area or formal dining room. There is a big difference between marketing a 4.5 room 2BR over a Classic 6 with its own formal dining room! In the end, if you are going to spend top dollar for a family home, be sure it has the features that will appeal to families down the road; and that means having a clear room/area for dining allowing the living room to be used on its own devices.

4. Configurable - A bit less important. Does the layout allow for changes? Can you lose a closet here so that you can expand a bathroom there? Buyers like the idea of customizing a layout to meet their own needs; so whenever possible, having a layout that is customizable may appeal to that perfect buyer at resale who has the ability to see the ultimate potential of the property.

5. Split Bedrooms - I find that most of my two bedroom buyers prefer to have split bedrooms. Leaving reasons why out of this discussion, the idea of the kids being across the apartment is more desirable! Again, this is layout feature that is less important than scalability and wasted space; but figured to mention it anyway!

Well, there it is! The importance of the layout when it comes to plunking down hundreds of thousands of dollars for your new home! Remember, permanent features of location, light, views, and raw space remain a higher priority in the buying process for future profit potential. After this, try to fine tune your vision to find a layout that will be able to meet your needs for time line
to own (can you grow into this property and stay a few more years), and appeal to the masses at resale!!

Related:

Transformation: My JR4 Into A 2BR

What To Do With Your JR4

Room Count: A Shady Science

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What Is 'ALL CASH' Worth?

A: A good topic to discuss considering the environment and the fact that one of my buyer clients unsuccessfully bid over ask in a recent highest & best situation. When you are up against 'all cash' bids, what premium should that offer have over a bid reliant upon financing? The short answer is that it all depends on the seller's risk level and situation, the more creative answer in my opinion is about 2-3% of the purchase price. There is no formula for finding out what 'all cash' is actually worth in any given deal, but it is safe to say that in tough lending environments its value surges!

What sort of discount should a buyer offering all-cash in this environment expect? On the flip side, how much should an all-cash bid be worth to the seller? Here is a recent situation where an all cash bid took complete control over a multiple bidding situation; I'll discuss the basics with changed details to get to the point of the discussion.

I'm blessed with very savvy buyer clients who are mini-experts on their price point. This buyer was no different and knew a great deal when one popped up. So, going into the first open house (which was active) we knew a strong bid was the very least needed to get this deal. Not surprisingly, multiple offers came in the very next day including ours. We did our diligence, formulated how under-valued we felt the property was priced compared to comps and property condition, spiced up the terms of our final bid, and went for it!

In the end we bid about 5% over ask and just under what we perceived as market value for the apartment. But it was the altered terms of the deal that we focused on to put us on par with an all cash competitive bid that we were told was already submitted; a very tough task to accomplish when credit crunch headlines make front page news everyday. Here is what we did and what you can do if you ever want to strengthen your bid in bidding war situations:

a) provide a pre-committment letter instead of a pre-approval
b) provide credit score; especially if its very strong
c) offer to sign a no-finance contigency contract of sale
d) raise the down payment by 5% to lower debt/income ratio and ease board review process
e) flexible closing date

the standards: point out liquid assets after closing, debt/income ratio if deal were to proceed, attorney info, lender info, salary & employment info, and a little note that we had advised the attorney to do due diligence within 2 business days of full receipt of doc's!

Did it work? Unfortunately no. We lost to an 'all-cash' bid that was also over the asking price. OK, not the end of the world but certainly frustrating. At least we knew our comfort zone and made a strong play for the property. Which brings us to why we lost!

In my opinion, I think we were the highest bid! Of course I'm not 100% sure, but its just a gut feeling after hearing back from the broker.

TO COMPETE AGAINST AN ALL CASH OFFER THAT ALSO HAPPENS TO BE ABOVE THE SELLER'S ASKING PRICE, PROVES TO BE A VERY DIFFICULT TASK IN TIMES LIKE THESE! SO, YOU MUST BID A PREMIUM TO MAKE THE SELLER EVEN CONSIDER TAKING YOUR DEAL THAT INCLUDES SOME RISK!

NORMAL LENDING / MACRO ENVIRONMENT

$895,000 Co-op Property w/ 2 bids submitted

Bid 1 --> $925,000, solid buyer putting minimum required down and financing the rest
Bid 2 --> $900,000 all cash 2.7% below highest bid

SELLER DECISION --> I would bet that the seller would go with Bid #1 and take the extra $25,000 with little risk the buyer will get a loan and pass the board. When I say solid, I mean that this buyer has the financials required by the board for approval.

TIGHT LENDING / MACRO ENVIRONMENT

$895,000 Co-op Property w/ 2 bids submitted

Bid 1 --> $925,000, solid buyer putting minimum required down and financing the rest
Bid 2 --> $900,000 all cash 2.7% below highest bid

SELLER DECISION --> In today's environment, I'm willing to bet that the all-cash $900,000 offer, even though its $25K less, is extremely appetizing to the seller; assuming of course the seller is aware of what is going on right now in the mortgage markets! It's still over the seller's asking price, who obviously priced low to get a quick sale in first place, and its a lock of a deal both for the loan commitment and the board approval! That is quite a comfort that is certainly worth something.

It's the psychology of the seller that has changed because of the deteriorating credit & mortgage markets. Cash is a very valuable tool for any offer right now, so if you have the means, do use it especially if you want that edge either in negotiating or against competing bids to get the deal done! In my opinion, as long as the mortgage and credit markets are in distress, an all cash offer should be able to win a deal at a 2-3% discount from what otherwise would be an acceptable bid or a competing higher bid!

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When Good Bids Go Bad

A: I've been very busy lately and bids are being submitted. As I focus on product quality, resale potential, and valuation, my clients usually start a bidding strategy in their head right after they leave the property. I try to wait until after I do comps analysis to devise a strategy because in my opinion the most important past sales to review are the ones that occur in the same building, NOT nearby! The goal is always to try to get the best price possible for the product that we choose to go for. Sometimes it works, sometimes it doesn't. But at least we know we will not overpay for a property just because the seller is greedy and stubborn on counter-offers; and expects to get 10% more than a past sale 6 months ago.

First off, here are my past writings on bidding strategy for buyers and all should be must reads for any first time purchaser:

Bidding Strategy 101: Reverse Psychology

The Sellers First Response: The Probe Bid

Timing A Low-Ball Offer

Moving on. First off, you must take into account listing history (time/price) & seller psychology when devising a bidding strategy; at least I do. What I mean is, if a listing is less than 3 weeks on the market then the seller really hasn't reached the point of desperation & frustration yet. So, by submitting a low ball bid on a property that is only a few weeks on the market may not get the desired response. Why? Because the seller says to themselves, "...it's only been 2 weeks and I already got a bid 10% below ask. I have time. I'll wait for a better bid".

On the flip side, a seller who has been on the market for 4+ months already and is getting frustrated by the lack of action in terms of bids received, their response is likely to be very different to your low-ball!

Another type of bid, a probe bid, is designed to be more aggressive than a low-ball bid with the hope to gain information about the seller's motivations on price. A probe bid is a very interesting negotiating tactic if applied correctly. The ultimate goal is to:

a) not insult the seller by bidding too low
b) retrieve information from the seller that may assist with the next move
c) see how motivated the seller is

Many brokers do not analyze bidding strategies and negotiating like I do, and encourage their clients to bid as aggressively as possible to get the deal done fast. Fine, I have no issues with that as long as buyers agree. But I don't think that's the best approach for buyers trying to get a good price on a deal; and lets be honest, many sellers do price high and try to test the market. If the product is such a deal, and has all the features that demand a strong bid, by all means do it. But more times than not, buyers don't get everything they hope for in the same package.

Which brings me to today's point: when good bids go bad! Say you find a great product, that is priced right, is fairly new to the market, and you want it. So, you put a bid about 7% below ask to start out the negotiation and get a very quick response that is not as aggressive as desired. This tells me:

1) seller is taking back control of negotiations by limited counter-offer
2) although a very fast response by the seller, its clear they are not too willing to stretch right now
3) is testing my clients seriousness to get a deal done

A fantastic response by the seller and one that tells us good information. The probe bet worked and after analyzing the building comps, it's clear the seller knows they priced correctly and shouldn't have to stretch too much from asking to get a deal done. While its not the result I had hoped for (seller is not as motivated to get a deal done quickly), it's a great deal of information that we can use for the next bid.

As I told my client after the seller's response to our probe bid, I think we should get aggressive, up the bid, and pay what I feel the property is worth on the open market without playing the ping-pong game any longer. This will give the seller the seriousness they are looking for, and give my client the best chance of getting the property at a price that I consider market value! If that doesn't work, at least it will get a final counter from the seller leaving my clients with a decision to make.

My client ultimately decided to bid less than my suggestion, put a 'best & final' tag on it, and give the seller until end of day Friday to accept. A bold move! This kind of move will work 50% of the time, and is a move I would be on board with IF the seller countered our original offer more aggressively, and showed some signs of motivation. But the seller didn't, and I think this move doomed us and had little effectiveness given the underlying scenario.

The Result: It didn't work and a higher all cash offer came in that was accepted; we are now backup. The combination of an un-aggressive re-counter + the strong arm tactic of it being our last bid, hurt us in the end. There was never a chance for us to up our bid, and the seller broker never got back to me that multiple bids are now in and for us to submit our highest bid by a certain deadline. While my clients bid was a good one, and the probe got us very useful information, we didn't respond the right way. It was a good bid that gone bad. Of course, the timing of another offer submitted didn't help either.

So what should we learn? When a property is priced right and early in its listing history, don't be shy to get a bit aggressive and pay what the property is worth on the open market! Many people have a fixed % in their head, regardless of asking price, that they must get the seller down from asking in order to do the deal. THAT IS A VERY BAD CHARACTER TRAIT and may prevent you from jumping on an opportunity when one presents itself. Instead, go into the bidding phase with a clear understanding of what the product SHOULD fetch on the open market based on comps, permanent features, location, light/views, condition, etc..If you do decide to play ping-pong, analyze the seller's response closely and don't hesitate to get aggressive and bid market value, even if its closer to the asking price than you might otherwise hope! In the end, it doesn't matter if the property is priced correctly!

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Live Chat , Update, Tips

In case you didn't notice, I reinstalled the live chat in the right side of urbandigs.com. I'll start doing the chat again daily from 10:00AM to about 11:00AM, or as time allows it. When I'm working, I'll leave the chat online in case anyone wants to talk briefly.

Also, I apologize for light postings past few business days, as I'm very busy right now. Once I get bids in for clients, searches done for new buyers, and appointments all set up I'll work on some new content and views on both the market here and macro updates. All in all, it seems the market here is active which leads me offer a few pieces of advice for both buyers & sellers:

FOR BUYERS:

Analyze your OWN, UNIQUE situation when deciding whether to buy or not. Try not to get caught up in headlines. If you can afford to buy, have the liquid assets waiting to be put to work, have a 4+ year timeline to own, and are happy with your job security and salary, then follow these easy steps so that the resale-ability of the product you will buy is maximized:

a) LIGHT/VIEWS
b) LOCATION
c) RAW SPACE
d) MONTHLY'S

Visit at least 7-8 properties in your price point so that you become familiar with property size, layouts, property condition, what is considered good light/views, etc.. Become a mini expert on your price point; understand how monthly costs should affect affordability of the purchase price on the open market. When a product comes on the market or becomes priced right both for you & the open market, go for it. Analyze building and neighborhood comps, focusing on the building comps more heavily, and devise a bidding strategy to increase chances of 'hitting' your desired # in the end!

FOR SELLERS:

Depending on your motivation to sell, focus on these two things first:

a) PRICING
b) MARKETING

Doug Heddings points out the importance of product quality, which is so important at resale, but in this case you already own your home so there is nothing you can do to change it. So, after pricing & marketing, you may want to dabble with low cost staging and/or renovations to get your property into tip top showing condition!

Psychology IS important to buyers! As they browse through your home, they try to envision if it will work for them. As they go into deep thought and envisioning, they start adding up what work will be needed to the property. More times than not buyers try to deduct these expenses from the purchase price. It's only in cases of aggressive pricing & packed open houses that this train of through becomes less of a factor.

Here are some quick tips:

1) remove your personal/family pictures wherever possible; remove the YOU element of the property so that you don't disrupt the buyers' train of thought as they envision their family in the apartment

2) floors? Refinishing your floors is a low cost and very high reaction type of renovation! For $2.25 - $2.50/sft, Marc at FloorworksNY can add life to your worn out floor; I'll vouch for his services and used him twice myself. As buyers walk into an apartment with a dull floor, they immediately think of replacing the floor and the high cost of that expense; aprox $15/sft! If the floor is sanded, stained, and poly'd and shines right into the buyers' faces as they enter the apartment, this expensive thought suddenly disappears!

3) try to show at sunniest times

4) staging; anti-clutter the apartment and re-arrange some furniture if need be to make the layout flow properly to maximize viewable usable space. Buyers like to see a large apartment, not a cluttered one that makes it appear smaller.

5) clean; such a simple thing yet I can't begin to tell you how many disgusting apartments I take buyers to. If the place was clean, the buyer wouldn't walk around the property with a grunt on their face the entire time.

6) quote accurate square footage; lying will get the buyers hopes up as they view the property online and disappoint them when they come to see it. A disappointed buyer is a buyer who doesn't submit a bid; and if they do, it's likely to be on the low side.

As to moving the property, obviously with a higher motivation to sell pricing becomes way more important. If you truly price right, you should get buyers into your open houses and hopefully a few bites within the first 3-4 weeks. If you aren't getting any traffic, re-analyze pricing and ask your broker how the property is being marketed weekly?

Good Luck to all!

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Co-op Board Packages: Safeguarding Your Identity

Recently, one of my customers had $15,000 stolen from her checking account. The incident happened about three weeks after her board package had been submitted to a co-op board. The thief allegedly called Citibank with sensitive personal information such as her bank account numbers, social security number, date of birth and address. The scam artist changed some of my customer's account information and was somehow able to walk into two branches in Westchester, two times each, and withdraw $15,000 in cash. She also opened a credit card with a $750 limit and charged it to the max. I am sure the impersonator's photo has been captured on a security camera somewhere and she will hopefully be caught.

It is certainly possible that this incident had nothing to do with my customer's co-op package. Maybe she left her wallet somewhere. Perhaps someone at her office picked up some of the information she was faxing to me or to her mortgage lender out of the fax machine. But it does seem to be a bit too coincidental. I was happy to report that I had already shredded all of her personal information as I do with all board packages. Out of the dozens of co-op transactions I have done, none of my other customers have had this happen to them.

A special fraud unit of the NYPD is investigating the situation & hopefully the impersonator will be caught. My customer has had her money returned to her, but this incident has taken a considerable amount of her time. She also has to worry about who has her personal information and when her identity might be stolen again.

I think this type of incident is fairly rare and there is no reason to be paranoid when submitting a board package. But it never hurts to be extra cautious!

It is important for buyers of co-ops to know who sees their personal information:

1. Their real estate agent and any assistants who help them compile board packages.
2. Their real estate agent's sales manager who gives the package a once-over.
3. The seller's real estate agent and their sales manager then reviews the package.
4. Some companies have a mail room that types and makes copies of board packages for them.
5. The buyer's mortgage lender.
6. The managing agent of the co-op board.
7. A messenger service if the board package is delivered via messenger.
8. The co-op board's screening committee, usually 3 - 6 people.

Unfortunately, I think that some co-op boards are not really educated on what to do with board packages once they are done with them. One board member admitted that she has a pile of them sitting in her apartment because she doesn't really know what to do with them. Many board members probably don't have shredders in their apartments. I wonder how many board packages just end up in the garbage?

After this incident, I realized that further steps are needed in addition to my just shredding my customer's information. We unfortunately can't just trust/assume that the brokers, messengers, board members, etc., will exercise the same care with others' personal information as they would with their own information.

So here are some actions you and your real estate agent can take in order to protect your personal information:

1. Black out with permanent marker all but the last four digits of bank account numbers on the *copies* of the board package. The original copy that goes to the managing agent does need to include complete bank account numbers.
2. Black out all but the last four digits of the social security numbers on all copies of the board package. The only place a SSN is really needed is on the credit report form that the managing agent uses to run the buyer's credit.
3. I've now decided to include a self-addressed envelope in each board package with a letter. The letter says something to the effect of:

Dear Members of the Board:
In order to protect my customer's sensitive personal information, I would be so appreciative if you would be so kind as to return his/her board package to me for shredding. I have included a self-addressed envelope and please send me your name and mailing address and I will gladly reimburse you for postage. Thank you so much for your consideration.

Even if board members don't return the package to me, I hope that the letter in itself will remind them of the importance of protecting prospective buyers' personal information. Thus far, I have submitted two packages this way. I hope both Boards respond favorably. Both managing agents have promised to try to help me to make sure my customer's information is protected.

I recently joined the Membership Committee of the Real Estate Board of New York City (REBNY). I hope to discuss with them the possibility of coming up with Standard Operating Procedures (SOPs) for brokers, managing agents, and co-op boards for protecting our customer's sensitive information. I am sure this issue is already on their radar, but it never hurts to have another person speak up!

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Who Wants A Depreciating Asset?

A: The topic of this post really does go against mainstream media, bullish brokers, and naive buyers who are always late to the party. Putting fundamentals aside for a moment and taking a peak at what our future may bring, you can't help but notice the warning signs to the broader economy. And to be blunt, I don't care how strong the currency trade is here for our market, if the US were to go into a recession (whether it be soft or outright nasty) the real estate market in Manhattan will quickly change! The Case-Shiller Index released this morning showed a broad based decline across all metro areas measured. While not shocking, we must note that as the housing market continues to decline, wall street and the securities derived from loans on these homes will cause more problems and we will move one notch closer to a recession. As far as investing is concerned, nobody wants to own a depreciating asset!

Where to begin, how about the media! I was late in reading this NY Times article titled, "New York Condos Lure Deal-Seeking Europeans" but was immediately fed up when I got to this statement added in by the author:

"While natives remain wary about real estate and worry about bonuses and the economic climate, foreign tourists are keeping brokers busy with their eagerness to buy up Manhattan apartments, which many see as investments."

What happens if the dollar rebounds? Are brokers and journalists going to switch their argument from "well, Manhattan is supported by a weak dollar and foreign demand" to "well, a strong US dollar is a sign of a strong US economy and with that comes strength in real estate"? Put me down for this quickchange in broker babble to occur at some point in the future. All BS'ing aside, I like to discuss investment strategies, real data, real macro trends, and how that all may affect asset classes. And I'll tell you one thing, NO ONE WANTS TO OWN A DEPRECIATING ASSET!!

On to the data. According to the Case-Shiller Home Price Index released this morning:

For a visual on this, please see the chart:

Housing downturn cycles tend to take a while to play out. First comes the drop in buyer demand, which leads to low sales volume and inventory building, which leads to weak data reports magnified by mainstream media, which encourages more drops in buyer demand, which causes prices to fall, which hits the investors holding securitized mortgage bonds, which infects the financial sector, which leads to higher lending rates, fewer loan options & tougher underwriting rules limiting who can even get a loan, which restricts buyer pool further, and on and on and on! Those in-the-know of macro trends tend to get cautious ahead of the curve, never timing it perfectly, but also not exposed to the pain & loss that hits home for many naive buyers and blind speculators who think the game will go on forever; (hmmm, go back to the above mention of the NY Times article and foreigners buying now even while "natives remain wary about real estate and worry about bonuses and the economic climate").

While the Case-Shiller Index is rear-view mirror and doesn't apply to the Manhattan real estate marketplace (read my post here why), it still is a dataset relied upon by the financial markets to monitor the national housing market. While not a leading indicator, it does paint a grim picture on housing and if the national market continues to tumble in 2008, then the pain will extend to wall street, the credit markets, and the financial sector and put us that much closer to a recession. No one wants a depreciating asset; not a homeowner, not the banks, not the investors holding mortgage backed securities, not the fed, and certainly not a prospective buyer about to put their money to work. This last part is not as cut and dry though as everyone needs a place to call home.

If a recession were to hit the US economy, than stocks will price that in ahead of time and continue to drop until the cloudy picture clears up. Corporations will get defensive and cut jobs, pay, and spending. The combination of a negative wealth effect and lack of security for one's job will certainly have an impact on buyer sentiment here in Manhattan. Sales volume will quickly slow, inventory will quickly build, and sellers will be faced with something that they had the luxury of not dealing with even as the national housing market crumbled; fierce seller competition. When speculators, foreign buyers, and distressed sellers join the normal every day sellers that just needs to unload a home at the same time, you will know the lagging slowdown finally hit Manhattan. We are a market so closely tied to wall street, and almost everyone on wall street knows there is danger in the air. Recessions do occur, downturns do occur, and housing is a market just like every other; it can go up & it can go down. Manhattan is no different; it is just much better positioned & protected. Think of Manhattan as the General Electric of the housing market, and to keep up with the analogy, I would call markets like Miami, Phoenix, & Las Vegas the ETOYS of housing.

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Dealing With A Bully Seller?

A: After previewing comments this morning to publish or junk away, I came across Rick's statement on my, "An Accepted Offer Does Not A Deal Make", post. Rick is dealing with a bully seller who accepted his offer but is refusing to fork over the offering plan and building financials for his attorney to review. As we all know, a buyer's real estate attorney does their diligence before advising you to sign a contract of sale. So, what to do? Fight back!

The comment:

Hi -- have you ever seen a situation where the seller withholds the condo docs, thus making it difficult -- if not impossible -- for the buyer to sign a contract? That's what I'm facing right now and don't know what recourse I have.

I have actually. Unfortunately, it probably means the seller accepted a lower than expected bid and is taking their time to get these docs to your attorney for review, in the hopes of getting a higher offer. Maybe they have a very interested buyer who is keeping them on the ropes.

SUBMIT A BID / NEGOTIATE ---> OFFER ACCEPTED ---> BUYER ATTORNEY DOES DILIGENCE ---> BUYER SIGNS CONTRACT FIRST / 10% DEPOSIT SENT ---> SELLER FULLY EXECUTES CONTRACT OF SALE

The problem is that nothing is binding until the seller countersigns the contract of sale making the deal fully executed. The only other issues that can likely affect the deal at this point are a board turndown or failure to get a loan committment; see my post titled, "No Finance Contingency Explained" for more info on this common practice in housing markets favoring sellers.

So, when you are at the stage of OFFER ACCEPTED the next move is for the your attorney to review the offering plan + 2 YRS building financials + board minutes + contract of sale. You should NEVER sign a contract of sale before your attorney does the diligence and OK's you to proceed with the transaction. But what if the seller delays getting these doc's to your attorney? Why would they do that? A few things come to mind.

WHY A SELLER WOULD DELAY GETTING DOCS TO BUYER ATTORNEY

In the real world it seems logical that a seller would delay getting a signed contract for one reason: they really aren't pressured to move quickly on the deal at the accepted purchase price. Other reasons could be:

These are some reasons that I can think of off the top of my head that would result in a seller delaying getting the doc's to the buyer attorney for review. Most of them are price/time sensitive.
So what can you do about it? Not much actually since you are helpless at this stage and can't proceed with the deal until your attorney reviews the building you are about to buy into.

UrbanDigs Says: The ONLY thing that you can do with a bully seller is to play hardball right back. Fight strength with strength. See how badly this deal actually means to them by PLACING A DEADLINE onto the seller to get the building/apt documents to your attorney. If its been more than 5 business days since an offer has been accepted and still no docs have been received by your attorney from the seller, put a deadline of 3 MORE BUSINESS DAYS onto the seller or else you will WITHDRAW YOUR OFFER! That is really the only thing you can do. If the seller doesn't want to move forward with you at the accepted purchase price, then why waste your time waiting for documents that might never come. Lay down the law and put the ball into the seller's court as clearly as possible. To me, a deadline is the most efficient way to achieve this or at the very least, find out what the deal really is sooner rather than later.

Originally Published February 6th, 2007

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Bidding Strategy 101: Reverse Psychology

A: Before you enter the next property for a showing remind yourself to act unimpressed, point out the bad features of the property (such as the lack of sunlight, renovation work needed, or noise level), and not say any sentences that include the words "I Love..." or "...that is gorgeous". The broker that is handling the open house or the specific appointment usually pays very close attention to your remarks (at least I do), and then provides their client with a report as to the success of the showings. Originally Published Nov 15th, 2006

Interesting isn't it. If a seller is told by the hired broker that most of the people that come in to view are not too impressed or complaining about the dungeon-like feel, then what do you think will happen when a lower than expected bid finally comes in?

I do this automatically when I accompany my buyer clients on showings. While I don't usually advise them beforehand to 'act unimpressed' in front of the seller broker, I go out of my way to point out that "...the kitchen needs a lot of work", or "...there really isn't as much light as the listing describes", or "...I wish there were better views".

The reason I do this is because I don't have any contact with the seller; thats the seller broker's job. Obviously the apartment is available because I'm there viewing it with a client, so I point out some of the things that I believe are causing this property not to sell with the hope that the seller broker relays that message to his/her client.

Very rarely is a property perfect and priced right at the same time. Chances are the property you are about to bid in, hasn't had any bids yet and the seller is just ancy to get 'a taste' of what it might sell for on the open market.

Negotiating is an art, not a science and many factors play into getting a seller to come down below their hopefuly price point.

By pointing out the negative features of the property you are in essence reminding the seller that their property really isn't as beautiful as they think it is.

STEP 1: Show Off Your Poker Face At Showings

Don't get excited, don't point out everything you love about the apartment, and for gods sake don't ask the seller broker right then and there if their client would accept a certain bid.

I remember one of my exclusives last year where the buyer (who had a buyer broker by the way) showed off their true feelings about the apartment I was selling on both showings. I relayed this info to my client. When they finally came in with a low bid, I told my client not to respond as I knew they would come up again within a day or two. After a few conversations with the buyer's broker and hearing the aboslute top that the buyer would pay, I advised my client to respond with a one time counter $10K over this #. The end result, I got my client that price! And it was all because I knew how much the buyer loved the property and that a measley $10K wouldn't break the deal.

Am I a scoundrel? No, I dont think so. After all, my fiduciary responsibility is to my client (the seller) to get the HIGHEST and BEST price possible for their apartment. Put yourself in their shoes. Would you be mad if your hired broker was astute enough as to point out to you that he can get a bit more from the buyer? I doubt it. I'm just doing my job the best I can.

My advice to that specific buyer: You should have had a better poker face and not reveal how much you loved the property to begin with so I would have nothing to report to my client during the negotiating process.

STEP 2: Do Your Research To Determine Market Price

Do you know what the last comparable unit sold for per square foot in that building? What are the nearby comps selling for per square foot? How is this unit priced compared to other active units in the building per square foot?

Be sure to give a premium per higher floor ($5,000 - $10,000 per floor is a generally accepted formula), for renovation work, and for natural sunlight and views (find out recently sold's exposures for this info) that the apartment has compared to last solds or other actives.

You must know this information. This is why you should be using a buyer broker whose real service will come to you during the bidding process. Ask your broker for all this information before you place the first bid. Bidding on a property without knowing this information is like driving a car with your feet; Yea it's possible but that doesn't mean it's to be done!

STEP 3: Devise A Bidding Strategy

The hard part yet the most fun part for me because of the challenge. While every situation is unique here is a quick step-by-step guide that I usually follow:

First: After all the research that you did you must determine the price that your are both HOPING to get the apartment for and WILLING to pay for the apartment.

Second: Start out 3-5% below the price you are HOPING to get the apartment for and present your bid in a professional manner. Write out a offer letter which includes your full name, your attorney info, your mortgage broker info, how much you plan on financing, when you would like to close, your job position, company name, salary, total assets, and finally the bid you are starting with. You can also add the phrase "...Please accept this bid in good faith and contact me as soon as possible with any response". Provide a copy of your pre-approval letter from your mortgage lender and a financial analysis form that clearly lists all your assets and liabilities.

Again, your broker should do all of this for you and prepare everything for submission. I usually follow up with a phone call to the broker that a bid was submitted and faxed and point out some of the negative features of the property that resulted in the bid submitted.

STEP 4: Negotiate

After I submit the initial bid and get the seller's first response, I usually know right away what the apartment will sell for. For example:

SELLER ASKING $600,000 ---> BUYER SUBMITS $525,000 BID ---> SELLER RESPONDS $575,000

I pretty much know that the buyer will have to go to around $550,000 to get a deal done for this particular property. I also know that the seller and the seller's broker assume the same thing based on the first counter offer. So, as a buyer broker, my focus shifts to getting $540,000 or lower for my client. Sometimes I can do it, sometimes I can't. But here is how I try.

My client is now at $525,000 and the seller's response was $575,000. My buyer told me they are hoping to get it for $540,000 but willing to pay $550,000 for the property. My next move would be to submit a one-time bid of $540,000 (that is, I mention this is the highest that my client is willing to go) and mention to the seller's broker that if we don't get it for $540,000 that "my client will move on another property that we are interested in". I also mention to the seller broker that we will need to get a response within the next 2 days.

What I am essentially doing is putting the deal in the seller's hands. Are they willing to lose a deal over $10,000? Probably not. By mentioning that there is competition and that my buyer laid out a deadline for a response I put 2 pressures on the seller. I'm hoping they will fold their cards and accept the deal.

STEP 5: It Backfires. Now What?

Ok, so the trick didnt work and the seller didn't budge. The response we got was a 'no response'. Don't panic, the deal is not dead yet. At this point you have to wait 2-3 days at least to let the feelings of a 'lost deal' seap in to the seller.

After some time has passed I would call the seller's broker and ask why their client had no response? I also start my series of questioning, "What is your client looking to get for this property?" "Maybe I can get my client a bit higher, but I need to know whether or not it is worth the effort first.", etc..

My goal is to find out what I need to do to get a deal done. For all I know, the seller wouldn't go lower than $560,000, in which case it didnt matter anyway because my buyer was only willing to go to $550,000. But most of the time the initial assumption was correct and the seller's broker will say to me, "...get your client to $550,000 and my seller would accept; but nothing lower".

That's when my buyer has a decision to make. Sure we didnt get that extra little discount, but it wasn't because we didn't try for it! In the end, both parties got what they wanted for a price that was acceptable.

Hopefully you will NEVER REACH STEP 5 and the deal will be wrapped up at STEP 4! Good Luck and as always, your feedback on enhancing/arguing/expanding this strategy are appreciated.

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An Accepted Offer Is Not A Done Deal

A: I want to re-publish this post from January 8th, 2007 after going through this experience again with one of my buyer clients. It's important to know that even when you get a verbally accepted offer, the deal is not done! Lets revisit how it works here in Manhattan so you are prepared for the process before you submit your bid. So, you've gained product knowledge by viewing more than 15 properties over the past 2 months or so, and got to the point where you know what 750 square feet should look like and whether or not a property is a good deal or not within a few minutes of entering. You did your pricing analysis with your broker, got past solds, analyzed current actives, valued in light & views & renovations & monthly expenses, and presented a bid. After a few back and forth sessions with the seller's broker, your offer was accepted! Congratulations, but don't get excited yet!

Before you submit a bid you should already have:

1. Pre-Approval Letter For Loan - you should have called at least 3 brokers, with one of them being a direct lender to get a competitive rate quote on all the loan products you are considering. Also make sure you get a rundown of closing costs and terms of the loan so that you don't have to pay any points or penalty's if you pay off or refinance your loan early.

Quick Tip: If you are pressured by time to close within 10 weeks or so of contract signing, especially if you are buying a co-op and have to go through board approval, be sure to ask the lender if they can expedite the appraisal, the appraisal's processing, & GET YOU A LOAN COMMITMENT LETTER + AZTEC RECOGNITION FORMS WITHIN 4-5 WEEKS OF CONTRACT SIGNING! These docs take the most time to get and are usually the last forms received to complete a board package, so be on top of this early on.

2. Real Estate Attorney - your attorney will be priced between $1500 - $2000 or so and will review the offering plan, contract of sale, 2 years of building financials, and board minutes. THIS IS THE MOST IMPORTANT ASPECT OF THE BUYING PROCESS BEFORE YOU SIGN A CONTACT! This is the time where you find out if the building you are thinking of buying into is financially healthy, is planning any assessments/major improvements, is operating at a gain/loss, has a healthy reserve fund, etc..Do not rush this process and be sure to ask your attorney if they notice any red flags about the diligence they did on the building!

3. Financial Snapshot - you should have a financial statement that clearly shows your assets, liabilities, and salary information for the seller to review. Presenting yourself in a clear light puts you in a good negotiating position right off the bat! Strong buyers that present little or no risk to the deal going through should gain a bit more control during negotiations; especially for a co-op that has strict financial guidelines limiting the buyer pool the property could be marketed to! Don't be upset if your representative buyer broker wants to pre-qualify you before viewing apartments or asks for this information before submitting a bid on your behalf. It's completely normal and to your advantage to provide transparency to the seller so that your bid is reviewed seriously!

So the time has come, the bid was submitted and your offer was accepted. The accepted offer that you have right now is non-binding and remains that way until you have a fully executed contract. That means the property is probably being marketed even while your attorney is reviewing the terms of the deal and building; anything can happen during this part of the transaction process! The timeline of this process will look something like this:

ACCEPTED OFFER ---> ATTORNEY REVIEWS CONTRACT OF SALE, 2 YEARS BUILDING FINANCIALS, OFFERING PLAN & BOARD MINUTES ---> BUYER SIGNS CONTRACT FIRST & SENDS IN 10% DEPOSIT ---> SELLER COUNTERSIGNS CONRACT ---> FULLY EXECUTED CONTRACT OF SALE IS REACHED AND BOARD PACKAGE + APPRAISAL CAN NOW BEGIN

Congratulations, the deal is now done and probably contingent upon receiving financing (if it isn't than that means you signed a contract without the financing contingency; read more here) and board approval! The buyer broker (or seller broker if there is none) will get to work on the board package at this time and your lender will get to work on ordering an appraisal of the property so that the loan commitment letter can be processed. Again, read my above tip if you are under any time pressure as getting these loan docs can sometimes slow things down and delay the closing.

UrbanDigs Says: Just because you have an accepted offer does not mean you have a done deal yet. The seller broker knows this and will KEEP the listing ACTIVE and continue to market the property until a contract is signed. Some things that could kill a deal before a contract is signed is inaccurate data presented by the seller broker that is disproved by the offering plan, building financials or contract of sale, a very low reserve fund in the building, or the building operating at a loss. If the seller broker advertised the property at 650 square feet and is later found to be 575 square feet, a re-negotiation of price might take place before the buyer signs the contract; so it really doesnt pay to lie about size (see my post, "Marketing Square Footage: Be Careful Not To Lie", as issues can come up at contract signing or the appraiser will appraise at a lower price when he comes to measure/evaluate causing a potential issue with lending). The two main things that can kill the deal after the contract is signed is failure to receive financing or a board rejection. Hopefully the seller broker was able to pre-qualify the buyer for both of these situations before even submitting the bid to their client for review! Good luck and remember to leave your emotions contained until that contract is fully executed!!

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Owner Says Sell!

A: Lets have some fun today. I was curious as to how many listings were out there that had the phrase "Owner Must Sell", "Serious Seller" or "Motivated Seller" in the description. Whether the apt is priced right or worth it, I'll leave up to you! You see, after a few months on the market with no bids accepted, a serious seller gets nervous. So nervous, they they start to tell the broker to forget about their fiduciary responsibility to get the highest and best price possible, and to just bring them a bid. If that means publicly stating that they are motivated, then so be it. Honestly, putting valuation aside, I was surprised at how many there were out there with these statements in the description! All listings found via Streeteasy.com.

Just because a note in the description screams desperation, doesn't mean that is always the case; it also doesn't mean that the price is right! If you can get a property for lower than past comparable sales levels, especially if the unit in question is on a higher floor or in better condition, then you took advantage of the motivated seller. Putting a bid 15% below ask because the web description says "Motivated Seller" doesn't mean they will flat out accept it. Keep in mind what these statements mean and that there are sellers out there who NEED to unload their property in a timely manner!

That said, here are the listings I found in which the 'OWNER MUST SELL'!

529 W 42nd

PRICE: $829,000 (reduced $40,000 on 3/30/2007)
SIZE: 1,250 sft
ON MARKET SINCE: 10/24/2006

2543 Eighth Ave

PRICE: $600,000 (reduced $25,000 on 9/20/2007)
SIZE: 1,000 sft
ON MARKET SINCE: 8/15/2007

251 W 19th

PRICE: $1,575,000 (reduced $320,000 on 9/19/2007)
SIZE:1,342 sft
ON MARKET SINCE: 1/24/2007

300 E 55th

PRICE: $4,900,000
SIZE: 2,278 sft
ON MARKET SINCE: 6/19/2007

2048 Madison Ave

PRICE: $1,780,000 (price reduction unknown)
SIZE: 3,100 sft
ON MARKET SINCE: Unknown - Check w/ Broker

444 W 19th

PRICE: $2,150,000 (reduced $100,000 on 5/28/2007)
SIZE: 1,389 sft
ON MARKET SINCE: 3/7/2006

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Marketed Size Doesn't Add Up?

QUESTION FROM URBANDIGS READER: After being persuaded to act fast amongst great interest, we put in a bid which was accepted for a 1BR apartment. We had 3 days to get our attorney, lender, and home inspection together. Since our inspector couldn't make it, we did it ourselves and measured the apartment conservatively. When we got home, we added up the numbers but we kept getting about 500 total sf. I was confused, did we miss anything? The listing said 675 sf? So I went back to their floor plan and tried to add up their numbers, still it gave me around 500-525 sf! That means 175 sf is missing somewhere, that's my second bedroom! We confronted the broker with the problem and asked for a reduction; but we didn't get it. So, we backed out. Did we do the right thing?

A: Unfortunately, this is a common problem here in Manhattan where most of our sales inventory is co-op, which don't quote exact square footage; leaving the broker to guestimate the exact size of the apartment. Putting pressure from the seller to rationalize a higher asking price aside, there really are no compelling reasons to participate in this type of false marketing. I find first impressions to be very important when showing a property, and that a disappointing first impression never leads to a good bid! In the end, it's up to you to determine whether the approximate size listed on marketing materials is accurate and worth basing any bid on!

In my post, "Marketing Square Footage: Be Careful Not To Lie", way back on February 13, 2006, I discussed the problem of false marketing here in Manhattan real estate:

The brokerage community must acknowledge that buyers are smarter these days and have been on the sidelines viewing properties without bidding for them for months now. They know how big a 1,600 square foot apartment should look after seeing 12 of them already!

Buyers have more control now than they did a year ago! If anything you should advise your client to agree to under-estimate the square footage a bit and let buyers be 'pleasantly surprised' when they come for a showing. After all, happy buyers are more likely to submit an offer!

How big is this property? Let's do some math being conservative:

BR (14'3 x 11'6) ---> Aprox. 170 sft
LR (12'6 x 12'6) ---> Aprox. 160 sft
OPEN KITCHEN (8'5 x 9') ---> Aprox. 80 sft
BATHROOM (lets say 7' x 9') ---> Aprox. 65 sft
TWO CLOSETS (lets say 20 sft each) ---> Aprox. 40 sft
FOYER (lets say 5' x 5') ---> Aprox. 25 sft
-----------------------------------------------------------------------------------
TOTAL APPROXIMATELY ---> 540 Square Feet

So, this buyer has a very valid case if the broker did in fact market the property at 675 total sft on the marketing materials. Thats about a 20% overstatement in size. Question is, what should this buyer do now if they are still interested in buying the property?

# 1: DO MORE RESEARCH / ASK FOR # OF SHARES - First, do more research and find out how many shares is allocated if its a co-op unit. Find out past sales in the building and if you can uncover what a similar unit was marketed at on a square footage basis and a per share basis. We are looking for consistency here. Chances are there are similar layouts somewhere in this building and that one of those similar units probably sold in the past 5 years or so (you just need to price in for time appreciation, renovations, light, views, etc.). Ask your buyer's broker to send you ALL layouts and marketing specs for similar units in the same building.

When you get this data, see if there is a discrepancy with size at which the property is marketed? Is this an isolated incident or were past units also marketed and sold at over-stated size quotes too? Make sure you analyze the floorplans and specific dimensions of each room when doing this comparative research.

Also, see what similar units sold for per square foot, or per share for co-ops with no size listed.

# 2: BASE BID ON YOUR ESTIMATE / BUYER BEWARE - Now that you did some research and you have hard facts PLUS your mathematical estimate of the size of the property, base your bid on this data and NOT what the marketed size may be!

For example, in this example you should base your bid on a property measuring 540 sft and NOT 675 sft! If you couldn't find and similar layouts or units with stated size listed for comparison, then use the 'per share' analysis. That means you need to know how many shares the unit in question has allocated to it AND at least one comparable unit to compare it with.

If this unit has 200 shares allocated to it and the last similar 1BR sold for $350,000 and had 210 shares but was one floor higher, chances are it is the same size and was given a 10 share premium for being on a higher floor. Do the math:

$350,000 / 210 = $1,666/per share

You should expect to pay around that price for the unit in question. If we multiply $1,666 by 200 shares for the unit we are discussing, we come to a price of about $333,000 or so; lower to compensate for being on a lower floor and getting fewer shares.

Remember that NYS is a Buyer Beware State!

#3: SUBMIT BID / EXPLAIN TO BROKER - Don't be scared to confront the selling broker about WHY you are submitting a bid lower than the asking price. Explain to the broker HOW you came to that #, and mention the past sold comparable unit you used for analysis.

Keep in mind that to get financing for a deal to go through the lender's assigned appraiser MUST appraise the property at the purchase price! If a property is over priced and the seller/broker rationalizes that price by bumping up the marketed square footage, you may fool a buyer but you probably won't fool the appraiser who comes in, measures, and then compares the purchase price to past solds in the building and surrounding area!

If it doesn't work, then back down! Take pride in the fact that you did your diligence and you avoided making such a large investment decision based on emotion! Let someone else make that mistake and deal with marketing it at the same over-stated price down the road. I'd rather you pay hundreds of thousands of dollars for a property that is marketed for what it is, rather than for what is isn't!

UrbanDigs Says - This buyer contacted me about this and told me that they backed out of the deal after measuring the place to confirm the dimensions listed on the floorplan. I think they made the right call. They only problem they did was submit the bid first, and then try to negotiate it down later when their concerns about the total size were confirmed. They should have done their research BEFORE submitting the bid! Even if the deal went through, the appraiser probably wouldn't have met the total size of 675 sft for the property. Be smart, don't lie about the size of a unit! It's better if you are honest and let the property sell itself. The main reason for lying in the first place is if a seller demands an outrageous sales price leaving the broker to bump up the size to make it more in line with market value! The problem with this strategy is that showings will leave buyers disappointed and that most buyers will ultimately pick up on the trick!

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Jumbo Rates Still Surging / ARM's Too

A: Weekly Mortgage Report from Wells Fargo (hat tip Michael McGivney) shows falling 30YR fixed rates but rising ARM rates across the board. Any buyers out there care to report what they are seeing after talking to their mortgage lenders? Lets see how consistent this report is with other brokers doing lending business in Manhattan!

First, some charts via the Wells Fargo report. Here are weekly rates check, unfortunately it doesn't show jumbo rates, I'll get to that shortly.

Here is a chart showing Home Sales data as released by NAR.

Now, onto the Jumbo rates that are more in tune with reality here in the world of Manhattan real estate. Michael McGivney is reporting to me another surge in Jumbo Loan rates for 30YR fixed loan products reflecting the increasing risk seen by lenders towards the mortgage markets.

The exact quote from Michael is...

"Jumbo rates are awful; 30 yr at 7.375% - 7.5% depending on LTV and credit. It is 0.125% higher than last week"

In addition, short term ARM product rates are rising because quite simply the risk is increasing for this type of loan product and fewer investors are willing to buy these riskier loan products on the secondary mortgage markets. That means lenders may be stuck holding the bag and that is something some don't want to do. According to the report:

Treasury yields dropped on AUG 30th as investors fled asset backed commercial paper in favor of the safety of government debt. The credit market situation is becoming quite unpredictable, with reports coming out almost every day detailing further ills for companies and the market as a whole. The housing market remains in a deep slump while consumer confidence is waning. We expect these factors to keep downward pressure on long-term mortgage rates in the near term. However, shortert-term ARM rates rose sharply this week and will carry upside risk as liquidity has dried up for these riskier mortgage instruments.

Great stuff from the inside trenches of the lending world here in Manhattan. WHAT ARE YOU BUYERS SEEING OUT THERE WITH RATE QUOTES? IS THIS REPORT ACCURATE OR OFF?

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Studio Vision: Hide The Bed!

A: A great piece from the NY Times on Sunday about thinking outside the box to maximize the space in a studio apartment. The article was about a pair of Manhattan architects who bought a studio in Tudor City. Their plan? Maximize the space of a straight studio by hiding the bed! Such a simple concept that most buyers think to do in the form of a murphy bed. But not these two. For all you studio buyers out there, this one is worth it especially if your plan is to buy and renovate your new home from scratch!

NY Times: Updating The Trundle Bed

First job, find the right studio for the right price! Since your plan involves spending a good amount of money on renovations, you need to make sure the studio property you buy is priced right given the condition it is in! Don't let the selling broker fool you into paying top dollar for location, light, or views! Instead, understand that the renovation process is a big burden for any homeowner and that you will have to deal with blueprints, architects, co-op boards, contractors, and the side effects and time it takes for construction. All of this is the reason why major renovations to kitchens, bathrooms and flooring often pay the homeowner MORE THAN DOLLAR VALUE back at resale; especially when the job is done right!

Next, hide the bed! No, that doesn't mean a murphy bed as that is not hidden! A murphy bed, for all those that don't know, is a piece of furniture installed against a wall that houses the bed. When you need to use it, simply open the furniture door and pull the bed down. When you're done, lift the bed back up and close the furniture doors! But the problem is the amount of space lost with the actual piece of furniture that houses the bed itself. The pull down method is the problem. So what to do?

Build a raised platform and hide the bed underneath! Think 'slide-out' instead of 'pull-down'! Why didn't I think of that!

As you see in the illustration to the right, these two creative thinkers built a raised platform at the back end of the studio that can be used as either the living area or dining area of the property. It doesn't matter! What matters is that the bed is built to slide underneath, removing any obtrusive murphy beds from existing on one of the walls. By building this way, the studio maximizes space, can have both a living and dining/office area comfortably, and will most likely appeal to future buyers as this type of construction is certainly not the norm in a positive way.

All in all, the cost of the total renovation for the raised platform (which I assume included a new wood floor as well to go with it), new kitchen, and new office space cost $75,000. Not cheap by any means, and certainly a cost I think could be beaten with the right contractor!

How did they think of the idea of a sliding bed? They went out for a bite to eat, of course:

"We were frustrated thinking of all these different solutions, and we got hungry," Ms. Yanagishita said. "We went to have Korean food in a restaurant on 32nd Street. We were eating kimchi - pickled cabbage - and we noticed the raised platform we were sitting on."

"Then all the little pieces came together like a Japanese puzzle box: things slide out, things fold in, things tuck away. It is clean, we hope, without any fussiness."

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Spotting A Bottom In Local Housing

A: Lets take a step back and talk a bit about how one would go about spotting a local housing bottom, as tough a job as you can strive for! First off, its important to note that picking a bottom in housing is extremely local given the variety of factors that are involved in housing fundamentals. However, we can strive to get close to a bottom by analyzing a few local factors + general economic conditions; inventory, affordability (jobs & rates), economic growth prospects, and buyer confidence. In my humble opinion, these are the fundamentals to watch out for. The hard part is combining this analysis and monitoring with your own unique situation to see if buying now or waiting to find a bottom is the better choice.

To pick a bottom you must be forward thinking! You can't wait until the data shows that the bottom was reached and we are already 6 months into the turnaround because by then you missed it and everyone on the sidelines plus speculators will be racing to buy in; unless of course you are more conservative whose investment strategy is geared towards transparency and comfort of buying when the housing environment is rosier. But this discussion is about spotting a bottom, or at lest trying to get as close as possible to finding one before it happens. Here is what I would look for on the fundamentals; you make your own opinions.

Inventory Increases Slowing

With the existing home sales report yesterday we learned that the # of months of inventory on the market right now across the nation hit a 16 YR high! As we are today, there is a 9.6 months batch of inventory waiting to be sold. That means, at the current sales pace and given the current # of units available for sale, it would take 9.6 months to clear out the entire batch! That of course assumes no additional units come to market and sales pace remains constant; an impossible scenario!

In addition, this data metric is not just about the total # of units available. It is also about the sales pace. The reason we reached a 16YR high is because a combination of rising inventory and slowing sales volume. Think about it. If sales volume would have increased instead of slowing, the # of months inventory on the market would not have been as high! Ah, I see the light!

So, there are two very important factors to keep an eye on as prices across the nation continue to fall PLUS one very important dynamic that comes with cheaper homes for sale!

Factors: Watch out for inventory trends! What we need to see to form a bottom in housing is a slowing down in pace of the rising # of units hitting the overall marketplace! When you start to see inventory trends even out and even drop, we might be close to bottoming out.

Dynamic: As prices fall it is prudent to predict that sales volume will increase! And as I just explained, as sales volume increases the # of months of unsold inventory by law will begin to drop! As this inventory metric drops and the # of months of unsold inventory begins to reverse course, you will start to see headlines discussing a bottom and more confidence in housing's future prospects for appreciation.

Affordability

THE LOCAL FUNDAMENTAL! In terms of housing, there are two important elements to affordability; jobs/salary + lending rates. We can keep this discussion short & sweet as long as we remember that jobs & salaries are a local phenomenon (look at Seattle, Atlanta & Dallas whose housing markets are still very strong due to local job growth); rates are more uniformed but vary with personal situations. Don't take my word for it. Check out the Case/Shiller Home Price Index Charts (via MacroMarkets.com) for Seattle, Atlanta & Dallas since they started keeping track and you will notice that the trend STILL is upward with the last update in the 2nd quarter of 2007:

When a local job market is strong, housing will be more affordable than when the jobs market is weakening. This is one aspect to affordability.

The other is lending rates. Lets put aside for a second the fact that alot of people made poor investment decisions and are now suffering for their mistakes; I'm talking about buying a house you cant afford in an environment where lenders would accommodate with loan products that were ticking time bombs.

That is the past, it happened already and steps are in place to prevent it from happening further. Right now, there is talk of the side effects of the credit squeeze effecting the jobs markets and therefore salaries. So let's see how that aspect of affordability is hit. In terms of where lending rates are, we already know that a disconnect has occurred in the lending rate world as risk was priced into the secondary mortgage markets. As bond yields fell with a flight to quality, interest rates rose because there was more risk associated with mortgage lending. In normal times, lending rates would have fell with bond yields; but we are not in normal times.

What do we need to see to spot a bottom? Two things, falling interest rates and a sustainable healthy job environment. These are the areas of most uncertainty! If jobs are lost and salaries with it, how will the buyer pool be effected? If rates continue to rise because risk is still being priced in, how will prices be effected? Here is what to look out for:

Factors: Healthy future local job growth prospects & falling interest rates. Buyers MUST be able to afford a home if there is to be a bottom and ultimate reversal in housing price appreciation! I just don't see how there can be a turnaround if a recession hits OR if interest rates continue to move higher as a result of deteriorating credit markets.

Economic Growth Prospects

In a phrase, we need economic growth prospects to include CERTAINTY, LIQUIDITY, LESS RISK, & GLOBALIZATION. Things we got used to in the past few years that helped fuel the stock market rally, and recently lost due to the current uncertainty surrounding the credit squeeze; except for globalization, however risks remain to global growth as a result of this situation.

We went from high liquidity and low volatility to low liquidity and high volatility virtually overnight! The tradable markets are in shock right now and are still trying to re-price risk and uncertainty to the still unfolding story of the credit markets & secondary mortgage markets. We just don't know who holds what garbage and how deep the hole is. We need this to pass through the system and the losers to be shaken out before any certainty will come back!

With uncertainty comes possible economic slowing and should a recession hit here at home, I don't see how that environment would help in any housing recovery. However, it may help us to spot the bottom as any economic slowdown (which will be accompanied by the Fed lowering fed funds rate and ultimately interest rates to the consumer) should be the next leg down in the national housing market. And buying in towards the back end of a recession BEFORE the eventual recovery may prove very profitable in the long run. Here is what to look for:

Factors: Spillover to US economic growth prospects from the current credit/liquidity squeeze. Expect stocks to price in these risks in ahead of time via a selloff and price in the recovery ahead of time with a turnaround as uncertainty dissolves. We are looking for signs of stabilization and confidence should a slowdown hit the US pushing housing more out of favor with buyers.

In addition, monitor effects on global economies (watch oil prices for an indication on global demand) as that could hit us at home if a slowdown oversees occurs, as well as the pricing of risk. You can monitor the pricing of risk by watching credit spreads. If risk is a concern, credit spreads will widen.

Buyer Confidence

Can someone please explain to me why there is no buyer confidence index for the housing market? One can easily argue that what bulls the housing markets up or down, when all else is normal, are the buyers! When buyer demand and confidence is high, inventory gets eaten up fairly quickly unbalancing the supply fundamental. On the flip side, when buyer demand and confidence is low, inventory quickly builds up putting sellers and pricing in a very bad situation; especially for those that MUST sell.

I have preached this before. Waaaay back on January 18th, 2006, I wrote a post titled, "Buyer Confidence? We Need A Formula!"; one of my favorite posts to this day because there is no such index! In that post I stated:

The national economy and the stock markets have the Consumer Confidence # as one indicator of the current strength/weakness in the overall economy. What current or leading indicators does the real estate industry have; let alone the NYC real estate market? Sales of existing homes? Filed Mortgage Applications? This is a very fast paced city and to keep ahead we must wisely analyze the data for hints of the near future. We need more.

We need a Buyer Confidence index, for housing only, that will help us gauge the strength or weakness of what really makes our real estate market move; the buyers!

Buyer Confidence - Buyers get more confident when the economy is strong, jobs market is tight, salary's are high, uncertainty is at a minimum, inventory offers choices, prices are affordable, and wealth effect is in place! In essence, buyer confidence is the ultimate effect of most of the fundamentals I discussed above when they positively relate to the buyer! I know, sounds like a lot to ask for. But it's important, especially OUTSIDE MANHATTAN!

UrbanDigs Says - These are my opinions for those who want a general understanding of what makes for a prime opportunity to buy close to a bottom. In the real world, it's not as cut and dry. Opportunities will pop up even if all these fundamentals don't line up. In addition, trying to time the housing market is EXTREMELY DIFFICULT and should not skew or alter your decision to buy if that decision is a clear one. Understanding your own situation, personally and financially, and combining that with your investment strategy is the way to go when deciding the timing of your purchase. This discussion is for those with very short term investment goals and strategies who are eager to learn under what circumstances the near term housing prospects (remember real estate is LOCAL) may reverse course in favor of appreciation for the years to come.

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"I" is for Inventory: NYC Still Very Tight

A: Readers often confuse statements that I make on this blog and interpret something I say as a prediction of future price appreciation. Not so. I rarely delve into that area as its way too hard to predict what short or medium term price appreciation will be in any given neighborhood of Manhattan. What I do strive for is to report to you what I see in this fast changing marketplace so that you can get a front row seat to any changes before mass media reports on them. I'll also provide my opinions and tips so that you see my opinions on handling the changing marketplace in the best way possible. When I state that 'because Manhattan is 75% co-op, we are somewhat protected from the subprime mess' it does NOT mean I am predicting an overly optimistic picture for future price appreciation. It means that this market is driven by unique fundamentals that if understood, will explain why we have not seen a correction thus far. Which brings me to today's post on inventory.

Inventory in the New York City real estate market is still very tight. My clients, who range in price point from low $300's (yes I still work with all buyers) to low $2M's, are still having trouble finding products that meet their living needs. Its not to say that there is absolutely nothing, it's just that options are very limited and what is available usually has more than one item that discourages them from bidding.

These clients are not picky either. They know that compromise is inevitable and that they will have to buy a property that has at least 'something' to it that they dont like. The key is, what that 'something' is. It's my job to make sure that the 'something' is NOT a permanent feature that will eventually limit resale profit potential. These 'somethings' include location, light, views, or raw space. This is where the problem is. Finding a property priced right in the perfect location, with good natural sunlight, at least decent views, and enough raw space to meet the buyers' needs. That is where inventory is limited.

Which brings me to today's market report. While the macro economic environment is still very uncertain, it is less uncertain than it was just a few weeks ago. Today, we know that:

a) The Fed is ready to step in when needed; although if stocks continue to rally on the assumption of a rate cut, that rate cut will never happen

b) The banking system seems to be reacting favorably to fed liquidity injections and cut in discount window

c) Major banks, like Bank of America taking a $2B stake in Countrywide Financial, are ready and willing to jump into buying opportunities for struggling smaller lenders

...this is helping to restore investor confidence and therefore stock prices. What is beneath the surface AND the ultimate economic side effects of this credit squeeze are still yet to be known. So we are not out of the woods yet. So what does this mean to NYC real estate that we know is so directly tied to wall street and wall street related jobs and bonuses?

It means that as long as NO MAJOR STOCK SELLOFF OR ECONOMIC RECESSION OCCURS, our marketplace fundamentals will NOT be so quick to change. Manhattan market fundamentals in place right now include:

* Tight Inventory - opposite of what is going on in most other local suburban markets
* Strong Jobs - jobs are still plentiful. There is only talk of job losses as a result of an economic slowdown from this credit squeeze; it did not happen yet.
* High Salaries - NY'ers are still making plenty of $$$. Again, there is only talk of a restriction in salaries as a result of any future recession.
* Bonuses - Umm, we are still only 800 points from record highs on the DOW. Who knows where we will end the year but if things pass over better than most expect and stock markets hold up, bonuses will not get hit as much as everyone expects. There goes that doomsday scenario.
* Weak Dollar - foreign buyers still see value in NYC real estate based on currency trends
* Lifestyle - urban lifestyle is still in demand as trend to live closer to workplace grows stronger
* Rental Rates Soaring - any change in this trend will be lagging from economic slowdowns. Soaring rents make buying more attractive options for those that can afford it, and as I mentioned above there are still plenty of buyers out there.

I see this recent headline from the NY Times story on Sunday that states "...Since June 2006, the national inventory of houses has increased by 12%, but Manhattan's apartment inventory has decreased by 32%":

The Manhattan Real Estate Slump That Wasn't (NY Times) -

Even the condo glut that so many real estate executives feared has turned out instead to be a boon of sorts. "If we didn’t have new development coming on at the pace we did, we'd have a chronic shortage across all sectors, and we’d see 20 percent price growth," said Mr. Miller, the appraiser.

To the extent Manhattan's housing market is threatened by a weak national economy and by declining bonuses, said Mr. Miller of Miller Samuel, "then the fact that we have a lower level of supply coming on would help keep the market from correcting."

UrbanDigs Says - As long as inventory remains tight, I just don't see how prices can come down as aggressively as some people think. That is not to say I expect 10% appreciation per year for the next two years! I don't. Rather, I see a sideways market for the near term. Corrections are perfectly normal for longer term sustainable growth, I've said this a number of times, so for now its important to continue to monitor the macro economic environment to see how that ultimately effects jobs, salaries, bonuses, affordability, rental rates, and ultimately inventory here at home!

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Living In A Tougher Lending World

A: I think back to November 2001 when I first bought real estate here in Manhattan. For the most part, the memory is still there although being almost 6 years ago. I was a NASDAQ Equities trader with Tradescape (at the time I was trading for over 3 years) and recently went through 2 very dramatic events; the dot com crash and 9/11. Trading was not only volatile but it was physically and emotionally draining at that time. As a contrarian investor seeking to buy my first piece of NYC real estate, I was disappointed that I couldn't get what I wanted for the price I was able to afford. I started following NYC real estate aggressively in 1999 when I started making money. With 9/11, the NYC real estate market had a brief but sudden correction; nobody wanted to hold on to properties and all of a sudden deals were to be found. My eyes lit up and I signed a contract in November 2001 and closed on the property on April, 5 2002; some 5 months later. Why so long? Because I had such a tough time getting my loan! The past has finally caught up with us!

I recall the seller being super pissed. I recall my attorney doing everything he can to buy me more time to secure the loan. I recall weeks and weeks of phone calls with my lender demanding more documents to back up my income. This is February & March of 2002. This is before lending standards starting loosening up so drastically which helped power the recent national housing boom. This was the time when the 30 YR fixed rate fell to 6.875%, and continued to fall for years after; I ultimately refinanced in 2005. This was the time I thought I would lose the deal of a lifetime.

I purchased a 1,093 sft JR4 condo at 245 East 93rd street for $500,000; Denice Rich of Corcoran was the selling broker. Actually, the sellers were asking $479,000 for the property because they wanted the place sold in '2 weeks time'; a bidding war erupted in the first 3 days after 40+ people packed the Sunday open house. An aggressive strategy that was common for that time period in New York City as residents had the fresh scare of terrorism in their minds and buildings were still being evacuated at least once every week or two for safety precautions; sellers wanted out! A crazy time to be buying to say the least but a good time for any contrarian investor who sees the longer term reward potential that comes with buying an asset that is down & out with mainstream investors.

But I almost lost the deal. I had trouble getting the damn loan commitment because...

1. I was a self-employed Equities Trader working AFTER the market crashed
2. I had declining income reported in 2001 compared with 2000
3. I had to come up with the last 3 years Tax Returns
4. I had to take a higher interest rate that I originally had a problem with
5. I had to provide bank statements & pay checks for last 3 months
6. I had to get a expected income verification letter for 2002 from my CPA saying my income would rise from 2001's.

It was hell. The whole process totally drained me. As if trading in a post stock market crash environment wasn't enough I had to deal with angry sellers, relentless sellers' attorney's, a tough lender, a hard trading market, and the questioning that comes with buying after the worst terrorist act in recorded US history. But the deal was too good to pass up on and I was determined to put up with the headache of getting that loan commitment so I can proceed to closing. I did and I finally closed on the property in early April, 2002.

The only reason it took so long was because I had to prove to my lender that I actually earned what I said I earned and that I could actually afford this property going forward. And for those that say, 'why didn't you call a different lender', I did! No one else would talk to a self-employed equities trader after the markets got hit so hard! Oh, one lender offered to work with me at a rate of 8.75% for a 30YR fixed; I didn't bend that far!

My Point: We are returning to a lending environment more like this! We are in the very early stages of tighter lending and underwriting standards after we got so used to no standards at all for the past 3-4 years! Looking forward, buyers will have to prove their earnings and employment. As Michael McGivney, a Wells Fargo Private Banker, said back on Aug. 10th:

Last week, a client getting approved for an interest only product, like a 5 year ARM, on a $500,000 loan qualified on the payment of $2604 at a rate of 6.25%.

Today, that same client, to qualify for the same loan, will need to have enough income to qualify for the "fully indexed, fully amortized" payment. That means they MUST qualify at a rate of 11.25%, fully amortized. That means a payment of $4863!!!!!! That's nearly DOUBLE the payment. That means they must have nearly DOUBLE THE INCOME!!!

It's going to take more than a few months to adjust to such a different world after years of loose lending standards. For any seller thinking about accepting a deal from a buyer whose income is derived 100% via self-employment, be sure that they can back that up with documents so you have no issues with the deal closing!

For more in depth talk on this topic, read my post last week titled, "Adjust Your Risk Tolerance For Loans".

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Adjust Your Risk Tolerance For Loans

A: Pre-approvals mean sh*t! Thats right, I said it, and it had to be said! I've been advising clients on both the buy and sell side of this for about 2 years now as the typical offer when submitted includes an offer letter, financial statement, and pre-approval from a lender. In this new world of high cost risk, limited loan options, drying up of liquidity in RMBS markets, liquidation of assets to cash, and tighter underwriting / lending standards it is absolutely crucial that the dealmakers focus on the loan aspect of the transaction and making sure that will go through!

This post is for BUYERS & SELLERS of Manhattan real estate, or any market really, as you adjust to changing market conditions due to macro economic events unfolding; specifically in the credit markets as liquidity dries up.

I've posted before on what you need to do to submit an offer for a property here in NYC, which basically includes:

1. Offer Letter - Includes your initial offer, your job position and company, length at job, total salary, liquid assets leftover AFTER closing, attorney info, expected closing date, and lender info.

2. Financial Statement - Includes a snapshot of your financial situation such as total assets (liquid and not liquid), total debts (include min payments if high), total salary and bonus.

3. Loan Pre-Approval - 1-page document from lender with building address shown and loan amount minus down payment. Don't worry if loan amount you are pre-approved for is higher than what you plan to bid, it is for strengthening your offer ONLY and NOT to give away your negotiating hand.

In today's world of high cost risk, limited loan options, tighter underwriting standards and uncertainty, it is critical that both buyers and sellers do their homework BEFORE submtting and accepting a bid. The last thing you want is to do a deal with an unknown lender that can't come through with a loan commitment days before your expected closing. This should now be viewed as a real possibility for any buyer with:

As Tanta of Calculated Risk timely states the quote of the day yesterday from Washing Post article:

"What I'm telling people is that they should not shop around for the lowest rate necessarily," Binstock said. "Go with the lender who you think is going to be there in the end."

UrbanDigs Says - BUYERS ---> For the best rates, stick to dealing directly with a bank rather than a broker or middleman that makes a commission on the deal. Also, go with a bank that has a large presence and is absolutely based in Manhattan. I'm thinking of the Wells Fargo's, Chase's, Citibank's, etc. that do business here.

UPDATE: 12:28PM - Manhattan Mortgage Company is also worth a phone call as I am hearing that rates are as competitive as direct lenders and they are a big presence here in Manhattan. If anything, call a few for comparative purposes and let me know if this has changed in past few days, but I dont think it has!

SELLERS ---> Its not all about what price you get, it's also about buyer quality and ability to get a loan commitment so the deal gets done! Now is NOT the time to mess around with iffy, subprime borrowers that are self employed and wrote off 60% of their stated income in their past 2 years tax returns! Give more weight to buyers that have solid jobs, have solid income, minimal debts, and are able to produce any and all required doc's to a lender as the underwriting process starts AFTER the contract is signed and appraisal is ordered!

A pre-approval does NOT mean a loan commitment!! That is your new mantra!

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Streeteasy.com's New Dev Directory

A: I don't plug companies that often here on UrbanDigs.com because I think it lowers the quality of the ultimate goal of this site. But when a great product comes out, I have a tendency to want to help spread the word. If you are looking for updates on new developments, or an easy way to find one, don't miss Streeteasy.com's New Development Directory.

The directory is broken down by section of Manhattan (downtown, midtown, UWS, UES, etc.) and provides you with the neighborhoods in each section as well as a quick glance of the number of new developments listed in each neighborhood.

Simply click on the neighborhood and all the new developments in that area are clearly listed and sortable. A great resource for any prospective buyer seeking a brand new product in a brand new building ripe with luxurious amenities! They also list coming soon, price movers, latest discussions, and new dev pricing data based on property size and general location. Very informative! Thanks Streeteasy guys!! Happy browsing!

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Playing NYC Housing With Credit Fears

A: First off, everybody needs to relax, take a step back, and re-analyze their own personal situation. Take a deep breath. The world is not coming to an end. The era of ultra liquidity is coming to an end. The era of stupid loans being made to buyers who never should be buying is coming to an end. The era of no doc loans, 100% financing, stated income, etc. is coming to an end. But Manhattan housing will always have value. While our marketplace is not immune to a recession, time and again NYC has proven to lag in housing downturns and lead in recoveries. Which brings us to to YOU!

Whether or not you should be buying or selling in the current New York City real estate marketplace is a decision tailored to your own unique situation. You should not make rash decisions about an article you read in the paper. You should not sell your home because Bear Stearn's announced that two hedge funds went under. You should sell your home if you find yourself in financial disarray due to a job loss and dwindling savings account. In short, take a step back, look at your own situation and then make an educated decision GIVEN the current environment we are in. Here are some tips starting with our current environment.

The New World - This is a changing lending environment where job security, salary, and credit actually mean something! The days of no doc, stated income, 100% financing are over! Lucky for us that really doesn't apply for us in Manhattan. Lets not forget that Manhattan is 75% co-op (down from 80% or so given all new construction) which requires a strict set of financial guidelines for prospective purchasers.

However, just how exposed our buyer pool is to wall street and interest rate increases is still yet to be seen. It's something to keep an eye on. For now, the credit crunch is hurting suburban markets and highly speculative urban markets (like Miami or Phoenix) way more than it is hurting us. In New York, there is just no shortage of qualified buyers who are fully capable of getting a loan! You can't even attempt to buy something here if you were hoping for no down payment and stated income loan. Forget about it. We never had those types of buyers here, nor did we have the level of speculative investing that other markets had. On the contrary, the current Manhattan real estate marketplace could be described as having limited inventory, plenty of willing and able buyers, high salaries, very limited rental alternatives, high and rising rental rates, and foreign buyers taking advantage of currency trends. Certainly a market that I would feel safer investing in and working in compared to many other local US markets when looking at the fundamentals driving it.

For Prospective But Nervous Buyers - Re-analyze your situation! Plain and simple. Stop trying to time the market or get caught up in all the headlines in the media. The media is enough to drive a man insane, especially if that man doesn't understand the current environment we are in and reads a doomsday article. Instead, focus on the four items that I talk about often here on urbandigs.com.

1. Job Security - Do you have a job? The word for today is Job! J - O - B! Before even thinking about buying a new apartment, you should be sure you are happy and comfortable with your current job and that there is very limited chance that you will get fired or relocated in the very near future! Job security should be viewed as a blanket of comfort.

1. Salary - Assuming you answered 'Yes' to #1, what is your gross salary? Is it high enough to provide you with a debt to income ratio of 30% or under? To do this, add up all your current monthly minimum payments (or debt payments you are required to pay) and add in what your total monthly costs of living would be with your new purchase. Take that # and divide it by your monthly gross take home pay. What do you get? Here is an example:

Minimum Debt Payments (Car, Credit Cards, Student Loans) = $750/Month
Mortgage Payment (including interest before tax benefits) = $1,800/Month
Maintenance Costs = $600/Month
Real Estate Taxes = $400/Month
-----------------------------------------------------------------
TOTAL MONTHLY COSTS - $3,550

Buyer Joe Shmo Earns $120,000/Year (including bonus) OR $10,000/Month Gross

To get the debt/income ratio divide $3,550/$10,000.

3,550 / 10,000 = 0.355

Joe Shmo has a debt/income ratio of 36%. Joe Shmo could be OK buying a condo but should make sure the bank will lend given his higher than hoped for monthly expenses. Some banks like to see a debt/income ratio under 28% and most co-ops like to see a debt/income ratio closer to 25%. In the real world, Joe Shmo could pull this off, especially if he does not live a luxurious lifestyle and is a bigger saver than spender! Joe Shmo could easily put more money down to lower his debt/income ratio to closer to 28% if he has the liquid assets. Lets get to that now.

3. Liquid Assets - You need to have some savings before you buy a new property. It costs money to buy or sell a home, so you need to take into account how much down payment plus closing costs will come out to. AFTER these closing costs, you should have liquid assets leftover to show the board, or if its a condo, for your own emergency funds.

For co-ops, a general rule of thumb is to have at least 1 years worth of maintenance plus mortgage in liquid assets after closing. Stricter co-ops can as for 2 years worth of assets.

For condos, its more up to the buyer's comfort level but 6 months of maintenance plus mortgage in liquid assets should be viewed as a minimum after closing. You would rather be closer to 1 years worth of assets, but if your salary is high, you could pull it off with less!

4. Timeline To Own - Very important. You should have a timeline to own of at least 4 years! Preferably 5 if possible! That way, you have enough ownership time to take advantage of tax benefits via deductions of interest and taxes, paying down equity and building wealth, and appreciation of the asset. If your timeline to own is 2 years or less, don't even consider buying. The transaction costs alone will make the investment hard to profit from. If its in the middle at 3 years, you have a decision to make; if renting out afterwards is an option then lean towards buying, if not then don't.

For Prospective But Nervous Sellers - Don't make rash decisions based on articles! This one is easy. Only sell right now while credit concerns is headline news if you are in:

1. Financially Disarray - If you lost a job, took a huge pay cut, or are using savings to cover living expenses than I would stop messing around and liquidate your biggest asset; i.e. sell your house! If you can't afford to live in your home then chances are you will be forced to sell at a later time, and that is a position that no seller should be in if they want to get top dollar at resale. Having a time pressure to sell forces you to aggressively lower the price of the property to move it quicker! Instead, sell now when inventory is so tight and buyers are still plentiful to avoid what could be a bad situation to sell in at a later time.

2. You Know 100% You Will Sell In Near Future - If you are completely certain you will be selling your property within the next year, and have options at your disposal to move in elsewhere or be relocated, then consider selling now. No one knows how these credit issues will ultimately play out and if you will be forced to sell in say 6 months but have a time pressure to close the deal by, then I would rather you sell now when you are not in any rush!

See the consistency here? I want you to avoid being a seller in a distressed situation and would rather you choose to sell sooner rather than later if you are in financial trouble or know for a fact you will have to sell in the very near future!

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3-Step Ladder To Home Ownership

A: Making the decision to buy now or wait for a serious downturn has proven time and again to be a virtually impossible feat. The problem is that you never know until well after the downturn has already reversed course where you should have bought in. Being that this realization is one of hindsight, timing the real estate market has always been a very difficult thing to do. Therefore, stick to a 3-step ladder approach in guiding your decision of whether to buy now or continue renting. Originally Published March 26, 2007

It all depends on your own unique situation.

By analyzing a couple of very important facts about your own current situation, you could be able to crunch the numbers and figure out how to make a buy versus rent decision. These include your financial situation, your planned time line to own, and your ability to find value (for resale) and happiness (for yourself).

Take it as a 3 step ladder up to the roof of home ownership. If you can make it up each step without falling, than you should probably consider buying over renting.

STEP 1: Your Financial Situation

Are you employed and can you comfortably afford to buy this home? One of the first things you should do is talk to your financial adviser or trusted real estate agent to discuss how much property you can actually afford. For the most part, what you will find is that you should put no more than 30% of your take home monthly income before taxes towards the total monthly costs of owning the property. To figure out your own situation, do it in reverse. Take the amount that you take home in salary every month, and simply multiply it by 0.30 on a calculator. If you earn $6,000 a month, than you should strive to keep your total monthly living expenses under $1,800/month (6000 x 0.3 = 1,800).

In addition, you should have saved up approximately 8-12 months of your total monthly living expenses in liquid assets AFTER you close on the property! To do this you must first tally up all your liquid (easily converted to cash) assets which include your checking/savings accounts, money market accounts, CD’s, etc.. Now that you know how much money you have, subtract the down payment that you will put towards the purchase and the closing costs estimate that your agent could provide for you. How much do you have left? How many months of living in this new home will you have leftover after you close? To do this, simply take your total liquid assets and divide by the total monthly living costs of the property. It should be between 8-12 months. For stricter co-ops and those who are self-employed, you should be closer to 12-18 months of liquid assets AFTER closing.

Finally, is your job secure? If there is a chance that you can lose this job or be transferred in the near future, than you just fell off the first step and can no longer proceed up the ladder to home ownership. Otherwise, step on.

STEP 2: Timeline To Own

This will be the easy step. Taking into account transaction costs to both buy and sell a piece of real estate, I like to advise my clients to take into consideration their minimum time line to own.

At the very minimum, you should plan to live in this home for 3 years. Ideally, I would like to see a buyer plan to own the home for a period of at least 4-5 years. That way, the home will have had time to appreciate and you will have taken good advantage of Uncle Sam’s tax benefits offered to homeowners.

Keep it simple, if you don’t see yourself owning the property in 2 years than you just fell off the second step. Lucky for you it’s just a step stool!

STEP 3: Find Value & Happiness

Your almost there. At this point you have pretty much figured out that you should be buying a home being that you are financially capable and not pressured to sell in the short term. The only thing left to do is to find a home that is a ‘best of group’ product and meets all your housing needs.

To find a best of group product you must gain knowledge of the properties in your target price group. Even if the apartment has a deal breaking flaw and you know its not the one, you should still go to see it to gain product knowledge. If anything, it will confirm a best of group product when you find it! You’ll know within the first 30 seconds of walking into a property if that is the right one for you. Keep your focus on putting your hard earned dollars towards the permanent features of the property such as location, views, sunlight, and raw space!

And finally, does the apartment have a good feel to it? You’ll know it when it happens. If it makes you happy because you know you are looking at your new home, than you just made it to the roof of home ownership!

Use this as a guide! If you meet all the criteria mentioned above with the exception that you only have 6 months of liquid assets instead of 8, than go for it as long as the building board will accept your application to purchase; especially if your time line to own is 5+ years.

SIDEBAR

While I just discussed the 3 most important factors towards making the buy versus rent decision, there are also variable factors that could come into play as well. These include factors that change with time such as interest rates, rental vacancy rates, and whether it’s a buyers’ or sellers’ market.

The very idea that these factors change with time makes it very hard to time perfectly. So, consider these only as extras in your decision.

Right now interest rates are still historically low, yet significantly higher than they were only a few years ago. Try not to let it affect you. Since interest rates are constantly moving and no one really knows where they might be heading in the future, it will only cloud your decision-making. If anything, you should research where rates are right now so that you have an accurate idea of what your monthly payments will be for the buy versus rent decisions you must make.

Rental vacancy in Manhattan has been below 1% for some time now. One of the main reasons for this is that potential buyers got priced out of the market and were forced to rent. In addition, many prospective buyers chose not to buy in the hopes that the market would retreat significantly. It didn’t. All it did is result in a very tight rental market with little to choose from and rental prices at 5-year highs. As rental prices rise, buying becomes a more viable decision.

Add it all together and you get a very healthy Manhattan real estate market, especially during the most active months of the year. I would describe the current market as a sellers market but before you go into frenzy about what I just said you must understand what a sellers market is. A sellers market is one of tight inventory and strong demand putting the control in the hands of the seller. In these types of markets bidding wars (even below ask) are very common and good deals are hard to find and don't last long. This is what is happening right now in Manhattan since early January.

UrbanDigs Says: If you climbed to the roof of home ownership and you found a great apartment that is priced right, go for it! If you made it to the top but only found a property you liked but didn’t love, than wait! When the frenzy dies down you might have more bargaining power but less options to choose from in the generally slower summer months.

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When A Walk-Through Goes Wrong

A: Doing a final walk-through is a MUST in the days before a scheduled closing with so much of your money being put into what is probably one of the biggest investments of your life! So, when you conduct the walk-through, be prepared for the worst! Here are some tips as well a great way to handle yourself if the apartment isn't in the condition you were hoping for!

When To Schedule The Walk-Through - This is one of the last steps of the buying process. The final walk-through should be held at least 2-3 business days prior to the closing. The reason is you want to give all parties involved in the transaction (buyer, seller, both attorneys, lender, etc..) enough time to reschedule should the closing have to be postponed by a few days. Don't wait for the seller broker to contact you to schedule this. Instead, be proactive and have your buyer broker or yourself (if no broker representation on the deal) contact the seller broker a week before the closing to set a date for a last check.

Wait For Apartment To Be Vacant - For existing apartments, you must wait for the seller to have moved out before conducting a final walk-through. In these types of deals, you are looking for damage beyond 'normal wear & tear' that may have occurred to the property. Minor scratches on the floor or walls from the hired moving company DO NOT count as major damage and will not be enough to postpone a scheduled closing. However, holes in the walls or chunks of flooring missing ARE something that should warrant a complaint!

For new developments, you are really looking for unfinished work, damaged materials, water damage, etc.. For large buildings with many units, one has to expect a few little things to be in need of attention, so rather than get all emotional about it, do the right thing and follow my advice a few paragraphs down on what to do! Chances are in this scenario that the closing will take place and the money would be put into escrow until the problems are resolved OR the closing will take place as it normally would and the issues will be addressed in the first week or two of occupancy for ALL new residents. Generally the first few weeks of occupancy in a new development is the time frame given to fix any and all minor issues reported.

What To Check For - As you do the walk-through, check to see if all electric outlets are working, the appliances are working, and that no major damage beyond 'normal wear & tear' occurred. The deal is, the property should be in the same 'AS IS' condition as it was upon the day you reached a fully executed contract of sale for the apartment! Checking for water damage or fire damage is also a good idea and should warrant a complaint if you find evidence of either.

What To Do When Problems Arise - It's very possible that you do find some major issues a few days before the scheduled closing! Good thing you did the walk-through! Now, its up to you to make a checklist of the problems (with worst problems at the very top) and take a picture of the actual issue at hand. When you get home, put all this into a word document and add in the images to physically show the problem you are complaining about! Call your attorney and lender and tell them to postpone the closing and then give this checklist + backup pics to the seller broker. The seller broker should have no excuses for not addressing the issues you brought up, IF you brought them up in this manner.

In the end, all the major issues should be addressed so that a 2nd walk-through can be scheduled and the closing can finally take place soon after!

SAMPLE CHECKLIST + PICS (thanks to a very thoughtful and thorough client of mine)

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The Starter/Investment Property

A: I would define a 'Starter/Investment Property' as a type of investment strategy that would look something like this: BUY ---> REPLENISH ACCOUNTS ---> RENT OUT ---> BUY BIGGER & REPEAT ---> SELL DURING NEXT FRENZY. Originally Published January 31st, 2007.

The goal of this investment strategy will be to start small, keep your credit perfect, buy bigger, and eventually own a few rental properties that would be constant source of monthly revenue while at the same time having the tenants build your wealth for you. Then wait patiently for a good selling opportunity!

To do this properly means sacrifice and discipline to buy a property that you wouldn't necessarily would want to live permanently in, but is in a location prime for rental income (i.e. near bars/restaurants/parks/subways); as tenants will pay more money to be closer to these city amenities.

FIND THE PROPERTY

This is the tough part. When looking for a starter/investment property you must focus on keeping the monthly payments as close to $1.00/sq. ft. as possible; if its under $1/sq.ft. then be careful the asking price was not raised to compensate). Try to do this without sacrificing the proximity to the above mentioned city amenities!

With a rental property some property features pay more than others. For example, an alcove studio on a prime street in a W. Village walk up might ask the same monthly rent as a small 1BR in a luxury hi/rise in the Upper East! So, location NOT luxuriousness of building is what pays off here.

Try your best to pay for location, light/views, and raw space before shelling out your $$$ for renovations, roof decks, and doormen!

BUY IT

Devise a bid strategy and take into account a possible seller reaction. Play a game in your head to see where the negotiating might go and plan accordingly based on what your target price is. Don't be afraid to low ball; just don't expect a good response if you bid 25% below asking! DO NOT STRETCH YOURSELF ON THIS FIRST PURCHASE! Remember that the goal here is to eventually buy another property and rent this one out!

Get your price and sign that contract (read my post, "My Offer Was Accepted! Now What?")!

RECOVER FINANCIALLY

After flopping down X amount for your down payment plus X amount for transaction closing costs you may feel a little depleted. Not to worry! You are on the right path to building wealth using the tax advantages of homeownership as a historical guide!

Take the next 1-2 years to recover financially and replenish your liquid assets! Don't start spending your money on vacations and unnecessary goods just yet, as the job is not done. Your goal RIGHT NOW should be to save up enough money to buy your next, bigger property!

If it takes you 5 years to get back to where you were before, than so be it! The apartment you just bought is not meant to be sold right away; rather the ideal situation will be to rent out the unit for monthly revenue until the next selling opportunity!

BUY BIGGER & REPEAT

After a few years have passed and your liquid assets after taxes have built up again, it's probably time to start considering buying a bigger apartment and rent out the initial starter investment property. Be sure to learn the products in your target market so that you can bid accordingly.

SELL DURING THE NEXT FRENZY

The entire goal of this strategy is to build wealth for yourself by adding rental properties to your portfolio; hopefully in addition to a new bigger property that you now own and live in. If you have succeeded in doing this in a 5 year period, than you are in great shape so far.

The last step of the puzzle is to WAIT for the next buyer frenzy to hit NYC where you will look to sell 1 or all of your properties and take profits. Uncle Sam offers you 2 tax advantages when you sell so that you can get out of paying Capital gains taxes on the profits from the sale.

TAX BENEFITS:

1. 1031 Exchange: Allows a tax payer to defer the paying of taxes on a gain when an investment property is SOLD & a new property of like or greater value is PURCHASED. In other words, if you first purchased a property for $400K, and then 1 year later sold it for $500K, you can then defer the payment of taxes on the $100K Capital gain in this transaction, as long as you purchase another property worth $500K or more.

2. Primary Residence Tax Benefits: If you have lived in your property, as your primary residence, for at least 2 out of a period of the last 5 years, you will not have to pay Capital gains taxes on the profit when you sell. This benefit equals up to $250K of tax-free gains for singles, and up to $500K of tax free gains for married couples. Of course, this is dependent on how you filed your last tax return; single or married.

Finally, here are some apartments/buildings you should keep an eye on if this strategy meets your investment needs:

1. 151 East 20th Street (Gramercy Park) - 5 floor prewar elevator building in Gramercy Park. Pied-a-terres and sublets allowed without board approval, as noted in central systems. Desirable location where good products are very hard to find. Should get good rental income.

2. 110 Thompson Street (SoHo) - 6th floor walkup building between Spring & Prince Streets allows pied-a-terre's and sublets; however exact sublet policy is unknown. This designer studio is in a great location and is in renting condition as is. Although its a hike up, this one probably wont last long.

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Why Harlem is Hot Hot Hot

Nope its not just the real feel temps of 105 degrees being felt citywide. Harlem is on fire from a development perspective and I'm going to try to show you why and why I think it will continue in the next couple of pages. Check out where new development has gone up or is going up on this Google map I made (yes this is what I do all day):

MAP OF HARLEM PROPOSED CONDOMINIUMS

For those of you aficionados who say - Dah! We already know...I hope you invested in the late 90s, because here are the stats:

* Washington Post

Despite this significant boom in Harlem, I think the best is yet to come. Away from those in the know, there are many who don't realize the huge changes that have happened in Harlem and what is to come, but lets back up for a minute.

Why did this happen?

Numbers Shmumbers you say...Why did it really happen?

Non-profits and social services organizations role in the Harlem Renaissance is undeniable - although their major contribution to it was in part through a surreptitious avenue - they moved uptown. Former President Bill Clinton's 2001 move to offices at 55 West 125th Street was the spark that started the fire. Non-profits and social services organizations quickly clustered around Clinton's offices absorbing much of the neighborhoods 3.4MM square feet of commercial space and quickly driving a doubling of rents to $35 per square foot range in 2004. The second Harlem Renaissance was also at least in part sparked by the Upper Manhattan Empowerment Zone (UMEZ), which began in 1994 and has financed 152 initiatives with $134MM in and leveraged $695MM in total investment. The UMEZ allocated 27% of its funds to tourism and cultural industrial development, 58% to business investment, and 15% to workforce and human capital development.

Tons of commercial developments over the last decade are making Harlem a better place to live. (The following are merely highlights)

So what's to look forward too?

Columbia University - The University has a proposed $7 Billion expansion on 17 acres in West Harlem designed by Renzo Piano and Skidmore Owings and Merrill.

East River Plaza - This game changing project will be a 500,000 square foot retail center development, which is a JV between Blumenfeld Development Corporation and Forest City Rattner. The center, on 6 acres stretching from 116th Street to 119th Street along the FDR Drive will include Home Depot, and Target as anchor tenants when it opens in 2008.

Harlem Park - Bringing Class A office space to Harlem, Vornado will deliver a 640,000 square foot 21 story mixed use building at 125th & Park by. The building will reside adjacent to the 125th Street stop on the Metro North commuter rail. The project is already 11% leased with a planned completion in 2009.

Harlem Piers Re-development - This is an $18.7MM publicly financed project to build two piers on the Hudson River between St. Clair Place and West 135th Street. The first will be used for excursion boats and water taxis with the second to be reserved for recreation including sunbathing and fishing. The connection to pedestrian and bicycle paths will fill a missing link in the planned coastal greenway on the Hudson River side of the city.

Harlem Hospital Center - The Harlem Hospital is in the second year of its five-year modernization plan. The $249 million five-year modernization plan includes demolishing antiquated buildings, renovating 183,000 square feet, and building a 150,000 square foot Patient Pavilion. Plans include a new Emergency Department, state-of-the-art critical care and diagnostic units, and new, fully equipped operating rooms.

Museum for African Art - The Museum for African Art will have a 90,000 square foot, $80MM new home designed by Yale’s Dr. Robert A.M. Stern. It is being called a cultural gateway to Harlem. It is set to open in 2009 at its new permanent location, 5th Avenue and 110th Street. It is the first new museum to be built on "Museum Mile" since the Guggenheim in 1959.

Avalon Morningside Park - Avalon's 20 Story 296 units rental apartment building at Morningside Drive and Cathedral Parkway is one of the largest new residential developments in Harlem. Importantly, Avalon is a trend setting public REIT, who has blazed trails in the Lower East Side Noho and Long Island City already.

How has all this impacted the residential real estate market?

If I have overwhelmed you with data, good. The point is the Harlem Renaissance is for real, its here to stay and things will only get better from here. While in a downturn Harlem like other "growth" areas could get hit hard. But you can bet I'm one investor who will be a buyer on any dip. Go check it out for yourself, but wait for the heat wave to end.

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Serious Buyers Get Ready: Summer Control

A: This is a post for all you serious buyers out there that know for a fact you will be buying a Manhattan apartment in the next 4 months or so. Get ready! As we head into the summer months, you should be able to determine those that really need to sell. Here is what to look for.

Now that the frenzy months of JAN - APRIL are over and things seem to be cooling a bit, those buyers that are not just browsing for fun or looking to learn product knowledge for a purchase sometime in 2008, should wake up and get to work!

But what happens if you finally found your desired property but there have been NO price cuts in the past 3+ months on the market? Well, chances are this seller has no pressure to move the property and is waiting for their price. In the real world, their is little you can do other than to test it out by submitting a bid that you are comfortable with. Have your buyer broker educate you on what the building is trading at and place a bid based on these comps with an explanation why so that the seller sees it; explain that anything over your price is out of whack with building past solds and might result in a failure of the property to appraise by a lender. Then hope for some type of reasonable response.

However, if you do find a property that has had multiple price cuts in the past month OR one really big price cut recently, you might have a ripe situation for getting a great deal. Unfortunately in real estate, one man's misfortune is another man's reward!

In addition to the buyer broker you may be using, you should be searching sites like Streeteasy.com & PropertyShark.com to learn product knowledge and educate yourself on past solds in the building and neighborhood you might be looking into.

The goal should be to find a seller who MUST sell and decided to overprice their property and test the market heading into the summer months. These sellers will be pushed against a wall come July & August, after months on the market and a stale listing, leaving them only with a price reduction strategy to re-stimulate interest. Questions that remain are whether or not you can find these property's and if they meet your desired criteria for your new home.

Finding a distressed seller will be much easier with the help of a buyer broker. The system should be:

BOTH OF YOU SEARCH FOR PROPERTIES & THEN WHEN ONE IS OF INTEREST HAVE YOUR BUYER BROKER SEND YOU THE LISTING HISTORY & BUILDING COMPS

First Came on Market: 3/02/2007
Original Asking Price: $3,400,000
Asking Price Reduced From: $2,750,000 on May 9th, 2007
maintenance: $785
RE Taxes: $990
Size: 1,822 SFT
PPSF: $1,153
Marketed By: Elaine Claymen & Daniel Ruiz of BrownHarrisStevens

430 West 34th - Price Cut $80,000 2 Days Ago!

First Came on Market: 1/19/2007
Original Asking Price: $875,000
Asking Price Reduced From: $875,000 on May 8th, 2007
maintenance: $1,560
Size: 1,200 SFT
PPSF: $662
Marketed By: Michael Johnson & Tami Solomon of Corcoran

UrbanDigs Says - You really need to be educated and willing to risk losing the deal during negotiations to get a very attractive price on a property (when your low bid is countered to but not accepted, you might have to back off for a day or two to see if the seller comes back to you to get a deal done). First off, you need to find an apartment where the seller is still willing to come lower on price. Second, you need to know how to negotiate. Third, you need to be able to get the deal done quickly before more buyers realize the value being offered. Losing a deal because you are not ready is a horrible feeling.

As you head into summertime, be sure to have your attorney already picked out, your lender fine tuned down to the 2 most competitive offers, and your eyes open. Working WITH your broker instead of against them will only help you in getting the best deal possible. With my clients, it is not uncommon for them to spot a deal before I do and send it over to me for review. I will then send them the info they need on the building and last sales so that together we can valuate the property properly and devise a bidding strategy when necessary. Are you doing the same with your broker?

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The 1-2 Punch: When A Deal Falls Through

A: Very interesting topic for a post that comes straight from the field. You have a new product on the market, priced right, that procures an accepted offer near ask within the first week. The deal eventually falls through. Then, a new bidder comes in with a strong bid, but not as strong as the first, and gets very little response. The 1-2 punch for the seller takes control right out of the 2nd bidder's hands leaving a situation to deal with. What to do?

Its hard enough being a buyer of Manhattan real estate these days without having to deal with lack of negotiability because of a previous deal falling through. How is a broker to advise their client?

On the one hand, the seller must be ready to go after experiencing a deal slip away. But on the other hand, being that the first offer was slightly under asking it makes any future offers that may be lower but still strong, seem not worthwhile! The seller broker is clearly doing their job and bringing in offers left and right for their client, but in the end they need to generate a fully executed contract of sale to get credit and move forward to closing.

When a deal falls through, the psych of the seller changes a bit. First off, they get a taste of what their property might sell for. Second, they get more confident and patient when it comes to future bids. Third, they keep the ball in their court and play hardball especially if the two bids come in within the first 4 weeks of the listing. All of this doesn't bode well for the buyer in terms of control during the negotiating process. Not such a bad thing if the property is priced right to begin with.

So, how does a buyer broker advise their client in this situation. Certainly you can advise them to go just under ask and get the deal done on the premise that bids are coming in quickly on the property in question which obviously means the product is getting traffic and is priced properly. Or, you can play hardball back and stick with the lower bid in and see how time changes the mind of the seller.

The only way to be sure is to put the seller into a situation where they might lose the 2nd deal! Question is, does the 2nd bidder want to risk losing the property? So, here is what I would advise my clients to do based on the economic and emotional status of the buyer:

Buyer Loves Property & Can Afford It - A property is worth what a buyer is willing to pay for it. If the deal is only $10,000 away or so and it is economically feasible for the buyer to pay that amount, go for it! Obviously the property is priced properly which is why the buyer loves it (assuming they did their homework and has product knowledge) and multiple bidders have made a play for it. So whats the problem. Taking into account past comps and current products in the price point, if the deal is within striking distance I would say to my client to up their bid and end the ping pong game now before a third bidder comes in and they lose the property they love.

If it does get you an accepted offer, don't waste time! Tell your real estate attorney to do their diligence promptly so that you can sign the contract and send it over to the seller attorney with your 10% deposit. A deal is never done until the seller countersigns the contract and the seller broker is wise to fully market the property until this happens. As you can see, deals do fall apart and the fact that the property was almost lost creates a sense of urgency to other interested buyers.

Buyer Likes Property & Will Have To Stretch To Buy It - Here is where I don't like my clients going. Its never a good idea to stretch far above your intended budget to get a property you love! That is allowing emotion to take over the investment decision.

If the buyer (2nd bidder in this case as first bidder deal fell through) already put in their MAX amount they can afford and anything over this amount leads to a sacrifice in quality of life, then your decision is clear! KEEP THE BID IN & PUT A DEADLINE ON IT!

In the end we must not forget what buying a home is all about beyond the investment value. When making the decision to buy, you need to:

A: Love the home
B: Can afford the home; job is stable & salary is high enough
C: Look to stay for at least 3-4 years
D: Know product knowledge and how to bid properly

Most sellers want to sell their home and those that price their homes high and dont get any bids for months, tend to react more aggressively when one finally comes in. However, on the flip side, those sellers that price right and get multiple bidders in a relatively short time period tend to get more stubborn. As a buyer you need to decide which strategy you want to take once that first deal falls through because chances are the seller will not be that accommodating!

Do the right thing. Sleep on it, take into account how much you love the property and the happiness it will bring to your lifestyle without sacrificing quality of life financially, and make your decision with a clear mind!

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Market Report: Transition To A Buyers Market

A: Its already starting to happen folks! Its May 1st and already I am noticing the beginning signs of a slowdown in Open House activity! After being on record since January 10th for stating that market activity has begun to surge, I am now going to go on record for stating that market activity is beginning to wane at public open houses. What we are seeing now is the transition in the Manhattan real estate marketplace from the sellers market of January - April to what will eventually be a buyers market as we get closer to the months of July & August. Sellers, its time to pass the torch back on to the buyers!

Brokers, Buyers, & Sellers - After reading this post I would love to hear your comments on what I am seeing as this is really only the 2nd week I have noticed things starting to slow a bit! Are you noticing the same thing?

Its important to note that media outlets differ from blogs because they usually lag in their reports to the readers after waiting for the event to happen and data reports to show a trend or surprising number. In the blog world such as UrbanDigs, I'm doing my best to tell you what I see right now!

And what I see right now is slowing open house activity! I went to three open houses this past Sunday and the most traffic out of any of them had only 2 other people there at the same time we were. The others we were the only ones there for the 10 minutes or so we stayed. Compare that to what I said back on January 10th:

After spending a few of the past 3 Sunday's with her going to Open Houses, I can tell you firsthand that most of them had very good traffic; by that I mean at least 4-5 different buyers were there at the same time we were. And that was ONLY 15 minutes or so of a 2 hour open house!

I've also had talks with a few other agents holding OH's and they report to me a noticeable, 3x or so, pickup in activity and this is across a range of price points across the city! This is the kind of reporting that you can take advantage of if your in the hunt to buy in the very near future! I'm not making this stuff up. If I had to estimate, I would say my own business has picked up about 4-fold in the past 3 weeks alone; most of it in the past 7-10 days!

My last open house was two Sunday's ago and we actually had a decent showing with about 12 people stopping by; not uncommon for the first open house of a new listing. I'm certainly curious to see how my first open house for my other new listing goes this coming Sunday; I'll report on that one next week although first open houses are not the best gauge to notice any new trends.

If I were to visually design for you how the NYC real estate market is seasonal, it would look something like this, for months JAN - SEPT. I left out OCT-DEC because those months seem to me to be very erratic; sometimes hot and sometimes cold. The months of JAN - SEPT have market characteristics to them that are easy to notice and eventually take advantage of:

To prove this, recall Jonathan Miller's chart breaking down the AVG Price Per Square Foot per quarter by clicking here. I wrote about his findings in my post titled, "Data Shows NYC Real Estate is Seasonal", and stated:

I talk often how buyer demand in the months of JAN - MARCH are normally much more active than any other 3-month consecutive range of the remaining calendar year. The months of MARCH - MAY are transition months where activity from buyer demand tends to move from very active --> to active --> to good ---> to slow. Once we get into the months of JUN - AUG, the market is typically significantly slower with only a few serious buyers coming to open houses and much fewer appointments during the week!

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Don't Be Fooled: 421A Tax Abatement

A: Let me be absolutely clear! The 421A Tax Abatement which is granted to developers by the city as an incentive to build and develop neighborhoods, is great for the developer's sales team as they ask top dollar for new units with temporarily low monthly expenses and a DUPE TO THE BUYER WHO INTENDS ON SELLING AFTER THE ABATEMENT EXPIRES! Originally published June 28th, 2006. Edited/Enhanced on April 25th, 2007.

I'm sure I will get a lot of harsh words for this post from either some colleagues or sales managers, or developers, but I can't help it! This is how I feel and think its important to at least play devil's advocate to anyone considering paying over $1,300 a square foot for a new development whose asking price can be this high because the monthly expenses are temporarily low due to the 421 Tax Abatement.

Don't get me wrong, new developments are a great product and perfect for those who can afford them. But for those seeking an investment play, its hard to rationalize the price per square foot + higher closing costs on some of these developments considering they will get more expensive to carry every two years for the next 10 or 15 years.

As I noted on a previous post, "What is a 421A Tax Abatement":

421 Tax Abatement - The Cooperative and Condominium Abatement Program provides partial tax relief for condo owners and co-op tenant-shareholders to reduce the disparity in property tax paid between residential Class 2 properties (i.e., condominiums and cooperatives) and Class 1 properties (i.e., one-, two-, and three-family homes), which are assessed at a lower percentage of market value.

The reason I think this temporary tax relief is a dupe for buyers who intend to sell their new home AFTER the abatement expires, is because in the world of real estate...

THE MONTHLY EXPENSES (MAINTENANCE + REAL ESTATE TAXES) OF A PARTICULAR PROPERTY ARE DIRECTLY CORRELATED WITH THE AFFORDABILITY OF THE APARTMENT AT RE-SALE. THEREFORE, A PROPERTY WITH HIGHER MONTHLY EXPENSES MUST LOWER THEIR ULTIMATE ASKING PRICE TO COMPENSATE FOR AFFORDABILITY OR ELSE IT WILL NEVER SELL. ON THE FLIP SIDE, A PROPERTY WITH VERY LOW MONTHLY EXPENSES CAN GET AWAY WITH A HIGHER ASKING PRICE ON THE OPEN MARKET.

Now lets apply this to real life and specifically look at a new development that was granted a 421A Tax Abatement, to get a better idea of what I am saying. On a recent visit to The Ariel West sales office, my client was considering purchasing a new apartment that was benefiting from a 421A tax abatement for 10 years. Here are the details of one of the property's we were looking into:

245 West 99th Street - Ariel West Apt. 21A

Size: 2,526 SFT
# Beds: 4
# Baths: 3.5
Maintenance: $2,291
RE Taxes w/ 421A: $201
Asking: $3,500,000
Price Per Sq. Ft.: $1,386
Marketed By: Corcoran Sales Center

Now, the number that is important for sake of this discussion is the monthly real estate tax of $201 for this apartment. The way abatements adjust is that every 2 years the monthly real estate tax rises 20% until maturity. At least that is what I originally thought. When I decided to put the sales agent on the spot and asked him what the assessed tax value of this apartment would be AFTER maturity of the abatement, we were shocked to find out the formula isn't as simple as a 20% adjustment every 2 years until maturity!

In fact, once the 421A tax abatement expires in 10 years the annual tax costs of this apartment would be approximately $31,000, or $2,583 a month! You should have seen the sales agent's face when I told my client of my concerns right then and there.

I ask you:

HOW MUCH CAN MY CLIENT REALLY SELL THIS APARTMENT FOR IF THE MONTHLY'S JUMP FROM $2,492 A MONTH TO $4,875 A MONTH IN 10 YEARS?

Most people don't have this luxury!

Here is how the tax abatement gradually expires:

EVERY 2 YEARS, 20% OF THE ABATED TAX TOTAL IS ADDED TO YOUR MONTHLY REAL ESTATE TAX PAYMENTS UNTIL MATURITY.

For example, if you just moved into your new development property and your real estate taxes start at $100/month, and mature at $800/month, then there is $700 of abated taxes. In 2 years, 20% of $700 (or $140) will be added to your monthly expenses bringing it up to $240/month. In another 2 years, 20% of $560 ($700 - $140 = $560 left) will be added to your monthly payments, and so on until maturity.

UrbanDigs Says: The 20% every 2 years hype is usually misunderstood. Instead, ask the developer's sales team to tell you what the actual taxes will be upon expiration of the 421A tax abatement BEFORE you buy so that you are fully informed of what you are getting into! I know for a fact that every new development is different and some neighborhoods will not experience what I discussed here (such as 70 Washington in DUMBO, Brooklyn), so make sure to go out of your way to educate yourself on this very important factor before you sign that contract and put your deposit down!

Quick Tip: No rocket science here. Look to sell your new condo when there is still 5-6 years left of the tax abatement so that you are not left without a chair when the music stops. By unloading when the monthly expenses have not yet reached their peak, you will be able to get a higher asking price before the monthly expenses top out and restrict affordability.

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Gift Tax Explained

A: Well I might as well pass on something that was discussed in this continuing education class that is taking all my free time. While I knew about this, some of you probably didnt. Often I find with buyer customers that the intended purchaser doesn't have sufficient liquid assets to make the home purchase and/or pass the board. The easy way out? Get a gift from a parent! Here is what you need to know.

What is a Gift Tax: The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.

The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.

Who Pays the Gift Tax? The donor is generally responsible for paying the gift tax. Under special arrangements the donee may agree to pay the tax instead. Please visit with your tax professional if you are considering this type of arrangement.

Here are the exemptions to the Federal Gift Tax:

To relate to what I see in the real estate world, married couples can each separately give up to $12,000 to the same person each year without making a taxable gift. So, a couple can pass down $24,000 to one child per year and be exempt from any gift taxes.

You can continue to gift up to $1,000,000 during a lifetime and get the exemptions from gift tax.

You can NOT deduct the value of the gift donated unless it was made to a charitable organization.

UrbanDigs Says: A gift is usually considered if the intended purchaser (that is the buyer who expects to be on the title or the stock) does not have the required assets to make the downpayment and closing costs, and still have some monies leftover to pass a board. In the case of a co-op transaction, the gift SHOULD be completed a good 2-3 months before preparation of the board package. Quite simply, you do NOT want that deposit to show up on the hard copies of the financial statements used to backup the listed assets of the buyer. If the deposit is shown, it could raise a red flag in the eyes of the board members. In my experience, I have always advised my client to provide a gift letter only if the deposit is shown on the financial statement provided used to backup a listed asset. So far I have not had any problems. For my clients that got the gift into their accounts early, I have not had any problems.

Knock on wood!

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Should You Buy? Try This Formula...

A: For all those out there who are trying to figure out whether they are financially capable of buying, try this simple excel spreadsheet that I designed. It was specifically created for those who currently own a home, thinking of selling, and putting the profits into buying a bigger house. So, naturally, it includes formulas to quickly and easily calculate transaction costs on both sides and add it to your financial profile in making the final decision. However, it can work for those who currently rent, are considering buying, and wondering if they are financially capable.

**DOWNLOAD 'SHOULD I BUY' SPREADSHEET HERE**
*you just need to fill in the green boxes; formulas will come up automatically!

It's not the most complex of spreadsheets, but I still think many will find it useful. Off the bat, there are a few assumptions that you should be made aware of:

ASSUMES - 6% Interest Rate (or $600 per $100,000 of loan)
ASSUMES - No points on loan
ASSUMES - 1.5% of Purchase Price closing costs for Co-op Purchase
ASSUMES - 4.325% of Purchase Price closing costs for Existing Condo Purchase
ASSUMES - 5.75% of Purchase Price closing costs for New Dev Condo Purchase
ASSUMES - Doesn't Include Homeowners/PMI Insurance
ASSUMES - A new dev purchase - Simply change the CELL INFO for B27 if you are buying an existing condo (B18) or co-op (B19)!

These are fair assumptions and are necessary to make this excel spreadsheet feasible for me to develop given the time I have to put into it right now. The biggest variable is your lending rate which obviously will vary, so please keep that into account. I also didnt enter PMI or Homeowners insurance which will add bit to the overall cost of the monthly payments; so please take into account. I didn't do either of these items because I don't know how yet to do the math for them!

THIS IS A VERY CONSERVATIVE SPREADSHEET AND SHOULD ONLY BE USED AS A GUIDE TO GIVE YOU A QUICK GLANCE AT YOUR SITUATION

For the SHOULD I BUY formula, I used an IF, AND statement to tell the program to analyze the data entered and look for a debt/income ratio of at least under 33% and 12 months liquid assets in reserves AFTER closing when advising you to BUY THE HOME!

In the real world, this is not set in stone! Obviously, if you have a debt to income ratio of 25% and only 6-8 months of liquid assets after closing, you might still be fine to pass a liberal co-op board; a condo will be fine! So, again, please use this spreadsheet accordingly!

In the future I will work on making this more complex so that you can enter in whether you are buying a condo or co-op (with their restrictions), and allow you to enter in a loan rate & homeowners insurance so that it is more accurate to your unique situation. For now, use as a general guide and email me if you have a specific question on the result that comes up!

ENJOY!

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Inside The Mind of an Active Buyer

A: Since I only provide you with my own perspective on so many topics, I thought it was time to go into the mind of an active buyer to discuss what was learned after months of property hunting and missed deals. Here is a Q & A from one of my 2BR buyers with a healthy budget who has seen a ton of property's and learned quite a bit since first starting.

Q: How long have you been actively looking for a new home?

A: We have been looking intensely since January

Q: How many property's have you seen?

A: I think we have seen AT LEAST 60. If a Condo or Condop is on the market between 800k and 1.5 million from 50th-96th & East End to Park, we have seen it

Q: What are the two most important property features to you?

A: Amenities: Doorman & Good Elevators

Unit Attributes: Layout and Condition (Of most importance Floor, Kitchen and Master Bath)

Q: Out of everything you have seen, how many property's are now gone?

A: If we have seen 60, at least 55 are now sold

Q: How many went into bidding wars that you know of?

A: Hard to say, but the of the four we have bid on, three went within a percentage point or over the ask

Q: How is Open House Traffic NOW as opposed to when you first started looking?

A: It’s starting to slow, but the change is VERY minor. I was also at a Open House recently that offered fresh baked cookies. My wife had to stop me from Bidding through the offer

Q: Do you feel its a BUYERS or SELLERS market?

A: It’s still a sellers market but my gut says we are starting to see a shift. And if you saw the size of my gut, you would trust it

Q: Do you feel like you have control during the negotiating process?

A: Absolutely. If you have no control over the bidding process than you lack the discipline needed to be a responsible consumer. Only YOU can make a bid

Q: What advice would you give new buyers that are just starting out?

A: Wait. Patience. Value the apartment and stick to your number. If it’s not this one, it’ll be another one. DON’T REACH.

Q: What aspect of the NYC real estate industry can change to benefit buyers?

A: First off, more cookies at open houses would be a tremendous help. We are in the market for a two bedroom Condo and see the following as items that will help buyers

- Credit Crunch (Hard to get a loan)
- Supply of New Construction coming on the market
- Weak Economy

Solid and with a hint of sense of humor. This couple truly is educated about their price point in the NYC marketplace and has placed bids on two properties that were unsuccessful. Does that mean they are bad clients? Maybe if I was a car salesman! But I respect their position. I respect their eagerness and motivation to see every new property on the market. I respect their discipline in the bidding process so as to maintain their search for value and not stretch above and beyond their means to buy a new home.

THIS IS WHAT IT TAKES TO BE A SAVVY REAL ESTATE INVESTOR IN NEW YORK CITY!

Of particular note is the quote, "If we have seen 60, at least 55 are now sold". Tells you something about the Manhattan market right now. Also, when asked about the bidding process and whether or not they felt in control, the response was "Absolutely. If you have no control over the bidding process than you lack the discipline needed to be a responsible consumer. Only YOU can make a bid". Good advice from a real buyer that I completely agree with!

Learn from what this buyer has gone through so far and was willing to share with us on UrbanDigs! A big thank you to the cowbell!

So, for all you buyers out there how does this compare with YOUR experience? Is it accurate? Is it way off? Please, do tell!

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$900K & No Shower Door...What Gives!

About 15 months ago, a buyer (and friend) of mine put down a deposit for an 787 sq ft one bedroom, 1.5 bath apartment at The Link, an El-Ad Properties development (El-Ad is also the developer for the Plaza).

A week before the closing, we went in for the walk-through to find that the sinks were misaligned, the painting wasn't finished, two outlets weren't working, and there was a plethora of other small problems. When we walked into the bathroom, we noticed that there was no shower door or shower rod. We were told, "This line doesn't have them."

The sales office bathroom had a shower door! The website shows a shower with a shower door! The offering plan doesn't say anything about the "A" line NOT having a shower door. There ensued a week-long battle between both sides' attorneys about who was responsible for paying for the shower door. In the end, my client had to pay to have a shower door installed because the developer refused to pay for it.

As I visit more and more new developments, my eye has become trained to look for the tiniest details. Many new development bathrooms no longer include towel bars, toilet paper holders, or shower doors! More and more frequently, I am finding that developers are cutting these out of their apartments, most likely to cut construction costs and keep their price per square foot lower.

How ridiculous is it for someone to pay $1,150/sq ft (15 months ago!) for a "new luxury condo" and not have a shower door or even a shower rod!? Here are some tidbits I have noticed with clients buying new developments.

On the positive side, I was thrilled to go to Maison East and Rutherford Place today and see that they do actually have toilet paper holders and towel bars. Maison East actually includes the washer/dryers - not just a washer/dryer hook up.

So what is a buyer to do?

TOES SAYS:

1. When buying in a new development, your attorney will read the offering plan, but to be on the safe side - you should read it also!

2. If the sales office says the building will be ready in the early spring, assume they mean the late summer. I have yet to see a building be ready earlier than what buyers/brokers are told.

3. If you get to your walk-through and find that the apartment still has work that needs to be done, schedule a second walk-through to make sure everything on the "punch list" has been completed. Postpone your closing date until everything on the punch list is complete if you have the luxury of doing so. Hopefully by delaying the closing you will expedite the process of getting things done.

4. Consider buying one of the apartments that was used as a model.

5. Assume that the hallways, lobby, fitness center, roof deck, and any other amenities will be completed at least 6 months later than when the building says they will be completed.

6. When buying off of a floor plan for a building that is not even in the ground yet, assume that the common charges being quoted to you are lower than what they will end up being when you move in. It is in the developer's interest to low ball the projected budget for the building to make the common charges look attractive to potential buyers.

In general, I love new developments and after the "dust settles," so do my clients. Young Wall Streeters in particular don't want to deal with the hassles of a co-op and they don't want to gut renovate an existing apartment. They want a gorgeous, never-lived in product. When you move into an apartment that has been lived in, there will always be something that needs to be renovated or fixed. Since the elevators, lobby, and other amenities are brand spanking new in a new development, you wont have to worry about assessments or common charge increases for any major capital improvements any time soon; unless of course there was shoddy work done that demands a redo.

By going into a new development purchase with reasonable expectations and a checklist of things to keep an eye on, you will have a much better experience! Best of luck in your search!

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Be Prepared When You Submit An Offer

A: I get asked this question ALL the time by my clients who are actively looking to buy an apartment, but don't even know what they are supposed to submit when they are ready to bid. Here is a breakdown for what is needed to submit a good-faith bid and make yourself look 'ready to go' so that the seller can take your offer seriously and counter appropriately. Originally Published July 28th, 2006

FINANCIALLY STRONG BUYERS CARRY MORE WEIGHT DURING THE NEGOTIATING PROCESS BECAUSE OF THE COMFORT THAT IS OFFERED TO THE SELLER DURING THE SALES AND BOARD REVIEW PROCESS. PAYING ALL CASH FOR A PROPERTY SHOULD DESERVE A 2-3% ADJUSTMENT IN PURCHASE PRICE IN FAVOR OF THE BUYER!

BEFORE YOU START LOOKING

NEEDED TO SUBMIT AN OFFER

WHEN OFFER IS ACCEPTED

1. Offering plan, 2 YRS building financials, board minutes, and contract of sale will be sent to your attorney listed in the offer letter.

2. Attorney does diligence and is expected to have contract ready to sign within 5 business days.

3. Buyer signs contract and sends in 10% deposit.

4. Seller countersigns contract and broker gets to work on board package.

5. Bank sends appraiser in and processes financing, if any. These docs (loan commitment + aztec forms) usually take the longest to get and are needed to finalize the board package before it is sent in.

6. Board package review.

7. Walk-through and Closing!

QUICK NOTES

1. If you are using a buyer broker, they will instruct you to have all of this ready as you get closer to submitting your bid.

2. If your buyer broker asks for a financial history, he/she is NOT being nosy! Rather, they are being professional and are looking out for your best interests as they try to show you apartments that you can actually afford and comfortably pass the board!

3. If buying a co-op, be prepared to hand in pay stubs, tax returns, employer letter, personal & business referrals, and hard copies to back up EVERY asset you listed! Being prepared makes for a smoother transaction so start saving these docs before you submit the bid!

4. Please educate yourself on what you can actually afford before you bid for a property! Try to keep the total living expenses (mortgage + maintenance + real estate taxes) UNDER 30% of your total take home monthly income. If you are over this #, think twice about what you are getting involved in!

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New Dev Sizing: Double Counting

A: Here's something most people do not know. When it comes to the quoted size of a new development condominium property, some developers include the portions of all common areas such as hallways, elevators, lobby's, roofdecks, etc. that are allocated to an individual unit; also known as 'common elements'. So, for anyone who went to new development sales office recently and was shown a floorplan that quoted a unit's size higher than it appeared to be on the layout, now you know why.Originally Published January, 19th 2007

First, a little investigating into what common elements are defined as. Its called Real Property Law 339-i and goes into detail how the condo unit-owner's common elements are calculated.

According to Habitat Magazine article titled, "Condominiums: A Primer To Ownership Interests":

An owner in a condominium has no lease. He/she actually owns a unit. That unit (usually an apartment), like a private house, is measurable. In Manhattan, such a unit is generally contained in a high-rise multiple dwelling. To get to that unit, one must walk through the lobby, ride the elevator, and walk down a hallway. These areas are used in common by other unit-owners to enter and leave their unit (apartment).

Additionally, embedded in the walls and floors of each unit (apartment) are girders, pipes and conduits, which service not only that unit, but also other units within the building. Accordingly, the legislature had to establish various forms of ownership so as to fully account for the ownership of the entire building in which an apartment exists. To solve this problem, they established "units" and "common elements." The units being the apartment in chief and the common elements being those portions of the building generally used by all other unit-owners to enter and leave each apartment, support the building, and bring all necessary services and utilities to a unit.

(a) proportion of floor area of the unit in relation to the floor area of all units

(b) fair market value of the unit in relation to the fair market value of all units

(c) equal allocation for each unit, or for each unit in a particular class

(d) floor space of the unit plus unique factors affecting relative values, such as availability of common elements for exclusive or shared use.

That last one seems relevant here. Let us review once more:

floor space of the unit PLUS unique factors affecting relative values, such as availability of common elements for exclusive or shared use

Noah asks Jonathan: Stuck here trying to write a post about how the total size of a condo unit is quoted by most brokers and new dev sales teams. Wanted to point out that this total size INCLUDES the unit's allocated percentage of the common elements, which is why the apt size itself may seem smaller than the quoted size. Can you please CONFIRM or DISPROVE what I just stated? Is my thinking here correct? I investigated Real Property Law 339-i for this post to back me up.

Jonathan responds: No thats not true. The % of common elements is based on the total square feet of the unit / total square feet of all units in the building. This percentage is then used to allocate expenses. Lately we have been reading about developers who have been taking liberties with including common area in the square feet calculation, (double counting), so it makes the square feet look larger, driving down the ppsf.

Thanks Jonathan for a detailed clarification of this new trend.

UrbanDigs Says: The total square feet quoted on some new development condominium property listings includes the total common elements allocated to the unit-owner. Be sure to ask the sales team if the new development you are thinking of buying into has included the allocated common elements into the unit you are considering. Your attorney could explain this in more detail especially when the offering plan is reviewed before you sign any contract of sale! Its all about being educated!

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Determining How Much To Put Down

A: It's a question that comes down to a few factors most important of which is your comfort zone and opportunity cost. How much money do you need in liquid assets AFTER closing to be comfortable given your current financial situation and lifestyle. Only you know how much money is coming in and being spent. But one thing I can tell you is that putting more money down at closing, if possible, is a good thing if your money is in cash earning very low interest!

While there is nothing wrong with putting down the bare minimum of 10% for a condo and 20% or so for a co-op, many buyers come to me with their full financial picture asking how much money they should put down past the minimum requirements.

First off, you need to crunch your own financial numbers and ask yourself a few questions regarding the property you are thinking of purchasing. Start with these questions:

1. How Much Will This Property Cost Monthly - A must! Do you even know what the property you are considering buying is going to cost you per month before tax benefits? Call your mortgage lender and get a rate quote based on your credit score and other factors and then go visit bankrate.com's mortgage calculator and plug in the numbers! Then add in the monthly maintenance and real estate tax payments (only maint. for co-ops as your taxes are included in this payment) to get your TOTAL COST OF OWNERSHIP!

2. How Much Are You Bringing In - Your debt/income ratio is a number that many co-ops look into to make sure that your total costs of home ownership do not exceed a certain portion of your take home income. Generally, you want to keep your total costs of living under 30% of your take home monthly income.

For example, if you take home $6,000/Month and the property you want to buy will cost you $2,000/Month, than your debt to income ratio is 33% (2000/6000 = 0.333333). This means that 1/3 of your gross monthly income is being put towards your living costs. You will also need to add in your minimum debt payments to this calculation; especially if you have high credit card debt or student loans (which is good debt and not looked upon as negatively as credit card debt in the eyes of board members).

What you are taking home in salary on a monthly basis largely determines how much of your assets you could put into your home. If you are making 10x your total cost of living payments, than obviously you could put down a lot more money at closing towards equity in the property as you would require less security in liquid assets afterwards due to your higher salary!

3. How Much Liquid Assets Do You Have - The biggie! You don't want to stretch yourself too thin but this post is for those in the opposite position and with suitable assets. To buy a new home you will have to pay transaction fees in addition to your down payment; nothing comes for free! If you are buying a condo than your closing costs will be significantly higher than if you are buying a co-op; so you must plan accordingly ahead of time.

First, determine what the TOTAL amount of liquid assets you have. This includes all asset classes that are easily convertible to cash. For sake of this discussion, lets call your assets 'A'.

TOTAL LIQUID ASSETS = A

Quick Tip: 401K other pension accounts do not count unless you have full access to this money w/out penalty. Real estate equity is also considered illiquid until you cash out, however you can pull out equity via a HELOC to cash into your checking account for another property purchase. If you are doing this be sure to take care of it before you buy the new home and already deposited the monies into your liquid accounts.

Now that you know your total assets, you must determine how much the minimum down payment + closing costs will eat up at closing; you do this so you know what you have leftover and how much of that you should put towards equity. The best thing to do is to contact your real estate attorney for a breakdown of closing costs for your specific property in question. Lets call your total closing costs estimate 'X'.

DOWN PAYMENT + CLOSING COSTS = X

4. What's Left - Do some math! Take your total liquid assets and subtract the down payment and closing costs to see what is leftover!

A - X = ?

For Co-ops: You will need to show 1-2 years of liquid assets AFTER closing to the board for review and approval. This is generally a bare minimum. Some co-ops request higher amounts. You can find out exactly what you need to pass a board by asking the listing broker of the property; specifically you should ask..."how much salary and liquid assets after closing does this board look for in prospective buyers?"

For Condos: You will need to show a few months at least of total monthly payments in liquid assets after closing for the listing broker to pre-approve you. Yes, its a condo and there is a right of first refusal process, but that does not mean you can put all your liquid assets into the down payment + closing costs! You still need to show something afterwards, although not as much as a co-op would demand.

COMFORT LEVEL & ROI

Still reading? Good!

Now that you know how much money you will have leftover after closing there are two main items you need to look into. First is your comfort level. Based on what your take home pay is, your expected total cost of living & other debts, and closing costs how much money do you need in your accounts after all is set and done to feel safe?

If your salary is just making it to cover your living costs, I would certainly want to have at least 8-10 months of living costs in liquid assets. If you have more than that, I would strongly consider putting more money down at closing so that your monthly living costs are lower, bringing your debt/income ratio down as well! This will make your daily life more comfortable knowing that your salary is more comfortably covering your living costs.

If your salary is easily covering your living costs and your debt/income ratio is below 30%, than you need to see how much your liquid assets is returning back to you via investments? If your money is in stocks or short term CD's, than you are probably used to a 5-8% return on your investment with stocks being the higher end. However, if your money is sitting in a checking account earning 1%, than you would be much better off putting MORE money down at closing and taking out a smaller loan!

The key here is understanding that you are paying interest on the loan amount you take out. So, if your investments are earning that interest or more for you, than it would be better to leave them as investments and utilize the tax benefits on the interest payments of the loan. However, if your money is earning little or no interest, than you would be better off putting more money into your down payment and taking out a smaller loan!

UrbanDigs Says:

PUTTING MORE MONEY DOWN WILL LOWER YOUR MONTHLY PAYMENTS AND AMOUNT OF TAX DEDUCTIBLE INTEREST YOU END UP PAYING. YOU CAN ALWAYS TAP INTO THIS ADDED EQUITY AT A LATER TIME BUT YOU MUST CONSIDER THE OPPORTUNITY COST OF PUTTING MORE MONEY INTO REAL ESTATE EQUITY AS OPPOSED TO WHAT IT OTHERWISE WOULD BE DOING FOR YOUR PORTFOLIO

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Timing The Market & Monetary Policy

A: Timing the housing market is extremely difficult but not impossible. You have to understand that like in poker, you'll never time it perfectly. In no-limit texas hold'em (a poker game that is just way too much fun), I put my bets on my skill of play and observations at the table rather than in luck. I strongly believe that I can outsmart my opponents either before the flop or post flop regardless of the cards I'm holding. With respect to timing the real estate market, its kind of similar. You'll never be perfect and like in no-limit hold'em, you will get beat sometimes by NOT timing the market perfectly. Thats just the way it is. However, by using some savvy observations as to where monetary policy is headed down the road you can get close to timing the market. Here is why! Originally Published August 1, 2006.

Monetary policy is set by the FOMC and fed chief Ben Bernanke to control price stability and fend off inflation. The goal is to keep the economy growing, fend off inflation, and price stability in our currency. Sometimes it all doesn't work out that way as the real world does what it wants. But I do know this:

AS RATES RISE AFFORDABILITY GOES DOWN AND BUYERS CAN BUY LESS HOME IN TERMS OF DOLLARS. AS RATES EASE AFFORDABILITY GOES UP AND BUYERS CAN BUY MORE HOME IN TERMS OF DOLLARS. THIS CORELLATION BETWEEN MOVEMENT OF INTEREST RATES AND AFFORDABILITY HAS BEEN PRETTY CONSTANT IN PAST HISTORY.

Now, lets look at a chart of the last 5 years or so of both monetary policy and the growth in the housing market. First monetary policy since early 2000:

Now, lets look at a chart of the US housing market since early 2000 and see if we can deduce any information (this was only chart I could find so it will have to do):

Hmmm. So, monetary policy bottomed out mid-2003 after undergoing a massive 600 basis points rate easing cycle (thats 6% to all you home gamers). Notice how the housing price chart didn't really show a huge jump in gains from 2000-2003 (jump from 165K to about 190K). The real jump occurred between mid 2003 and late 2005, a good two and a half years AFTER monetary policy bottomed out. Therefore we can deduce that home buyers between late 2001 and early 2003 timed the market perfectly (that is if they chose to sell recently or are in the process of selling).

Note that this time period of late 2001 to early 2003 represents the NEARING OF THE END OF THE RATE EASING CYCLE & THE BOTTOMING OUT OF THE FED FUNDS RATE. Since monetary policy is lagging in its effects, it is fairly safe to say that a GOOD TIME TO BUY IS WHEN THE FED IS NEARING AN END TO A RATE EASING CYCLE, as the results of the after-effects are shown in the above house price chart.

On the flip side, note that the drop off in house prices since early 2006 represents THE NEARING OF THE END OF A RATE TIGHTENING CYCLE. We are still waiting for the results of what happens AFTER the fed finishes their rate tightening cycle. However, we can safely say that a GOOD TIME TO SELL IS WHEN THE FED IS NEARING AN END TO A RATE TIGHTENING CYCLE.

Look here for a visual representation of what I just said:

Make sense? Read it all again if your a bit confused. The effects of monetary policy are lagging so when the fed cuts rates to stimulate the economy by making money less expensive to borrow, the real world doesn't see the effects for a good year or so. As in recent past history and dictated by the charts above, it was from early 2003 to late 2005 that the housing market saw incredible gains, about 2 years AFTER the fed starting cutting rates and 2 years AFTER rates bottomed out! Not an exact science or a crystal ball, but certainly a good guide!

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No Finance Contingency Comeback?

A: Say it ain't so! In a clear sign that the Manhattan real estate market is in full frenzy mode, I just experienced my first deal where the seller is requesting a removal of the 'finance contingency' that is part of the contract of sale. This type of tactic was very common in the months of JAN-APRIL of 2005 when bidding wars were everywhere and a good product was very difficult to find. While I won't go out and say that today's market is exactly like it was 2 years ago, it is active enough that one seller is risking a deal by asking for a No Finance Contingency contract.

First let me just define a few things here for you:

No Finance Contingency Contract of Sale: Every contract of sale includes a financing contingency that simply means the deal is contingent on the buyer obtaining financing at the appraised purchase price. Should the buyer not be able to obtain a loan commitment, then the deal falls apart as stated in the contract of sale and the deposit is returned to the buyer. When a seller asks for a NO FINANCE CONTINGENCY deal, in essence they are requesting to REMOVE the financing contingency from the contract of sale putting pressure on the buyer to obtain a loan to close the deal. Should the buyer in this case not be able to obtain a loan commitment, than the buyer must come up with the cash to proceed with the closing or risk losing some/all of their deposit.

I wrote about this on March 1st, 2006 in a post titled, "No Finance Contingency Explained". In the comment thread was a response by NYC real estate attorney Peter Graubard, who I recommend often to my clients. It stated:

When a buyer agrees that there will be no financing contingency, the financing contingency clause that is already in most contracts is simply omitted.

All mortgage commitments have conditions attached to them that need to be satisfied prior to closing. The conditions range from an appraisal of the apartment, to the approval by the bank of the co-op or condominium, to something that needs explanation by the borrower. Also, if a mortgage commitment letter is issued by the bank, but the borrower's financial condition takes a turn for the worse after the commitment is issued, but before closing, the bank may withdraw the commitment (i.e. if the borrower lost his/her job prior to closing). In this event, a buyer who has signed a non-contingent contract is in jeopardy of not being able to close and losing his/her contract deposit.

First off, you should ask your lender to investigate the property/building in question. According to Wells Fargo Private Mortgage Banker Michael McGivney:

"I like to remove the risk for the buyer at the very beginning by providing a loan commitment rather than a pre-approval before any contract is signed. That way the buyer knows ahead of time what their risks are and can take comfort in proceeding with a No Finance Contingency deal."

1. Land-lease Building - Building lease must be reviewed and updated by lender
2. Property Valuation - Appraisal must come in at asking price. If it comes in below, the lender will only commit to a loan at the appraised price leaving the buyer to make up the difference at closing
3. Owner/Occupancy Rate - Lenders like to see a building with an owner/occupancy rate above 70% or so. Once you get below 60%, some lenders might not be able to produce a loan commitment for the buyer as the risk of default in the building due to a larger # of investors is higher. Read my post on Owner/Occupancy Rate Explained.

Here is my advice for the prospective buyer in the deal:

Buyer is Confident in Obtaining A Loan: Getting a loan today is still very easy as tighter lending standards for the most part have not hit many of the major lending institutions. So, it really boils down to your own financial situation. Assuming you pass the credit, income, and assets part of a lenders review, ask your mortgage broker to review the building in question. If possible, try to get a commitment rather than a pre-approval letter from your lender. Being upfront with your lender is very important in this situation. Tell them everything about you, the no finance contingency deal, and the building in question.

Buyer is NOT Confident in Obtaining A Loan: If you have bad credit, a non stable or low paying job, and little assets than you should be concerned about this type of a deal. If anything, discuss the situation with your lender and reconsider the seller's request for omitting the finance contingency in the contract of sale. Everything is negotiable, especially this, and in the face of losing a deal I don't see how a seller can rationalize passing up a market valued offer simply because they want a NO FINANCE CONTINGENCY deal. Remember, it's a strategy that sellers can get away with in a sellers' market where if they pass on the deal, they will have no problem finding a similar buyer.

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Blogging For Transparency: NYC Heats Up

A: Many of my colleagues just couldn't understand my passion for blogging and taking 2 steps back in my own business to put the time into what I consider making Manhattan real estate more transparent! That is why I do it; to bring to you street level information on what is going on right now in New York City real estate. Is it a buyers market, a sellers market, who has control, etc..Hopefully, I've gained a level of trust with my readers after 20 months of doing this and the thousands of hours I put into my content to try to educate you on investing in this marketplace. But if didn't, perhaps the NY Times Page one article from 2 days ago will help.

Thanks to Jonathan Miller for pointing this one out as I actually missed the article.

HOUSING MARKET HEATS UP AGAIN IN NEW YORK CITY

Since the new year began, a burst of activity has broken out in Manhattan and several Brooklyn neighborhoods as New Yorkers frenetically hunt for co-ops, condominiums and town houses, sending prices higher despite sluggish sales in many other cities.

Preliminary indications from real estate firms showed that this increased activity, with open houses jammed and bidding wars taking place, has occurred in all price ranges -- from tiny studios in the East Village to red-brick mansions on the Upper East Side -- in counterpoint to the heavily weighted record sales of luxury properties that led the market in the late summer and fall.

For those of you who read UrbanDigs daily you would have known this street level observation since January 10th, and hopefully heeded my advice:

January 10th, 2007 - Market Report: Buyers Out in Full Force

AS A BUYER - Don't try to low-ball or wait out a housing downturn if you plan on signing a contract in the next 1-3 months! If you do, you will NOT get the response you hope for as the seller's broker most definitely is reporting the rise in activity to their client. If you choose to wait until March or so you may not find the inventory as attractive as it is today. If all this buyer activity results in what I expect it to, you will later on see sales volume come in very strong during the months of January & February, removing a lot of unsold inventory that has built up over the past few months.

AS A SELLER - No one can tell you when to sell your home. That is your call. But, if you have been planning on selling your home in the next 3-6 months, it might be worthwhile to get it ACTIVE NOW and get in on some of this action! You may even be able to price slightly higher than you were original thinking to test out the market, as it is times like these (that is, a surge in buyer demand) where sellers get their price or more a good percentage of the time. Don't overprice tremendously unless you have a huge terrace, incredible views, or an unbelievable renovation (although the first two are the best reasons for pricing higher as I'm not convinced buyers will pay top dollar for a very high end renovation job).

February 12th, 2007 - Market Update: Very Active Buyer Pool

February 16th, 2007 - NYC Housing Defies Odds

Even Peter Comitini reported on this surge in activity in early January as well!

January 9th, 2007 - Open House Attendance Soars

But the most useful report was the first one from January, 10th! It's now 6 weeks later and if you didn't take that advice, especially if you were a buyer with a time pressure, you are kicking yourself with the strong competition and lack of inventory to choose from right now. Hopefully, you aren't in that situation though.

UrbanDigs Says: I hope I don't need to prove myself anymore to my readers! I'm an honest, ethical, and passionate blogger who just gets a high out of innovative ways to make real estate more transparent and to discuss tips to best profit from it! The internet is a great thing and for those seeking to profit on New York City real estate, the blogosphere offers you real time opinions and observations about the market that you are considering investing in. Times are changing and you should change with them! In the end, a more transparent real estate market will only help you make more educated and timely decisions! Blog on!!

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Maintenance Charges: The Hidden Devil...!

A: They are. If your monthly maintenance + real estate charges equal more than 1.65x the total square footage, then you better make sure the asking price of the property has been lowered to compensate for the higher cost of carrying the apartment! Read this post to see why! Originally Published November 29, 2005.

The situation is experienced by almost all buyers of NYC real estate at some point in their apartment search.

How Does Total Monthly Expenses Affect the Value of an Apartment?

THE MONTHLY COSTS TO CARRY A PROPERTY IS DIRECTLY RELATED TO THE AFFORDABILITY OF THE PROPERTY ON THE OPEN MARKET. PUT SIMPLY, THE HIGHER THE MONTHLY COSTS TO MAINTAIN A PROPERTY THE LESS AFFORDABLE THE PURCHASE PRICE WILL BE TO THE BUYER POOL

Your monthly maintenance charges consists of different fees depending on whether you are buying a Co-op or Condominium in NYC.

For CONDOMINIUM: Includes fees associated with the overall uptake and maintenance of the building and its services.

For Co-op: Includes fees associated with the overall uptake and maintenance of the building and its services + real estate taxes.

Since Maintenance Fees are variable fees, chances are you will be faced with Rising Monthly Maintenance Fees at one point or another. So, in order to make a Wise Investment with your 100's of Thousands of Dollars, it is important to understand why they fluctuate and its effects...

Each building is like a different company, lets say a publicly traded company for arguments sake. Some publicly traded companies, like for instance INTEL CORP. (NASDAQ: INTC), owns a great place in the market for semiconductor chips which can be analogous to owning an apartment in a great location of NYC; lets say 84th & Madison Avenue. Chances are, this will not change unless an outside force, such as a natural disaster should hit the area.

The marketing and branding that INTEL spends so much money on, can be analogous to the outside appearance of the building, or building amenities. Is the lobby extravagant? Is there a roof-deck? Gym? Doorman? Well, you get the picture.

Finally, the quarterly earnings report that INTEL releases every 3 months can be directly compared to the 2 years of financial statements that the buyer's attorney will go over before advising you to SIGN THAT CONTRACT!! Needless to say, I hope you have a INTEL type of report, rather that one that resembles ENRON or WORLDCOM!!

Starting to make sense to you?

The building's maintenance fees have a direct relationship with the financial health of the building you are about to buy in. If there were major repairs recently on the building such as roofwork or facade repair, than chances are the operational costs of these projects took a nice chunk of change out of the building's reserve fund. For all you first timers out there:

BUILDING RESERVE FUND: Monies put aside by the building, and paid by the owners or shareholders, to be used to pay for the overall maintenance and upkeep of building and its services. Building amenities such as a 24HR Doorman, gym, or roofdeck, will increase the overall costs of running the building and these services.

TIP: The building should have at least 4 months worth of overall monthly building expenses in the reserve fund for future repairs. Anything less, raises a red flag, and leaves the board little options OTHER THAN charging a maintenance assessment at some point down the road!!

For me, I like to use the following formula for assessing whether or not an individual apartment's maintenance charges are a signal of strong financial sense.

MAINTENANCE FEES/TOTAL SQUARE FEET

For instance: A 800 Sq. Ft. 1 Bedroom apartment in a Co-op Building Charges $760/Month in Maintenance.

760/800 = 0.95

NOW YOU TRY IT AT HOME & USE THIS GRAPH AS A GUIDE!

LOW MAINTENANCE/STRONG BUILDING FINANCIALS = UNDER 1.15
AVERAGE MAINTENANCE/AVERAGE BUILDING FINANCIALS = 1.15 - 1.65
HIGH MAINTENANCE/WEAK BUILDING FINANCIALS or UNDERLYING ISSUES (such as a landlease) = OVER 1.65

*NOTE #1: Since Co-op Maintenance Charges include your real estate taxes, you must COMBINE the monthly carrying charges (CC) and the real estate taxes when calculating for condominiums.
**NOTE #2: Just because you came out with a figure over 1.65, using that formula, doesn't mean your building is about to go down the toilet! There can be a number of reasons for this, such as recent building work done that led to a temporary monthly assessment. It just means that the VALUE of the property poses a risk at resale, due to the high monthly costs, and will result in a lower purchase price than apartments that have a maintenance score under 1.0.

In the end, you MUST buy the best VALUE FOR YOUR MONEY, that has the best chance for APPRECIATION IN RESALE, come time for you to sell.

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Holding The Crystal Ball

A: Do you hold the crystal ball? Does Jonathan Miller? Does Brownstoner? Does Grunt? Does Sellsius or Rain City Guide? Perhaps True Gotham does? Housing on a national level is falling, not so in NYC real estate, so maybe BubbleMeter is holding the crystal ball. What about the Digs? Nope. Not me. No one is holding the crystal ball and with everything that all these great bloggers write about you must keep your focus on one very important thing: EVERYONE NEEDS A HOME! IS OWNING THE RIGHT CHOICE FOR YOU?

Don't get caught up in the whole debate right now that is going on about the nationwide housing market. If you plan on owning for medium to long term, let's say at least 4-5 years, then you should seriously consider buying over renting as the tax benefits, equity building, and ultimate price appreciation over the longer term will more than make up for any short term pain you might endure knowing that your house is worth a bit less than what you paid for it.

WHO CARES! Your NOT planning on selling! You need a home to live in! And you can afford to live there comfortably! Who cares what the short term price fluctuations are for your home. And to boot, rental prices are at a peak after rising for the past 3 years straight! Rental inventory is so low right now that it is almost gauranteed that you will wind up settling for an apartment you don't really like, in a neighborhood that wasn't your first choice, and at a price far higher than you first thought!

Maintain your investment focus so that you can make clear, transparent decisions that suit your own needs best! Some of these include:

Fact is, inventory levels for the sales market right now are high enough to find good deals! And, mortgage rates have ticked down over the past 3 months or so falling from July highs of about 6.79% to current levels about 6.375%. The main reason for this drop is falling yields on treasury's due to the fed's PAUSE from a long interest rate hike campaign. Basically the bond market is betting on lower rates in the near future; possibly due to a recession predicted to hit the country over the next year or 2.

While these temporary lower rates will not SAVE the housing market from a short term correction, it does give potential buyers a good case when deciding whether to rent or own. Since rates are still historically low, the numbers might make more sense to buy.

Forget predictions or reading every article that comes out on the housing market and instead focus on the right or wrong reasons to buy a new home. Some of these include:

RIGHT REASONS TO BUY

1. Because you've worked hard over the past few years and are now earning a great salary that is only expected to continue to rise.
2. Because your credit is perfect and you can lock in a great rate.
3. Because you have been saving up cash for a while now and can easily afford a down payment on a home and still have enough liquid assets leftover to cushion your lifestyle.
4. Because you know you will NOT be selling within 3 years.
5. Because you love where the new home is and are comfortable with the asking price.

WRONG REASONS TO BUY

1. Because you just got a new job and are making more money than you ever did before.
2. Because you saved up enough money to afford a down payment but will be broke after that.
3. Because you refuse to rent and through away money.
4. Because you are unsure of where you might be 2 years from now.
5. Because you are unsure of your job security.
6. Because your family or friends own and are telling you to buy also.
7. Because you found an apartment with a terrace that you MUST have.
8. Because your credit is poor.

Be smart. Buy for the right reasons. If you are questioning any aspect of buying a new home, talk to your accountant or financial planner to get a devil's advocate side of the equation. Who knows, maybe they will save you from an inevitable financial disaster!

For me, that means renting as I am an independent contractor whose salary is unknown and job security non-existent. Furthermore, I honestly don't know where I might be in 2 or 3 years being that I just got married and the kids are now a more consistent discussion. So, I have 2 pretty big reasons against buying right now that could cost me tens of thousands of dollars if I end up buying today and selling in 2 years and the housing market remained flat during that entire time; the transaction fees alone would cost me tens of thousands and with no price appreciation at resale, I lose money in the end.

So, I'll rent and get 5.5% in a money market account for the time being and look to buy again in the near future when I know my future plans are more concrete and my job/sales business, or at least salary, is higher and more transparent.

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NYC Real Estate Data Book 2007

A: Thanks to The Real Deal's Data Book 2007 for compiling this set of data for the New York City real estate market in 2006.

* The most expensive zip code in New York City is 10007.
* In 2006, the median apartment price for Manhattan was $750,000.
* The apartment inventory in New York City is following the same seasonal pattern as it has since 2001.
* Average price per square foot in Manhattan for an apartment is $984.
* Average Manhattan apartment price is $1,214,379.
* The average cost for a two-bedroom rental is $3,200 a month.
* Total population in New York City is 8,000,000 people.
* There are roughly 2,000,000 rental units and 925,000 owner units.
* The Bronx, which has roughly a million more people than Staten Island, has roughly the same number of owner-occupied units: 102,000 and 103,000, respectively.
* There are 1,000,000 rent-stabilized apartments and 59,000 rent-controlled apartments in New York City.
* There are roughly 30,000 real estate sales agents and brokers in New York City.
* The biggest developer in New York City is The Related Companies.
* There are about 20,000 condos units that were planned for development in Manhattan for 2006.
* The total number of units planned for all the boroughs is 32,191.
* The largest office landlord in New York City is Tishman Speyer with 40.5M square feet of space, with almost half in Manhattan.
* World Trade Center site leaseholder Larry Sivlerstein owns 8,000,000 square feet.
* Manhattan's biggest office tenant is Citigroup with 5,000,000 square feet.
* The biggest sale in the history of the city happened when Extell Development, a newly formed group, bought a 77-acre lot in Manhattan for $1.8 billion from Donald Trump.
* -The top office lease for New York City was Morgan Stanley, leasing close to 500,000 square feet from Wachovia.
* Average asking rent in Manhattan for office space, depending on the neighborhood, ranged from $28 to $60 a foot.
* McDonalds is the largest retailer in the city, with 284 stores. There is 102,000,000 square feet of retail space in New York City.

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More Transparency Can Clean Up Industry

A: I recently had a realization as I was submitting a bid on behalf of a client and was told by the listing broker that a higher offer was submitted and that we had one chance to up our bid. I was told the offer was accepted already, but that no contracts were sent out so that my clients had one last chance to get the property; so we upped our bid and I had to advise my client on the hardest aspect of my job --> how high to go. And then it dawned on me. If there were only a one-stop site that has complete data on co-op and condo sales in Manhattan, only then will I be able to see whether or not the listing broker was being honest or unethical.

A little over a week ago the NY Times had a story called, 'Agents of Angst', which went into detail on how real estate agents are a step below used car salesman in terms of reputation. Here is an excerpt:

A Harris poll conducted last year that ranked occupations in terms of prestige placed real estate brokers at the very bottom of a list of 23 professions. (Firefighters and doctors were at the top.)

To start with, brokers are salespeople, so buyers with suspicious minds would naturally suspect brokers of trying to sell them something they don't necessarily want or need. But brokers also admit that some real estate agents help to perpetuate stereotypes with classic bait-and-switch schemes and by putting their own desires to close a deal over a client's best interests. The fact that brokers themselves sometimes find it hard to trust one another only compounds the level of suspicion in real estate.

Think about it. If an agent knew in advance that the actual price of the property would eventually be made public and be accessible to anyone with internet access, than how could they get away with unethical behavior when the deal is closed? The situation would in essence change the playing field, I would think, as agents could now be accused of unethical behavior or not observing their fiduciary responsibilities to their client (the seller) and risk losing their license and credibility in the field. Well, assuming they have credibility.

For example, consider this situation in a world where ALL transaction data is made public within a week of closing:

Sally Seller Broker is hired to market property at $500,000 ---> Buyer Broker Bob submits a bid of $465,000 on behalf of their client ---> Sally Seller Broker receives bid of $455,000 from a direct client with NO buyer broker ---> Sally Seller Broker ONLY submits direct client's bid to seller ---> Deal closes for 455,000

Although the deal is now closed and Buyer Broker Bob can't do anything to reverse it, he will be able to see very clearly that Sally Seller Broker acted in their OWN best interests and never disclosed a competing bid to their client, the seller. Sally Seller Broker was acting this way to ensure a higher commission for herself; and the seller never had a clue. But Buyer Broker Bob does and can now contact REBNY, DOS Licensing Services, MEDIA outlets and perhaps even the seller if he kept proof of the bid being submitted before any contract was signed.

Perhaps if Sally Seller Broker knew in advance that unethical behavior (that caused this industry to get such a bad reputation in the first place) would be easily revealed at the close of the deal, they would be less likey to commit such acts and more likely to behave ethically and in their clients best interests. Which is all we can strive for.

SITES TRYING TO HELP

Streeteasy.com - One of my favorite NYC real estate aggregators and search engine. I use it quite often for my own clients and find it very useful. Recent upgrades in services offered allow you to pay $10/mth for access to comparable sales data collected.

ACRIS System - City provided Automated City Register Information System. Has co-op sales and is free to use. Need to know LOT/BLOCK # or NAME of buyer. Cannot enter building address.

PropertyShark.com - All purpose building/unit data resource. Co-op comps listed by date after you go in and select a neighborhood.

UrbanDigs Says: Its hard being an honest salesman! But hopefully help is on the way. By making real estate transactions completely transaparent, brokers, buyers, and sellers will be able to tell whether or not their higher offer was ever submitted to the seller by the hired listing broker. Should you find that the deal did in fact close for a sizeable amount UNDER what your client's bid was, and you know for a fact that your bid was submitted BEFORE any offer was accepted and contract signed, well then you now have a complaint to file against the unethical party involved as long as you have the records to prove it. Hopefully this new world of transparency that is soon to be upon us will help CLEAN UP this industry of some sorts of foul play via the realization that it won't be so easy to get away with anymore!

Now that my client's bid of $1.7M is in, its just a waiting game to hear whether it was accepted or not. Should it not be accepted, I certainly will keep my eyes open to what this apt eventually sold for by looking it up on public records. Only then will I know what we were up against and whether or not there really was another higher bid submitted!

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A Caution Against Buying Too Soon

I have an amazing exclusive at 7 W 96th Street, a 600 sq ft one bedroom for less than $417K. The apt is crying out for a buyer to give it just a little TLC. I like to say that each apartment has a story, and this apartment's history is long and a little bit sad.

In 2005, the sellers were working with a broker who put a student with parents paying cash for the apartment up for board approval. They went to contract at $520K when NYC was at the absolute height of the market. The sellers, thinking they were going to net over $460K from their sale, bought a new apartment.

The building does not allow parents buying for students, so naturally, the buyer was turned down. The sellers put the apartment back on the market, this time with the building's management company as the listing firm.

A Toes Tip: In general, I caution against using a small management company to market your apartment. Typically they have few sales agents and no one has ever heard of them so no one is visiting their website to check out their new listings. So unless a management company sales agent is very aggressive with NY Times and Craigslist ads and open houses, and keeps the listing very current in the Real Estate Board of New York's (REBNY's) database so other brokerage firms know about it, the apartment is not going to get very much exposure. The less exposure your property gets, the lower the price it is going garner.

The apartment sat on the market for months, beginning a steady price decline as the media touted the "Bubble," which scared buyers out of the market. Finally, the price landed at $425K, and remained there for several months.

After an apartment is on the market for about 8 weeks, buyers and brokers start thinking that something is wrong with it, and they stop showing it unless there are significant price drops. A full year and a half after the apartment went on the market, my manager brought me in to take on the listing because I have had success in reviving stale listings. I took on the listing at the same price as the last broker, $425K, and began my usual marketing blitz. Here is the listing today:

Asking Price: $417,000
maintenance: $784
Doorman: Yes
Size: Aprox 600 sft from floorplan
PPSF: $695
Flip Tax: None
Pre-War: Yes

**OPEN HOUSE** Sunday Feb 11th, 2:00 - 3:00PM

I had a professional photographer take photos and do a virtual tour, sent a mailing to the three closest buildings, put it on our website and in the NY Times print and online editions, advertised frequently on Craigslist, and featured the apt prominently in my e-newsletter, which goes to 2,350 friends, clients, and other contacts.

The result was quite incredible:

1st Open House: Over 30 people

2nd Open House: Aprox 20 people

3rd Open House: Aprox 20 people again

Only 3 buyers had seen the apartment in its past life on the market, which had been just 2 weeks before.

The rule of thumb in the industry is that if 30 buyers see an apt and/or 30 days go buy, and you don't receive offers near the asking price, you are overpriced. Offers came in below $400K, but the sellers, having taken a bridge loan to buy their other property, simply can't take anything that low. I requested that the sellers drop the price to $417K, which was the lowest they were willing to go. Essentially, unless they get a certain price for the apartment, they are going to be in debt.

For every open house, I wash the windows, I put out flowers, I light scented candles. The apartment is as "staged" and as "renovated" as the seller's are willing / able to do, and really, it looks quite lovely. I've communicated the number of showings, feedback from brokers and buyers, sent them comparable listings, and educated them on the current market conditions.

Buyers are VERY savvy these days and they simply will not buy an apartment for more than what they think it is worth. So at this point, I am at a loss of what else I can do and I'm open to your suggestions!

TOES says: Make sure you and your broker know what will and will not fly with your building's board. If a candidate is borderline, run the info by the management company and see if they will give you a preliminary yea or nay.

TOES says: Don't buy something new before you know that your buyer has passed the co-op board. You can always try to negotiate terms in the contract allowing you to "rent back" from the buyers for a certain period of time so that you can close on a new home.

TOES says: If you must buy something new before knowing whether your buyer has passed the co-op board, be extremely conservative with what you think you are going to net on your sale. Have a contingency plan in case your buyer doesn't pass the board and you have to sell the apt at 20% below what it is in contract for. Investigate taking out a home equity line of credit on the apt and renting it out.

TOES says: Sellers: If 30 people have seen your apartment in 30 days on the market and you are not getting offers near the asking price - your apartment is overpriced for the current market conditions.

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Owner/Occupancy Rate: Does it Matter?

A: YES! If the Owner/Occupancy rate of the building you are about to buy into is less than 60% than it will raise a red flag in the eyes of most lending institutions which could lead to big trouble in getting a loan commitment letter!

Owner/Occupancy Rate:The percentage of units that are currently occupied by the owner or co-owner in the building, even if it is mortgaged or fully paid. The higher this percentage is the easier it will be to receive financing from your lending bank.

The thinking is this: If a building has most of its units leased out or occupied by someone other than the owner than the risk of a maintenance payment default is higher. Also, it tells a story about the building itself. Why don't owners want to live in this building? In the eyes of a lending institution, a building with a low owner occupancy rate is a higher risk investment that they may not be willing to lend on.

As a buyer, you should ask this question to the seller broker who is supposed to know what this percentage is. If they do not know, then ask them politely to find out. Some logic applies here as well; if the co-op doesn't allow subleasing than chances are the owner occupancy rate is very close to 100%.

UrbanDigs Says: If your intentions are to buy a investor friendly property (either co-op, condop, or condo) find out what the Owner/Occupancy rate is. If it is between 50% - 60% you should be OK although some banks may not lend on that building (be sure to give your mortgage broker the building address so they can check if the can lend on it). If it is lower than 50%, than buyer beware. Not only will you have trouble getting a committment from a lending bank, but you will have the same trouble finding a buyer when you go to re-sell. If a buyer's bank won't lend on your building, well then you are fresh out of luck and will have to lower your asking price to compensate.

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Fear of First-Time Homeownership

A: I have a client to thank for this post; you know who you are! Being a first time buyer could be a very scary thing. You start to think about housing bubbles, giving away tons of money in down payment and closing costs, feeling broke again, and getting involved in a huge investment without knowing everything you really need to know. Trust me I understand. Also trust me when I say that these feelings are normal. As long as you understand whether buying is the right decision for you, what you can really afford, and then focus on a best of breed housing product after seeing 10-15 property's, you'll do just fine!

It's all about building wealth! Owning your home for the most part will cost you more money than renting on a monthly basis, so you should understand WHY it is that buying makes more sense than renting! In short, you should seriously consider buying instead of renting if, and only if:

1. TIMELINE - Timeline to own is greater than 4 years OR Rental Investment Strategy
2. JOB / SALARY - Your job is secure and your salary affords a debt/income ratio under 30%
3. LISQUID ASSETS - You have enough liquid assets AFTER closing to cover at least 6 months MORTGAGE + MAINT + TAXES payments (family gifts are fine as long as they stay with you after closing and are truly a gift given to you to assist in buying your first home)

These 3 criteria are MUST's in one's decision to buy or rent in a particular marketplace. After that, it boils down to how happy you are in a particular neighborhood, planning ahead for lifestyle changes (such as a having a baby), and knowing how much you can afford!

You need a timeline to own over greater than 4 years to be able to ride out any short term bumps that the housing market may experience. Timing the market is very difficult and by having at least a 4-5 year timeline to owning, you would most likely be able to sell your home when you want to and NOT when you have to. Sellers who MUST sell within a certain timeframe rarely get top dollar at resale.

Quick Tip: If you have the 'live-in then rent-out' strategy in mind, try to live in the apartment as your primary residence for the first 2 years. That way, you can rent it out for another 2 years and if you decide to sell it after the 4th year, you will qualify for the primary residence tax benefit for any gains reported at resale on the transaction. You must live in the property for 2 out of the last 5 years as your primary residence to qualify for this tax break.

Your job MUST be secure! No rocket science here. As long as your job is stable and your income is growing, than putting your money into a home you own rather than a home you rent, is always a better long term play. Your monthly total living expenses + other debt expenses should not exceed 30% of your take home pre tax monthly income. Closer to 25% is more ideal. If you are buying a condo, there will be little review of your finances so its up to you to determine whether you are buying within your means.

Quick Tip: If you are self-employed, be sure you have twice as much liquid assets in reserves AFTER closing than normal just in case you have some temporary down time of income.

Finally, having enough liquid assets to be able to cover the down payment PLUS closing costs is a MUST. But having enough liquid assets AFTER these costs, is a bigger MUST! Be sure to have enough reserves in liquid assets to cover at least 6 months of living costs of the new home. If it cost you $3,000 a month to live in your new home, than you should have at the very minimum $18,000 in liquid assets after closing. You'll need more to pass a co-op board!

Here are some must-reads that I wrote in the past if you are considering buying vs. renting.

Are You Ready To Buy?

To Buy or Not To Buy: Here's What To Do

High Monthly's: Find The Discount

How To Retain The Most Resale Value

UrbanDigs Says: Your first year as a homeowner should be a rebuilding year. Sacrifice your vacations, night-outs, gifts to friends/family, and any unnecessary spending so that you can SAVE MORE MONEY to rebuild your liquid accounts a bit after plunking down most of your money into your new home. Buying a home is forced savings as you pay down a bit of principal each month in your mortgage payment; assuming you don't have a interest-only type of loan product. By building wealth little by little and getting tax benefits in your monthly payments and at resale on profits, owning your home proves time and again to be a savvy long term investment. Its those homeowners who buy for the wrong reasons and above their means that get into trouble!

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Agency Disclosure Revealed

A: After getting a nice little comment thread going on the "Buyer Beware" article I posted a few days ago, I wanted to bring to light what Jan brought up; that is, "..why don't NYC brokers use a buyer disclosure form"? The answer: Agency disclosure is NOT required if the property in question is a building with more than 4 units.

According to June Liu of the DOS Licensing Services:

"If the buyer is looking into buying an apartment in a building with more than 4 units, than you DO NOT need to provide the client with an agency disclosure. But if it is a single house (1-4 family) than you need to provide the client, no matter if it is a buyer or seller, with an agency disclosure form and have them sign it before showing them the property."

Prior to the revisions to Section 443 of the Real Property Law, only one agency relationship disclosure form was required for buyer/seller and landlord/tenant transactions. The combined form used the terms "seller/landlord" and"buyer/tenant" interchangeably. On and after January 1, 2007, the combined form will no longer be permitted and, rather, two separate disclosure forms will be required; one for seller/buyer transactions and another for landlord/tenant transactions. The two forms provide expanded, clearer definitions of the different agency relationships and explain the fiduciary duties owed by brokers and salespeople under each type of agency relationship.

NOTE: We are 2 weeks into this new poilcy. I'm sure REBNY and other organziations have been in talks with ALL the major NYC brokerage firms about this. As any word of change hits, I will post on UrbanDigs. For now, I will continue to verbally disclose my role as buyer broker before working with any new client.

More importantly, here is in black and white how the Division of Licensing Services in NYS defines a buyer broker and a seller broker. I've had this debate many times, and sometimes it gets heated, as some argue that the buyer broker is working on behalf of the seller. This is technically correct as the buyer broker's paycheck at closing will come from the seller's commission that is ultimately SPLIT between both brokers involved in the transaction. However, I will stand my ground and get confirmed by what I will list below from the DOS, that as a buyer broker my fiduciary responsibility is to the buyer and keep their interest in mind during the buying process, especially when it comes to bidding and negotiating where I will do my best to get the property at the lowest price possible for my buyer client.

Disclosure Regarding Real Estate Agency Relationships

Sellers Agent: A seller’s agent is an agent who is engaged by a seller to represent the seller’s interest. The seller’s agent does this by securing a buyer for the seller’s home at a price and on terms acceptable to the seller. A seller’s agent has, without limitation, the following fiduciary duties to the seller: reasonable care, undivided loyalty, confidentiality, full disclosure, obedience and duty to account. A seller’s agent does not represent the interests of the buyer. The obligations of a seller’s agent are also subject to any specific provisions set forth in an agreement between the agent and the seller. In dealings with the buyer, a seller’s agent should (a) exercise reasonable skill and care in performance of the agent’s duties; (b) deal honestly, fairly and in good faith; and (c) disclose all facts known to the agent materially affecting the value or desirability of property, except as otherwise provided by law.

Buyer's Agent: A buyer’s agent is an agent who is engaged by a buyer to represent the buyer’s interest. The buyer’s agent does this by negotiating the purchase of a home at a price and on terms acceptable to the buyer. A buyer’s agent has, without limitation, the following fiduciary duties to the buyer: reasonable care, undivided loyalty, confidentiality, full disclosure, obedience and duty to account. A buyer’s agent does not represent the interest of the seller. The obligations of a buyer’s agent are also subject to any specific provisions set forth in an agreement between the agent and the buyer. In dealings with the seller, a buyer’s agent should (a) exercise reasonable skill and care in performance of the agent’s duties; (b) deal honestly, fairly and in good faith; and (c) disclose all facts known to the agent materially affecting the buyer’s ability and/or willingness to perform a contract to acquire seller’s property that are not inconsistent with the agent’s fiduciary duties to the buyer.

My posts on Buyer Brokers -

NY State: A Buyer Beware State

Using A Buyer Broker

NOTE: In the buyer's agent relationship disclosure as shown above that:

A buyer’s agent does not represent the interest of the seller

Comments? Thoughts? Arguments? Lets get it on!

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Property Tax Cut Coming..?

A: Mayor Bloomberg is proposing to cut property taxes by as much as 5% as '...New York enjoys the bounty from its booming economy and real estate market...". The proposed tax cut would apply for at least the next fiscal year, and would combine with a sales tax cut for clothing to total $1 billion of the city's $55 billion budget.

This is both good news & bad news for homeowners:

Good News - A property tax cut is good news because it will lower the monthly costs to the homeowner at the end of the day. Although the tax cut won't be as fruitful as it sounds because the homeowner is already writing off their real estate taxes come tax-time, as one of the benefits of owning. However, lower monthly expenses associated with any property should increase affordability on the open market; as long as buyer demand remains healthy enough to support price appreciation.

Bad News - Generally speaking, property taxes are directly associated with the city's assessed value of your home on the open market. Therefore, as property taxes rise it is because the value of your home has increased. In this case, a property tax cut could be the city's first official acknowledgment that home prices have hit a standtsill and may even had started to dip a bit. The theory continues, as property taxes fall it is because the value of your home has also dropped a bit.

According to Wikipedia: The taxing authority requires and/or performs an appraisal of the monetary value of the property, and tax is assessed in proportion to that value

NOTE: Mayor Bloomberg boosted property taxes a total of about 21% or so between 2002-2004 when the housing market realized incredible gains. I recall my own property taxes being raised from $650/month or so up to about $800/month during this time; causing what is known as a shortage spread in my monthly mortgage payments and a temporary surge in my monthly living costs to correct the issue.

The question that comes to my mind, is what Bloomberg really knows about the city's budget and generated revenues both now and in the future. For example, all those new developments that have been sold and now occupied will eventually lead to growing tax revenues as the city's granted tax abatement expires on each building and homeowner. So, there will be much more property tax revenue going to come into the city reserves from these guys. This makes me wonder whether or not the proposed property tax cut is a result of flattening/falling property values or good fiscal planning and management.

In today's NY Times article:

The tax cuts represent a departure for Mr. Bloomberg, who last year used the bulk of a $5 billion surplus for a reserve fund to pay future health care costs and to offset projected deficits. This time, Mr. Bloomberg concluded that given the city’s overall fiscal health, revenues that had come in so much higher than expected should be shared with taxpayers and plowed back into the economy, aides said.

The proposals are likely to further burnish the mayor’s reputation among New Yorkers, which took a heavy beating during his first term, when he pushed through an 18.5 percent tax increase. Mr. Bloomberg is in his second and final term, and has drawn increasing interest as a potential candidate for national office, and his decision to cut taxes fuels speculation about his future.

But, they said, the city was flush enough to set aside $750 million for the property tax cut, at least for the fiscal year beginning in July, which would translate into an average overall reduction of 5 percent. The average yearly tax bill for a condominium owner is $6,449, so a 5 percent cut would translate to $322 annually. The average tax bill on a house is $3,098, and a 5 percent cut would save $160.

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NY State: A 'Buyer Beware' State

A: I decided to write this post after reading an article in January's Real Deal magazine. The article was titled, "Designated buyers' agents remain rare" (scroll down), and discussed the disconnect between buyers and agents at their first substantial meeting as to the relationship/role that the agent will ultimately play as buyer broker. While much debate has arisen as to who the buyer broker really works for, in my eyes its clear, THE BUYER!

I wrote about how I view the role of the buyer broker a while ago in the post titled, "Using A Buyer Broker". I discussed why I think every buyer of New York City real estate, especially first time buyers, should use a buyer broker as their guide. Mainly, the broker should act as a devils advocate at showings and ensure that the buyer puts their money towards the permament property features, evaluate the property compared to the target market, devise a bidding strategy, and work to get the property for the lowest price possible. Here is a clip from that post:

My Definition of a NYC Buyer Broker: A broker who represents the buyer and has a fiduciary responsibility to the buyer in finding a property that meets their needs on all levels (price, location, size, condition, style, and living quality). A buyer broker should look to find the best value for their client and negotiate on their behalf during the bidding process to get the lowest possible purchase price from the seller.

The article in The Real Deal discusses this and brings up a very good point about New York State and buying real estate here. That is:

NEW YORK STATE IS A BUYER BEWARE STATE

Of particular note is how the agent representing the seller under-reported the real estate taxes on a property by 50%, leading the buyer to legal action!

"He sued the real estate company and the agent and lost, under the rationale that this is a buyer beware state,"...

UrbanDigs Says: The seller broker was hired by the seller to market the property and get the highest and best price possible! You should understand this and act accordingly. There is nothing illegal about the seller broker representing both clients in the transaction, and in fact, is something that is hoped for by the seller agent as their commission is larger. As a buyer, I just feel you should have unbiased representation by an expert in the field of NYC real estate who knows the product, the process, and how to evaluate a property. There are no fees to use a buyer broker and therefore, no reason not to use one unless you have that independant urge to do everything yourself and learn from your own mistakes! I admire that philosophy greatly, as I would describe myself in that way, but when it comes to plunking down hundreds of thousands of dollars in a housing market that is much different than years ago, you should work with a broker you feel comfortable with to make sure your money is going to a solid, best of breed product! A good buyer broker will make sure that happens!

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Floors & EasyClosets.com

A: Do some research and ask around for a few reputable contractors to give you a quote for sanding, staining, and poly'ing the hardwood floors. It will probably be about $2.50/Sq. Ft. for a good company which will prove to be well worth it. Then, go to www.easyclosets.com and follow the on-screen Closet Design Wizard to create your new closets based on your own needs.

First lets discuss the floors. The impression a potential buyer has on a property when they FIRST open that door is critical. Based on my own experience I would tell you that within the first 30 seconds my clients know whether or not this is the apartment they will ultimately place a bid on. Having said that...

Having a good floor that shines back out at you and just looks fantastic will almost certainly gaurantee you a 'admirable' first impression as buyers come in.

Floors is another renovation that varies with each apartment but generally speaking I would look to put about $3/sq. ft. aside for floor refinishing. After a quick search on Google I found these:

SpotLessFloors
Masterpeice Floors
NY Hardwood Floors

Now on to the closets. Most apartments in NYC dont have incredible closet space and most dont have them furnished either. For a very little money and about 30 minutes of labor you can really maximize and enhance your closets with www.easyclosets.com.

Using the Closet Design Wizard on the link above you first select the shape of the closets that you will be renovating. Then enter in the actual dimensions and you will be sent on to the design wizard. Its actually pretty cool after a good 5 minutes or so of figuring the thing out. For me, I tried to keep my budget at $450 a closet so I can get both of mine done for under $1,000. Here's how 1 turned out:

One very important note I can offer you is to be sure to use the togglebolts (which are the v-shaped bolts that are pushed through your drywall to add stability to the support bar) as you follow the install instructions or else the support bar may not be able to withstand the weight of the closet, and it will fall to its impending death. FYI: Below is an image of a toggle bolt and its screw on the left and exactly how this bolt is used on the drywall to the right.

If you are a seller with limited funds or a buyer/owner looking to enhance your new property, then this broker advises you to invest in refinsihing your hardwood floors and furnishing your closets!

Originally Published 01/03/2006

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Changing Indentities When You Buy

A: Picture this. You are a buyer whose been looking for the past 6+ months. You know a good buying oppurtunity is on its way but you play your game like your in no rush to buy. You go to open houses, learn your product knowledge, and get a general understanding of what your price point will ultimately get you. But do you put yourself in the seller shoes and try to anaylze what features of the apartment might be used as selling points when you ultimately resell?

To understand the psychology of your foe, is to understand how to beat them

But how do you do this? Well for starters, ask your broker to only show you apartments that are higher than the 15th floor. Chances are a 22nd floor apartment is going to offer some type of view and sunlight. Now you just need to fine tune that view and get one of the park or river. Another way, ask your broker for terrace apartments and see for yourself what kind of price difference outdoor space is getting in a slowing housing market. Remember the goal here is to buy in a buyers market and get those features that will ultimately get you top dollar when sold in a sellers market!

Don't worry about the noise if your on a corner; you can always citi-proof your windows. Sure its a costly renovation but if you went into an apartment with great views and sunlight but was insanely noisy from cabs, buses, and ambulances what would you think? Now picture that property 95% quieter but with the same great views and sunlight?

You must change personas when you look to buy. If you are adament about getting a fully renovated apartment, then for a moment step back and ponder whether buying a wreck will ultimately save you $50,000+? Calculate in monthly carrying costs while work is done along with the project estimate to see if paying for renovations are worthwhile.

The next time you step into an apartment, act as if you are the seller's broker. What does this apartment TRULY OFFER to prospective buyers that show up? If it offers great views, sunlight, and location then chances are it will wind up being a good investment.

Take a look at these terrace apartments and see how they compare with other listings in the neighborhood:

301 E 64th: Apt 19B

Price: $699,000
Reduced From: $869,000 to $699,000 (Motivated!)
Size: 800 SFT
maintenance: $1,498 (High Monthlys Restricts Affordability)
PPSF: $874 (not including terrace)
Marketed By: Lori Carlis of CBHK

301 E 22nd: Apt 17G

Price: $749,000
Reduced From: $769,000 to $749,000
Size: 750 SFT
maintenance: $1,049 (reasonable given size + terrace)
PPSF: $999 (more reasonable monthlys explains higher asking price)
Marketed By: Joanna Lee of Halstead

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Would The Real Sellers Please Stand Up

A: I'm often asked to describe the current market by my buyer clients and to offer my thoughts on where the market might be going in the short term, as most of my buyers have some sort of time pressure to buy their new apartment; whether it be a lease expiring, tax reasons, or other. Tough question, but I think the best way to describe the current market is by explaining to my clients that out of ALL the inventory currently available for sale, perhaps only 55% or so are serious sellers!

But how could this be? If someone isn't a serious seller, then why would they list their apartment for sale? One answer: TO SEE IF THEY CAN GET THEIR PRICE!

Have you tried to bid on a property AFTER you did all your research to come up with current market value of the property only to get a 'no response' from the seller? Did you find that the seller didn't even come close to meeting you halfway even though you are more than financially qualified to buy their home? If you answered 'yes' to either of these questions, than you will understand what I am talking about.

Today's New York City real estate market is mainly comprised of some sort of combination between SERIOUS SELLERS and what I like to call TESTERS. Here is my quick unofficial definition of both:

Serious Seller: Quite simply, a seller that must sell their home with at least one type of time pressure! The time pressure could be a divorce, financial burden, re-location, or other. A serious seller owns a property that ultimately doesn't want to be owned. They are pressuring their hired agent to generate traffic, holding OH's every Sunday, reducing their asking price as the market activity deems necessary, and flat out doing everything they can to create a buzz about the property. It is these sellers that buyers are trying to find and do a deal with as they will respond to your offer reasonably.

Testers: Testers are sellers that really don't have any pressure to sell. They would like to move, but only if they get their price. Testers don't mind if their property has been on the market for some time, as they usually start out asking well above market value to in essence 'TEST THE MARKET'. If a building is selling for $900/sft and a property is currently asking $1150/sft, then it is pretty safe to say that this seller is a tester. Even if they get a bid of $900/sft, they will only respond with a price that equates to $1,050/sft. Testers are adament about getting the highest sales price in the building and will not be bullied by finacially secure buyers or those looking to pay all cash. Testers are not easy for buyers to deal with and will only do a deal if they get their price; otherwise the listing will eventually be removed from the open market. Testers might reduce their price, but it will only be from the original way out-of-line asking price to a modestly out-of-line asking price.

Is there anything wrong with testing the market? NO, abosultely not! That's the thing. Buyers can be as frustrated as they are but when they eventually go and resell, they are going to expect top dollar for their property unless their is some type of pressure that is causes them to unload the property for market value.

If I were to estimate from experience the breakdown of all Manhattan real estate sellers to see how many were testers and how many were serious, it would probably look something like this pie chart:

Now, what to do? Unfortunately there really isn't much anyone can do to convince a 'tester seller' to change their mindset. Put yourself in their place, if it was your home that you were trying to sell and wanted to test the market to see if you can get a certain price range, would your broker be able to convince you to take a lower offer? Probably not! In fact, you would probably fire the broker and sign with someone else for the insult.

The best way to handle a 'tester seller' is to submit your HIGHEST & BEST PRICE possible. This does NOT mean submitting a verbal bid or a simple email to the broker! This means faxing a hand written bid, with all your financial information, your pre-approval letter, your attorney info, your mortgage broker info, and your financial anaylsis form for review by the seller. Remember that ALL bids must be submitted to the client for review. By giving in your highest bid presented in the best possible light and showing off all your qualifications as a buyer, you are putting the ball into the 'tester seller's' court for a response. Chances are the response won't be what you hope, but its your best shot at getting a property whose only chance of selling is convincing a tough seller to let go.

For serious sellers, well its up to your negotiating skills and the skills of your hired broker to get a deal done. The question with a serious seller is not whether you can get the property, but at what price!

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What Co-op Boards Look For

A: In the world of Manhattan real estate, co-ops occupy about 75% of the city's building population. Because you are buying shares in a corporation and not real property (you have to buy a condo if you want real property), and the building is governed by elected shareholders who set rules and policies by which the building is run, the value is less than that of condos. When potential buyers think about a co-op board interview they usually think of something painful and irritating, like getting a root canal. Since I just had 2 root canals last week, let me be the first to tell you that it is NOT AS BAD AS YOU THINK! If you are considering buying a co-op in New York City, here is what the board will probably look for.

New York City Co-op boards differ from building to building making it very difficult for me to describe one formula for passing the review and interview. So, here are a few guidelines that you may want to check yourself against to see if you are at least a good candidate.

NOTE: The seller's broker is in charge of pre-qualifying prospective buyers for their client so that only passable buyers are negotiated with. This is why you are asked for a financial anaylsis when submitting a bid. The seller broker will contact the building's managing agent to find out exactly what the co-op board guidelines are, and what they like to see in new buyers. Therefore it is extremely important for you to ASK THE SELLER BROKER beforehand what the co-op board is looking for in 2 general financial categories: Salary & Liquid Assets After Closing

SALARY

OK, first off you pretty much have to have a job. If you are self-employed it gets a bit trickier as there is minimal or no job security (yet not impossible; you just might need to submit an extra year of tax returns and provide a letter from your accountant backing up your income).

Assuming your employed, most co-op boards are going to want to see that you are making at least 4X your total monthly expenses in annual salary keeping your debt/income ratio under 25%. A quick example would be if your total monthly expenses will be close to $4,000, then the board will want to see combined annual income close to $190,000 (4 x $4,000 = $16,000 x 12 = $192,000).

Now its not set in stone that you need to make this much as some co-op boards will allow up to 33% debt/income ratio which would mean that you need to make at least 3X your total monthly living costs per month; but its a good idea to be more financially able than less.

QUICK TIP: If you do not meet this salary requirement, find out if the co-op board will accept guarantors to help back you up. If not, then consider getting a tax-free gift from a family memeber, if possible. But make sure you get these funds into your account as soon as possible so that the deposit clears and produces a mailed statement that has the funds in your account but not the deposit listed. If deposit is listed, get an accountant gift letter to submit with the board package.

LIQUID ASSETS

Another requirement that is hard to generalize is how much liquid assets you will need AFTER CLOSING COSTS to satisfy the co-op board. Nobody cares how much liquid assets you have BEFORE you close. Rather, what you need to show is that you have money leftover in liquid accounts after you pay the down payment and closing costs to do this deal.

Liquid assets include:

IF YOU ARE SELLING & UPGRADING: If you are currently selling your property, yet found a place to buy first and want to use your existing home as an asset, fine. However, yor current mortgage will be considered a liability and many co-op boards will want to see a SIGNED CONTRACT for your existing home sent in with the board package so that they know the home is on its way to being sold, and the profit on its way to your bank account!

Generally speaking, the co-op board will want to see at least 12 Months of total living expenses in liquid assets AFTER closing. For example, using the same #'s as above with a $4,000 total monthly living expense, the board will want to see at least $48,000 (12 x $4,000) in liquid assets AFTER you pay your down payment and closing costs!

Some stricter co-op boards will use a percentage of the deal as a requirement for liquid assets expected after closing. For example, my current exclusive at 49 East 96th Street requires that the buyer have at least 25% of the purchase price in liquid assets after closing.

QUICK TIP: Check the MAX FINANCING requirement that is listed on the property webad as a quick guide to the building's co-op strictness. If the co-op requires MORE THAN 20% down, than chances are they are more strict in other requirements as well (salary & liquid assets). The more over 20% that is required, the more strict the co-op board probably is in their requirements for new shareholders. A co-op board that asks for 50% down will probably want to see a siginificant amount of liquid assets & salary to pass the board!

OTHER ITEMS YOU WILL NEED TO PROVIDE

The 2 most important requirements are your salary and liquid assets because the co-op board will want to see that you can actually afford the property you are trying to buy. If you are buying too much house, than you are a threat in defaulting on maintenance payments (which will result in the other shareholders picking up the tab on your behalf) and/or selling the property soonafter the purchase and with a time pressure (having the sale pressured means not getting top dollar making the rest of the units in the building less valuable for future marketing than they otherwise might be).

Besides these 2 big guys, the co-op board package will ask you to provide:

UrbanDigs Says: Buying a co-op will get you more bang for your buck, no question. But keep in mind that you will have a process to go through to buy it which means you will have to go through this same process when you go and resell the property. Also, you will be restricted on policies such as subletting, pied-e-terre's, parents buying for kids, etc..On the same token, if you buy in a strict co-op that requires 50% or more down and tons of liquid assets than don't be surprised if you experience longer time on market when you go to resell as your buyer pool you are marketing to will be limited. When buying in a co-op like this, you should go into the deal educated on these issues and buy for the long term that is a place you see yourself living in or raising a family in for some time!

Good Luck!

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Knowing When To Ask Top Dollar

A: With all the talk recently in the blogosphere about flipping and stubborn sellers, lets take a look at the other side of the coin and discuss how buyers can find a great deal and then ask for top dollar later. The quick yet very difficult solution for buyers becomes: BUY A WRECK ON THE BEST BLOCK POSSIBLE, IN THE BEST BUILDING POSSIBLE, WITH THE BEST LIGHT & VIEWS POSSIBLE, WHOSE MONTHLY EXPENSES ARE BELOW $1.50/sft. Everything else can be fixed.

When it comes to real estate investing you must keep emotion out of your decision-making. You will probably find 'your emotions' as the most threatening feeling when deciding whether or not to go for it! You must clear your head, put all your other stresses aside, and figure out whether this home is somewhere you can be happy living in and appealing to others when you go and resell.

The 2 best permanent features of any apartment that will ultimately allow you to ask top dollar when you go and resell are SUNLIGHT & VIEWS. Don't worry about the rest of the features you may have been hoping for. If you wanted a working fireplace or a roofdeck but stumbled upon a great value property that is a total wreck with great sun and city views, TAKE IT! Chances are you won't own this property forever but will prove to be a great investment for the time period that you owned it for.

I'll tell you this straight from my experience in the field of NYC real estate sales: Buyers LOVE sunlight and views. I've had clients who were adamant on living in Greenwich Village and wouldn't even look at a listing outside this neighborhood. That stubbornness took about 4 weeks to shake off. The reason is that there still is NOT that much inventory out there. The good products, that is any unit priced right and features great sunlight and city/park views, are moving quickly while the cookie cutter units that are just like everything else out there is not. My conclusion, units that are properly priced to begin with and offer good sunlight and views are not lowering their prices as often as dark units and are experiencing less time on market. Go figure. Those are two fairly significant fundamentals that are currently affecting sellers in today's market (price cuts & time on market).

So, you have to look for the features that will help move your apartment faster and at the highest price possible. I didn't include LOCATION in this list because I think today's market is very different from the NYC housing market a few years ago. So many neighborhoods changed over the past 3 years or so that buyers are effortlessly expanding their 'grid', so-to-speak, of where they would consider living in. This consideration of multiple neighborhoods is making LOCATION not as important as it once was; I didn't say not important at all, just not as important as it used to be. At least this is my train of thought. As a result natural sunlight and views take center stage. It is now these two apartment features that buyers are looking for; and rightly so.

Tell me if I'm wrong? If any buyers are reading this blog and like the topics that are discussed then you are the perfect person to speak out on the comment thread. Has the frustration of not being able to find what you want caused you to expand your 'grid' of where to buy in? If so, then why? Do you now look at light and views as the deal maker or breaker, or is it some other apartment feature?

Whats great about my job is that every experience I have, whether from a buyer or a seller, is a learning one in which I can realize a new lesson or change in the current market. If I learn something while out with a buyer, I can flip that around and advise the seller on what may help get them the best profit at resale. And that is exactly what I'm seeing right now. Buyers are more stubborn, or WISE, I should say as they look to spend their hundreds of thousands of dollars on a property that will ultimately give them a profit at resale. This lack of umph, for lack of a better word, makes buyers patient and sellers frustrated.

Here is one unit that will certainly demand a premium at resale; the question now becomes how much of a premium. Look at these incredible Central park views:

80 Central Park West

Price: $1.5M
Size: 950 sft
PPSF: $1,578/sft
maintenance/CC: $1,356
Balcony: Yes
Marketed By: Toni Haber of Elliman

*NOTE - This is by no means cheap and is a great example for this post. The incredible views and natural sunlight allow the seller to price at the high end. Will it sell at this price point; no I dont think so. Its still a one bedroom apartment that because of its configuration really cannot be converted to a small 2BR for marketing purposes, but what sets it apart besides the location is the gorgeous views. I would think $1.3M for a list price and $1.15M or so for a one time bid would make this a pretty good deal for both buyer and seller. If the seller gets $1.2M or higher than I think they should take it without thinking twice.

If there is ever a time to get a deal on housing, its during the downtimes. Use your judgment, leave your emotions at home, have the vision to see past the wreck or work needed, and focus on natural sunlight and city/park/courtyard views and you should do just fine regardless of the housing correction currently underway.

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Crunching The Numbers: BUY or RENT?

A: I was asked by readers to provide more detail on this so here it is. For those of you who have been reading my blog for some time, you know that I owned a condo at Astor Terrace which is located at 245 East 93rd Street, which I sold 4 months ago. By the way, Astor Terrace is a great building to live in! Now that I am no longer a homeowner, I discussed with you my thoughts on whether I should buy now or rent and wait a few years to buy later. Besides the slowing housing market, there were a few factors that convinced me that renting was the short term decision for me. Here is how I crunched the #'s to come to my decision.

NOTE: Buying and selling real estate is a wonderful investment if understood properly. The tax benefits and track record of long term appreciation in housing prices generally combine to make homeowners very happy when they decide to finally sell. However, you can screw up in real estate! Just look at that guy at Iamfacingforeclosure.com. Always remember that your personal situation combined with transaction fees with buying and selling can equate to a BAD INVESTMENT! Read this post carefully to understand how.

Before going into the number crunching starting with the monies I have leftover from the sale of my condo minus personal debts, credit debts, wedding costs, honeymoon costs, moving costs, etc., it is very important to understand the factors that might influence my decision to buy or rent. These factors include:

HOUSING SLOWING

With the housing market slowing down I must take into account whether future short or medium term appreciation in price will offset transaction fees that go with buying and selling real estate. One should always assume aproximately 4.5% of purchase price in fees on the buy side and aproximately 7-8% of purchase price in fees on the sell side.

Will the profit on your deal cover these costs or will you take a loss?

Plus, all I know is that housing is currently slowing. When the bottom will hit and realizing I missed it is entirely a different story; but one I am focusing intensely on. I just want to get close and I know that NYC bust cycles are fairly short so my eyes are tuned in.

TIMELINE TO OWN

Now that I'm married I honestly don't know when we might decide to start a family. And that means changes in everything! Will I need a bigger apartment? Will we move to suburbs? I certainly don't know. But I'm honest enough to convince myself that these are very real possibilities and as such I really don't know where I might be in 2 years.

So, my timeline to own as of right now is about 2 years.

JOB SECURITY

Ha! Yea right. Not for me! I'm considered an independent contractor and my company makes sure that I fully understand this! Being self-employed means minimal job security unless you are savvy enough to have built up a very reputable and sustainable business for yourself via personal refferals and such, making your job much more secure.

But for me, I'm still building my business and trying to prove myself to new clients. Because of this, I still have some growing pains ahead of me before I feel secure in estimating future years salary! While being self-employed is great in many ways, you must be able to manage your time wisely for it to work. I always use caution making big investments and buying a new home is certainly a big investment!

The combination of a slowing housing market, 2 years timeline to own, plus minimal job security all convince me that I should at the very least EXERCISE EXTREME CAUTION when making the decision whether to BUY or RENT! Now on to the #'s.

Before I signed a 1-Year lease to rent at 160 E 84th street, I looked over similar apartments in this neighborhood that would be a good guinea pig for this anaylsis. I eventually found an apartment at The Plymouth House, a co-op located at 235 East 87th street, which is very similar to where I am renting. Both units are 900 sft, JR4 layouts, 1BR/1BTH, Full-Time doorman, and in the same general neighborhood. Here's some details on 235 East 87th:

APT 7D

Price: $669,000 (Reduced from $695,000)
Size: 900 SFT
maintenance: $1,251
PPSF: $743

**VERY IMPORTANT TO NOTE**: I did NOT include tax write-offs in this anaylsis because I work 100% from home as a virtual agent and as such I write off a portion of my rent as a business expense. This makes the tax write-offs for buying vs. renting pretty much a wash. If anything it skews the #'s slightly in favor of the buy side. Also, I am assuming in the calculations that my income will cover my housing costs and as such will allow my interest income earned to be stable as that money sits in a 5% online savings account for 2 years (you can get better but for sake of this anaylsis its fine). Finally, I assumed a $625,000 purchase price for APT 7D at 235 E 87th, and for sake of this anaylsis, assumed a sales price two years from now of $675,000; a profit of $50,000 which I think is pretty comforting given market conditions and no major work done on the unit.

A snapshot of the anaylsis (LINK TO DOWNLOAD if you want to look into the formula's I used for calculations):

CONCLUSIONS: Because of my 2 YR timeline, insecurity with my job and future salary, and transaction fees to buy and then sell again it makes sense to rent for now rather then to buy. If I did buy a comparable unit to the rental I just signed a lease for, and it appreciated 3% a year for the next 2 years, I still would have about $56,000 LESS MONEY when all is set and done.

Now, with this type of anaylsis time plays a very important role. If I were to chart the rent vs buy anaylsis, at some point they would meet; making buying the better decision. This is due to the combination of more price appreciation in the home, more equity paid off, and the growing benefits of tax write-offs.

This is my anaylsis FOR ME! Not for you! If you are looking to buy because you saved up for the past 5 years and your rent is rising and you know you will be living there for 5+ years, than obviously the #'s change significantly! Plus, most people do NOT work from home negating the tax write-off I use for my rental costs! That means that buying has tax benefits and renting does not, so keep these things in mind! If you would like me to go over your own situation with no strings attached, give me an email or simply change the #'s around in the XLS file link that is provided above to match your own situation.

Maybe in the future I can whip up a java program that does this anaysis automatically.

THOUGHTS? DID I MAKE THE RIGHT CALL? WHAT WOULD YOU DO? DID I MISS SOMETHING?

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Sponsor Sales in Your Neighborhood?

A: Looking for no board approval but can't afford the premium that condo's get in NYC? Then you need a sponsor sale! In short, a sponsor unit is a leftover unit from the developer that was held for whatever reason, and is now being sold. Since you are buying from the developer there is no board approval process.

According to Wallfly.com's Glossary: Sponsor Unit: Apartments that are held as an investment by the sponsor - the original developer who built the building or converted the the building to a co-op. Sponsor apartments are usually exempt from board approval.

In a co-op, sponsor units are called "unsold shares" and they can be marketed by the sponsor until they are all sold. This process can take many years in a co-op or condo when a converted building has rent-regulated tenants who are not required to vacate.

Typically, in a Sponsor sale there is:

Needless to say, you should discuss any sponsor sale purchase with your hired attorney to make sure you fully understand all aspects of the transaction, especially the fees that might be passed down to you!

Here are a few sponsor sales that might be in your neighborhood:

101 West 23rd Street

Price: $789,000
Size: 1,400 sft
Maint: $2,128
PPSF: $564
# Beds: 3
# Baths: 2

310 East 46th Street

Price: $695,000
Size: 800 sft
Maint: $1,835
PPSF: $869
# Beds: 1
# Baths: 1

319 East 50th Street

Price: $699,000
Size: 762 sft
Maint: $836
PPSF: $917
# Beds: 1
# Baths: 1

215 East 80th Street

Price: $2,100,000
Size: 1,628 sft
Maint: $966
RE Taxes: $747
PPSF: $1,289
# Beds: Conv 2
# Baths: 1

315 Riverside Drive

Price: $1,175,000
Size: N/A
Maint: N/A
RE Taxes: $747
PPSF: $1,121
# Beds: 2
# Baths: 2

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Timing a Low-Ball Offer

A: Great topic for the times we are in right now in NYC. Is there a bad time to submit a low-ball offer? The answer is 'YES' which brings us to this topic for today. When would a good situation arise for a qualified buyer to low-ball and submit what I like to call a '1-TIME OFFER'?

Low-Ball Offer: A low-ball offer is a term used to describe an offer on a house that is substantially less than the asking price. While any offer can be presented, a low-ball offer can sour a prospective sale and discourage the seller from negotiating at all. Unless the house is very overpriced, the offer will probably be rejected. In a buyer's market a motivated seller will either accept or make a counter-offer.

First lets clarify two things: YOU LIKE THE PROPERTY & YOU ARE QUALIFIED TO PURCHASE IT

By the latter I mean that you earn at least what the board is looking for and are under the pre-determined debt/income ratio and that you have sufficient liquid assets leftover after closing to meet another set of pre-determined levels (generally you will need to show around 12 months of maint + mortgage in liquid).

Now that we know you can get the property, you need to shove the seller up against the wall and make a play.

For buyers, the BEST situation to submit a low-ball offer is when:

1. Seller has reduced the price for 3rd time
2. Seller reduced price two times within 4 weeks
3. Property has been on the market for at least 4 months
4. You show up to OH and apartment is empty with no names on sign in sheet
5. You find out that seller bought 5+ years ago
6. Imperfections are cosmetic NOT permanent

Some examples would include:

131 W 28th Street - Reduced from $995K to $800K; Reduced twice in last 4 weeks. On market since 6/1/2006.

100 W 72nd Street - Reduced from $925K to $799K; Reduced twice in last 3 weeks. On market since 4/19/2006.

444 East 84th Street - Reduced from $750K to $659K; Reduced twice in last 3 weeks. On market since 8/17/2006

100 West 39th Street - Reduced from $749K to $699K; Reduced three times since on market in first 4 1/2 weeks.

The WORST time to submit a low-ball offer is when:

1. Seller has not reduced asking price yet
2. Apartment is less than 4 weeks on market
3. OH and/or showings are crowded

THE KEY

The KEY is to accept imperfections! Its VERY hard to find everything you are looking for anyway, so don't miss out on a great deal if there are a few imperfections in the property; especially ones that can easily be updated!

If you are a stingy buyer than the perfect property you are seeking will never make it into the BEST scenario for making a low ball offer OR the low ball offer itself will just insult the seller making future negotiations with you difficult.

All of this seems pretty logical and straightforward but in this business I see low-ball offers being submitted at the WORST times! There is NO WAY a seller will respond to a 1-Time Low-Ball offer if the property is only 3 weeks on the market and there were 10 people at the OH on Sunday! It's a waste of a good strategy to try and get a great deal from a desperate seller.

To go on a slight tangent here, if the property is new on the market and you know there is activity on it, and you absolutely love it, then bid accordingly! Don't risk insulting the seller and giving them leverage with the other interested buyers in that they can now honestly say, 'we have an offer submitted, there was no response yet'. You will be amazed at what some buyers do when they find out an offer was submitted on a property they love!

Anyway, back to finding the best situation for a low-ball. You must find signs of DESPERATION!! Does this person HAVE TO unload this property right now! Did they buy over 5 years ago making the deal a very profitable one for them even if its much lower than they originally hoped! Were there more than 1 price cut within a month? These are the things that make low-ball offers work! They are reduced to $750,000 from $850,000 over the course of 5 months, with 2 price cuts of $25K within the past month alone.

I know, its hard to find all of those criteria for any one property let alone one you want to buy. But, I list the BEST situation with those 5 characteristics. You don't need all of them for a 1-time low-ball offer to be effective.

SUBMITTING A 1-TIME LOW-BALL OFFER

Typically, low-ball offers are made by unmotivated buyers seeking a deal. Sellers usually shrug them away refusing to play the game. This is why you MUST prove your seriousness as a buyer and submit the offer as I describe above! It's your best chance to make it work.

By removing the option of a response (taking out negotiations) you hit the desperate seller where they hurt the most, and put the ball in their court to make a deal happen right now. While it is a bit of a risky strategy if you really love the apartment and are haggling over $25-50K or so, it usually works when the timing is right. You just need to be in the right place, at the right time, and like what you see and who knows, maybe you'll get it for much less!

Happy Bidding!

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Realizing When To Re-Enter The Market

A: Forgive me for writing about general topics for the next few weeks while I commute back and forth to NYC for work and time is limited with the loss associated with travelling. I'll go back to real data posts once I move back to NYC, which hopefully should be next week. For today, I felt like discussing what "Dave" brought up in yesterday's comment thread about finding the market's trough; how do you do this? Well, I'm no fortune teller or Wharton graduate, but here are a few things I would look for should you be an active investor in housing who buys and sells more than the norm hoping to take advantage of market trends.

In yesterday's post titled, "Housing Slowing; More Interested Buyers", Dave provided this comment:

How do you decide when the market is at it's trough? What you set out above is to see if something is priced below what was sold in the building previous. However, what if you buy now and prices are lower in 12 months time? We know property is inflated on a global scale, but by how much, we have no idea. How does the contrarian property purchaser decide when is the "optimum" time to enter the market they are looking at? (i.e. when it's at it's lowest ebb, before things pick up again).

Lets go over what I thought was the best answer I could come up with to Dave's original comment.

Interest Rate Policy

Monetary Policy is set by the federal reserve board of governors and headed by Ben Bernanke. The main purpose of monetary policy is to defend against inflation and control pricing stability; however, policy is usually changed to reflect current events that are affecting the nation and the economy (i.e., a long rate cutting campaign after the dot com bubble burst to help stimulate the economy).

Right now, policy is at a pause after 2 1/2 years of 1/4 point interest rate hikes. You probably have felt the pain of higher interest rates on your mortgage, credit card, and auto financing bills! Thats the point! The purpose of raising rates is to defend against inflation, cool the economy, and restrict investments by making money more expensive to borrow. This is already done! The question that remains is what the full affects of all rate hikes will ultimately have on the economy as there is a lag of about 10-12 months between a rate move and its affect on the economy. We have like 7-8 more months to go.

I recently wrote a post comparing housing to monetary policy, titled "Timing The Market & Monetary Policy", and is worth a look for sake of this discussion. In a nutshell:

Look To Sell - When the fed nears the end of a rate hiking campaign when the full effects of monetary policy are still yet to be felt.

Look To Buy - When the fed nears the end of a rate easing campaign and interest rates are nearing their bottom. When the fed reverse's course and starts to raise rates again, consumers will rush to lock in the low rates while they are still there PLUS the effects of lower rates to stimulate the economy are yet to be fully felt, and that can only be good for housing if the economy picks up 1-2 years later.

INVENTORY LEVELS

It is no surprise that inventory levels right now are at recent highs. Now that the psychology of the market has turned negative, with the media outlets assuring this dynamic remains, more people are choosing to sell their homes than there are looking to buy a home. The result is a rise in inventory levels to the highest level in 7 years, I believe is the last stat (correct me if Im wrong).

Inventory levels is something that you have to use some investment savvy with in predicting. If you wait for the data to prove that inventory is at its highest point, than its too late. You need to have a sense of where levels are heading in the future to really nail it down.

To answer Dave's question, in a nutshell:

Look To Sell - When inventory levels are below normal levels and supply is just very limited. Tough, I know. But if you realize 10 people at an OH with you, a filled up sign-in sheet, and bidding wars, then you know that inventory is tight and now is a good time to sell!

Look To Buy - When inventory levels have topped out, reversed course, and are into a correction to more normal levels. If the average # of listings in your local market is 5,000 at any given time, yet that has ran up to 8,000 recently, than you would want to get back in when this reverses course and is closer to 7,000 or so (a hypothetical example). You want to buy when supply outweighs demand, OH activity is lethargic, and good bids for sellers are hard to come by.

TIME ON MARKET

A big indicator when trying to determine if it is a buyer's market or a seller's market. If time on market is on the rise and nearing a long term peak, than you know its a buyer's market and seller's will have to adjust their prices to move a property. After all, the reason why the property isn't moving in the first place is because the price is most likely too high! Hence, a correction is in the works.

In a nutshell:

Look To Sell - When time on market is lower than the norm for your local market. Right now time on market for most of the country is at a 10 year high or so. Not the best time to be selling as you may get desperate. You want to sell when property's are moving very quickly due to the huge demand and bidding wars that result.

Look To Buy - When time on market tops out, starts to reverse course and head back to the norm. Again, once this trend gets started it takes an awful lot to reverse course. Try to buy when time on market is still relatively high and sellers are forced to adjust pricing to maove a property.

RENTAL COSTS

The final piece to my puzzle. Rental costs are on the rise as rental buildings have converted to condos to take advantage of market trends and would be buyers get priced out of the housing market and look to wait it out by renting. The result is very low vacancy rates in most major cities, giving pricing control to landlords and managment companies. Not good for renters.

However, as housing continues to cool and rents continue to rise, there will be an inflection point. Nothing goes on forever and this is no exception.

In a nutshell:

Look To Buy - When rents are high and on the rise. This way, at some point there weill be a level where rental costs are so high that BUYING makes the most sense. This may be happening right now and there very well may be a rent induced buying surge in the near future in NYC.

Making a decision to SELL on rental costs is not really related. At least I dont think so. On the other hand making the decision to BUY because renting is just way too expensive, does make sense. So, I'll leave out 'look to sell' for this one.

CONCLUSIONS - To answer Dave's question:

How does the contrarian property purchaser decide when is the "optimum" time to enter the market they are looking at?

A Delicate combination of when the fed nears the end of a interest rate easing campaign, when inventory levels have topped out and reversed course to more normal levels, when time on market has topped out and starts to reverse course toward the norm, and when rental prices stop rising and vacancy rates start to creep up again.

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Housing Slowing; More Interested Buyers

A: Its the focus of most contrarian thinking; that is buy when a sector is out of favor and down with a medium term forecast for appreciation. No one can pick the exact bottom, but you can look for deals if you understand how to spot them. So what makes a good deal and something to jump on in this market? Lets discuss.

I wrote about Contrarian strategy a ways back to point out the main aspects of this investment school of thought. When it comes to housing though, an illiquid investment because of the time it takes to sell a home and the transaction fees associated with the deal, you must make sure that you are buying a new property for the right reasons and NOT just because a deal pops up. To start out, the right reasons to buy would include:

1. A stable job (without the possibilitiy of relocation) with rising income that you see yourself at for the next 3-5 years

2. Thinking ahead to a home that you can grow into for the longer term

3. Saved up financially to be able to afford the initial costs of home ownership (i.e. closing costs, moving costs, mortgage + taxes + maintenance costs)

4. You are happy with the town/city that the home is in

These are some powerful reasons to buy a new home rather than rent. But how do you spot a deal? In order to spot a deal you must first gain PRODUCT KNOWLEDGE.

PRODUCT KNOWLEDGE

Your buyer broker should already know this, but if you are working on your own product knowledge of your price point is extremely important. Not only do you have to be able to know what you can get for your budget, but you will need to know how to spot a deal when one pops up that can be moved on very quickly!

In real estate training with Citi-Habitats, they talk about placing buyer clients into categories:

'A' Buyers - Buyers whom are educated on their price point and have been looking for a while. These buyers are the most ready to go and will jump on a good deal when it is found. 'A' Buyers should gain a broker's highest priority especially after months of working with these clients.

'B' Buyers - Buyers who are 1-2 months into looking for a new apartment but aren't quite ready to go. These buyers are still in the education process of buying a new home and are about halfway between 'C' buyers and 'A' buyers. 'B' buyers quickly move up the scale to 'A' buyers after a month or so of solid showings and will be loyal to their hard working agent that spends the time with them.

'C' Buyers - Buyers who are just starting to look around, have some time before they need to buy, and are really uneducated about what they can afford, what is out there, and spotting a good deal. These buyers require patience on the part of the real estate agent who makes their annual salary on commission alone. 'C' Buyers are considered in the industry the worst type of buyer to work with, although I do not agree. To me, 'C' buyers are the easiest buyers to work with and become the most loyal over time. Start out through emails by sending these buyers listings with excerpts to educate them on why one listing might be better than another.

Which buyer would you classify yourself as? If you do not classify yourself as an 'A' buyer (again this is an industry set category for agents), than how will you know when a good deal presents itself?

Bottom Line: Get product knowledge by researching all properties in your price point and visiting open houses on your Sunday's! Try to see at least 10-12 properties in the first few months of looking which should give you the experience needed to spot a good deal in the future!

SPOTTING A DEAL

Look at the main 3 aspects of housing that I talk about all the time here on UrbanDigs and then compare the PPSF (price per square foot) with recently sold's in the building to evaluate the desperation of a seller.

The 3 main aspects of housing that take priority remain:

1. Location
2. Light/Views
3. Raw Space

This should be your focus, with all other apartment/building characteristics following suit (i.e. renovations, a roofdeck, gym in building, etc.). When you spot a property that meets your needs and wants, you normally move on to price evaluation next to see if the apartment is priced right and worth a bid. Thats exactly what you should do now except you need to find out RECENT SALES for this particular building as well.

Ask your broker or look at PropertyShark.com to try and find the last sales in the building and then compare to what this property is asking. Lets do an example:

245 East 93rd Street (a luxury full service building in the UES) has a large 1,494 sft 2BR/2.5BTH apartment on the 11th floor listed for sale at $1.195M. Details:

245 East 93rd Street; Apt 11H
Size: 1,494 sft
maintenance: $842
RE Taxes: $820
Views/Light: City & River Views with N/E exposures
Asking: $1,195,000
PPSF: $800

Now lets look at the last comparable unit sold in the building to evaluate current pricing. The last units sold were:

Apt. 8D
Closed: 7/26/2006
Size: 1,400 sft
Closing Price: $1,125,000
Closing PPSF: $804

Apt. 19E
Closed: 6/06/2006
Size: 1,300 sft
Closing Price: $1,125,000
Closing PPSF: $865

CONCLUSIONS: The current ACTIVE 2BR/2.5BTH apartment at 245 East 93rd street has been on the market only 2 weeks but is priced right and below the last 2 comparable sold in this building! Obviously the eventual purchase price will be even lower with a negotiation making this listing a good deal for a new family seeking space to grow into at this price point!

Do the same work for your price point and for any listing that looks like a good deal to you and you should be just fine! And remember:

AS HOUSING SLOWS SAVVY BUYERS GET MORE INTERESTED TO SCOOP UP THE BEST DEALS

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How I Think About Rent vs Buy

A: Wow what a difference 4 years makes! When I first bought my condo I knew I was taking a big risk by buying more house than my income could afford. I had the down payment money saved up from my previous career as an equities trader, and just fell in love with a JR4 + terrace on East 93rd street. I always considered renting it out a viable option should the monthly payments got too pricey. Today, rental prices are at 6 year highs or so and finding a good apartment (i.e. renovated with doorman in desireable location) is incrediby expensive. Lets do some analyzing to see how the #'s play out and why I think renting is a good option for my specific situation.

When I first rented out my condo I got $350 less than the total expenses I needed to break even. Not bad I thought, but it got worse. As real estate values soared property taxes were raised as the city began cashing in on the changing market trend. As a result my living costs began to rise and all of a sudden my monthly loss rose to $700 a month. Fun stuff this real estate thing; only I wish I thought of this contingency before I bought!

Anyway, as I spent yesterday browsing 1BR rentals in the UES to move into I saw with my own eyes what the headlines and I have been reporting for the past 6-12 months or so. Good rentals are asking sky high prices!

Is it worth it. Here is how I would anaylze it:

RENTAL OPTIONS

1 BR at Park 96 - $2750/Month (nice size at 750 sft and location but apt in poor condition as the building begins to age a bit at 12)

1BR at The Monterey - $3200/Month (small at 650-700 sft but renovated)

1BR at Carnegie Park - $3095/Month (650 sft is small but building has most amenities)

BUYING OPTIONS (Lets assume 20% down, 5% Below Ask Purchase Price & Interest Rate of 6.5%)

130 E 94: Apt 6D
Asking: $499,000
Size: 725 sft
Maint: $1,144
Estimated Monthly Payment (Before Tax Benefits): $3,616 w/ $94,810 down payment
Total Transaction Fees: Aprox $50,000 ($7,000 on buy side and aprox 8% of purchase price, lets say $525,000, on sell side)
Total Monies Needed To Buy & Lost Interest Expense (5% Money Market) - $102,000 & $425/Month Interest Lost

40 E 94: Apt
Asking: $679,000
Size: 783 sft
Maint: $1,019
Estimated Monthly Payment (Before Tax Benefits): $4,356 w/ $129,010 down payment
Total Transaction Fees: Aprox $80,000 ($25,000 on buy side and aprox 8% of purchase price, lets say $699,000, on sell side)
Total Monies Needed To Buy & Lost Interest Expense (5% Money Market) - $155,000 & $646/Month Interest Lost

150 E 93: Apt 7F
Asking: $499,000
Size: 750 sft
Maint: $996
Estimated Monthly Payment (Before Tax Benefits): $3,468 w/ $94,810 down payment
Total Transaction Fees: Aprox $50,000 ($7,000 on buy side and aprox 8% of purchase price, lets say $525,000, on sell side)
Total Monies Needed To Buy & Lost Interest Expense (5% Money Market) - $102,000 & $425/Month Interest Lost

To get these numbers I will use the first example of 130 E 94th apartment:

Asking Price = $499,000
Purchase Price = $474,050 (5% Below Ask)
Down Payment = $94,810 (20% of $474,050 Price)
Loan Amount = $379,240 ($474,050 - $94,810)
Loan Payment = $2,397.05 (6.5% over 30 years)
Other Payments = $1,144 (maintenance + RE Taxes)
Other Payments = $75/Month Homeowners Insurance
TOTAL PAYMENT = $3,616 Per Month Before Tax Benefits

NOT DONE YET! One of the least acknowledged aspects of buying a new home is the transaction fees with buying & selling (not just buying because the deal isn't done until you sell and to sell you must pay transaction fees as well!). Co-op transaction fees are lower than that of condos because you are NOT buying real property. So, I added these aproximate and generalized costs (assuming 6% brokers commission on sell side too) just to give a conservative estimate for sake of crunching the numbers. You MUST take these costs into account when deciding whether or not to buy or rent as well!

I also added in the TOTAL monies needed from the buyer to do the deal and the monthly interest income that this money would have generated if it was sitting in a 5% money market account (again, very conservative as 5.5% is more likely). It's always good to know what your money could be making if it was safely sitting in a high yielding CD or money market account during these number crunching sessions.

Conclusions: For someone like me who is planning on buying again in NYC but doesn't know how long I will keep this new property, it doesn't pay off to rush back in! Transaction costs alone make buying and selling over the next 2 years a poor option when comparing it to renting, even with much higher rental prices and no tax benefits! Remember, with the money I save on down payment and closing costs added to the rest of my portfolio, I can get interest income that equals almost 50% of my rental costs; offsetting the loss of building equity a bit and uncle sams tax benefits of home ownership!

For me, in my opinion, given market conditions and fundamentals, RENTING makes the most sense short term with the intention of buying down the road for the longer term so that the transaction fees of buying and selling are cancelled out by a more positive environment of home price appreciation that I think is upcoming in the years to come.

I apologize if this post got lengthy and a bit confusing with all the #'s, but this is how I analyze the situation before making a decision. Please reread the post if it was confusing at first focusing on the numbers section. If you believe I missed something or could enhance my thinking, please speak up on comments section!

Good Luck!

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The Art of the Offer: How To Submit A Bid

All too often I receive offers from brokers and buyers that tell me nothing more than the amount of money they are willing to pay for the apartment. This is not a problem if you are willing to pay whatever is necessary to close the deal but the reality is that money is only a portion of the negotiation, especially with coops that require board approval. After all, my job is not only to get the highest offer possible but to also get the most qualified offer possible! Presenting my seller with an unqualified/not serious bid is simply a waste of their time and energy.

My Advice: Put all your cards on the table without disclosing how high you are willing to go to get a deal done. Here are a few ideas:

1. Always put the initial offer in writing: Type it up if possible to make it appear more credible.

2. Paint a solid financial picture of yourself: List your company name, job position, time with firm, salary & bonus.

3. Include how much down you are willing to pay: Back this up with a Pre-Approval letter from your mortgage lender.

4. When can you sign a contract: Include the amount of time you will need in order to produce an executed contract and usual 10% deposit (I would suggest hours not days; i.e. 72-96 hours).

5. Include when you can close: Sellers love a quick closing date (i.e. 30-45 days from contract signing).

6. Explain your offer with facts: Recent comparable sales, renovations, views/sunlight, location, etc.. Let them know that 'you know' whats going on in the building and surrounding neighborhood!

7. Let them know you are serious: Go ahead and state that you are 'ready to go' and that a timely response would be appreciated.

If the broker or seller asks you for more information after reviewing your offer, which obviously means that they are willing to work with you, give them what they ask for and present that in the best possible light.

Stay firm; don't be afraid to be patient and best of luck!!

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