Buyer Tips & Tricks Archives

May 13, 2008

Room Count: A Shady Science

Posted by Noah Rosenblatt on May 13, 2008 at 8.56 AM

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.

Definition of Room for Major Capital Improvement (MCI) Purposes

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.

Therefore, when you have a JR4 property with one bedroom, one living room, a walled kitchen and a separate dining/office alcove, there SHOULD be 3.5 rooms.

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!

April 29, 2008

Contract Re-Assignments: A Sign of the Times?

Posted by Noah Rosenblatt on April 29, 2008 at 10.58 AM

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?"

The post back in October is a great example of me discussing my true feelings on what could be on the horizon, that was not a trend yet, but due to the macro fundamentals that were building at the time seemed a likely result for our marketplace. Its all about being one step AHEAD OF THE CURVE!

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.

April 23, 2008

Timing The Market: The Wait & See

Posted by Noah Rosenblatt on April 23, 2008 at 10.07 AM

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!

April 16, 2008

The Importance of Views

Posted by Noah Rosenblatt on April 16, 2008 at 10.44 AM

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.

April 14, 2008

The Seller's First Response: Probe Bid

Posted by Noah Rosenblatt on April 14, 2008 at 9.00 AM

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.

In fact, a complimentary side effect of this principle is that assuming the seller is really looking to sell their property than there is a price range already pre-determined as to what the seller would like to move the property for. The question that remains is how big is this 'acceptable range' and how quickly the seller wants to move the property; the faster the need to sell the lower the price is likely to be.

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

I use a poker analogy because of the incredible strategy and observational skill needed to play a good hold em' tourney from beginning to end. A similar scenario could be argued for housing negotiations.

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!

April 9, 2008

Bringing in a Buyer Broker After Viewing a Property?

Posted by Noah Rosenblatt on April 9, 2008 at 11.56 AM

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.

There it is, in black & white, and couldn't be clearer!

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.

April 8, 2008

Raised Limit Conforming Loan Explained

Posted by Noah Rosenblatt on April 8, 2008 at 2.54 PM

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 key phrase is: The fee for doing a loan under the new limits is 2 points, but that fee gets built into the pricing of the rate. Take a look at the conforming rate of 5.875% compared to the raised conforming loan rate of 6.875%! In this case, for a loan of $700,000 and zero up front points, the two point fee translates to a 1% HIGHER RATE!

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.

March 27, 2008

The Importance of the Layout

Posted by Noah Rosenblatt on March 27, 2008 at 11.04 AM

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

March 13, 2008

What Is 'ALL CASH' Worth?

Posted by Noah Rosenblatt on March 13, 2008 at 11.54 AM

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!

In normal times, I would say that an all-cash offer should gather 1-2% of the purchase price as a premium for providing the seller with the comfort of bypassing the loan & board approval process; although I have heard of all cash deals getting rejected by a co-op board, though it is not the norm! Let me explain using a similar over-ask multiple bidding scenario as we just went through with the numbers changed:

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!

February 7, 2008

When Good Bids Go Bad

Posted by Noah Rosenblatt on February 7, 2008 at 11.11 AM

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!

February 4, 2008

Live Chat , Update, Tips

Posted by Noah Rosenblatt on February 4, 2008 at 10.27 AM

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!

January 3, 2008

Co-op Board Packages: Safeguarding Your Identity

Posted by Christine Toes on January 3, 2008 at 9.39 AM

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!

December 26, 2007

Who Wants A Depreciating Asset?

Posted by Noah Rosenblatt on December 26, 2007 at 10.11 AM

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."

So, are we basically saying that foreigners don't know sh*t, are completely clueless when it comes to our slowing housing market, and are blind to the economic warning signs that are expected to hit not only in the US, but abroad as well? Is this what we are pinning our hopes on; the foreign investor? Read "Does A Weaker Dollar Accelerate Foreign Demand", for my take and other top brokers' take on foreigners in our marketplace.

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:

the 10-City composite posts a record low in its annual growth rate

11 of the 20 Metro areas did the same

every Metro market went DOWN in both October & September

11 of the 20 Metro areas tracked, plus the two composite indexes, recorded their single largest monthly decline on record in October

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.

November 20, 2007

Dealing With A Bully Seller?

Posted by Noah Rosenblatt on November 20, 2007 at 9.20 AM

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.

My Answer:

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.

The problem here is one of helplessness. In the world of Manhattan real estate, the timeline for submitting a bid and getting a fully executed contract of sale is as follows:

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:

Buyer Activity is Strong

Another Interested Buyer Playing Games w/ Submitting A Bid

No Time Pressure Affecting the Seller

Seller Expected a Longer Time on Market & Prefers a Delayed Closing Date

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

October 23, 2007

Bidding Strategy 101: Reverse Psychology

Posted by Noah Rosenblatt on October 23, 2007 at 9.25 AM

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.

Trust me, every seller thinks their apartment is worth top dollar until its on the market for 3-4 months. Your job is to bring the seller down to earth. But how do you do this? Here are a few steps to guide you:

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.

October 22, 2007

An Accepted Offer Is Not A Done Deal

Posted by Noah Rosenblatt on October 22, 2007 at 8.14 PM

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 wa