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?"

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.

• Comments (9)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

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.

• Comments (23)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

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.

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!

• Comments (7)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

Bringing in a Buyer Broker After Viewing a Property?

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.

• Comments (21)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

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 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.

• Comments (18)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

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

• Comments (2)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

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!

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!

• Comments (11)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

Getting a Divorce? Don't Buy A Co-Op!

I seem to be living in co-op HELL these days. See my post on the nightmare of the proprietary lease renewal here.

My latest adventure was working with a customer who was going through a divorce. I didn't think it was a big deal that he didn't list alimony or child support payments on his financial statement because none had been determined yet. Word to the wise: Going through a divorce? Don't buy a co-op.

Co-ops are generally looking for:

- 20 - 25% down payment (sometimes more, rarely less)
- 18 months at a minimum and most likely 2 years of mortgage and maintenance payments left over in reserve in liquid assets (401Ks and IRAs do not count!) after the down payment (Sutton Place and Park/5th Ave buildings frequently look for much higher reserves - this at least gives you a ballpark requirement for most co-op buildings)
- A 25 - 28% debt to income ratio (if your payments are $3,000/month, you need to gross about $12,000/month)

So if you are going through a divorce where you may be required to pay alimony or child support in the future, a board is going to be very concerned about your future debt to income ratio, even if your current numbers are great.

In this case, my customer had 2 years of payments in reserve, he was putting more than 20% down on the apartment, he had a great job history, a credit score of 770 and had a 26% debt to income ratio.

After submitting the board package, the board's managing agent asked for my customers divorce settlement paperwork. I explained that the divorce wasn't final and no paperwork had been drawn up yet. We ended up having to get a letter from the wife stating that her husband wasn't going to have to pay alimony or child support. I felt terrible for my customer and can not imagine how awkward it must have been for him to ask his wife to do this for him.

But even the letter from the wife wasn't enough for this building. The board then asked my buyer to put a year's worth of maintenance payments ($11,000) into an escrow account for an indefinite period of time. Although the broker rumor mill is that other people in the building have asked for and received their escrow $ back after one year, there is really no absolute guarantee that the building will give it back until my buyer sells his apartment. Different buildings work their escrow agreements differently.

Toes says:

If you are going through a divorce, buy a condo!

If you can't buy a condo, be prepared to furnish any paperwork that has been drawn up, or be prepared to have an attorney or your soon to be ex draft a letter to the board about estimated (or better yet, maximum) alimony or child support payments.

If you are going through a divorce be prepared to offer a year or two of maintenance to be kept in an escrow account to make a co-op board feel comfortable with your future debt to income ratio and reserves.

If you buy a co-op when you are going through a divorce, you'd better be be overly qualified to buy the apartment! Don't submit joint bank statements because naturally the board will assume that only half of the funds in that account will end up being yours. As my mother always said, "a woman should always have her OWN MONEY!"

When buying a co-op, plan to bear your heart and soul to the co-op board. Nothing is sacred! NOTHING.

Photo: Source

• Comments (3)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

Another Co-op Board Nightmare: Lease Expiration

Please note that this is me, Christine Toes, writing this post, and not Noah:)

I am representing a seller in a building with a difficult managing agent or a difficult co-op board (it is hard to say which & it could be a combination of the two. Perhaps they aren't being difficult, it might be that they just don't care?). The buyer was approved by the board to purchase the apartment on Thursday, December 20th. Normally, we'd schedule a closing date and be done in about two weeks, perhaps a little bit more due to the holiday season. So we should have closed before January 4th.

The co-ops proprietary lease expires in about 30 years, and her lender (Wells Fargo) will not give her a 30 year loan until the Managing Agent (MA) sends them a letter saying that the board intends to renew the proprietary lease. It is my understanding that every lender is going to require that a co-op's proprietary lease be valid for more than 30 years or they are not going to issue a 30 year mortgage. So this isn't a problem with Wells, it is something any lender would require.

Of course the board is going to renew the proprietary lease! This should be a routine procedure. But the MA says we must wait for the next board meeting in order to address this issue, citing that she doesn't have the authority to write the letter.

Originally the meeting was supposed to be the first week in January, so we figured this issue would just set us back 2 weeks. Then the board cancelled their January meeting and decided to wait until February 6th to meet!

Despite repeated calls to the Managing Agent by the seller, and both the buyer's and seller's attorneys the M.A. says her hands are tied and we have to sit tight until February. The seller also called his neighbor who is on the building's Board of Directors, but hasn't received a response. Meanwhile, the seller is paying for a vacant apartment and the buyer's mortgage rate lock has probably expired. Luckily for her rates have probably gone down since she locked in a rate, but she may face penalties or incur additional fees for extending her rate. And she'd obviously like to move into her apartment!

I am tempted to write a letter to the entire building letting them know what is going on. I don't know if the Board of Directors (except the seller's neighbor) is even aware that this is happening. And I suspect shareholders in the building would not be happy to learn that the MA / Board are unnecessarily holding up a sale for SIX WEEKS!

My seller's attorney (who has done thousands of co-op transactions in Manhattan) tells me that this is preposterous and that he has never seen it happen before.

Toes says:
1. If you are on your building's Board of Directors, find out when your proprietary lease expires and make sure that the Board votes to renew it when it gets down to 30 years prior to its expiration.

2. If you are on your building's Board of Directors, give your Managing Agent a directive to contact you if a problem is holding up a sale in the building.

3. If you are selling your property, talk to your managing agent and ensure that the proprietary lease is not expiring close to 30 years from when you anticipate a closing.

• Comments (4)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

Co-Op Board Turn Down: Sales Price Too Low?

Before I start, know that is me, Christine Toes that is writing this, not Noah!

I recently encountered a situation where a buyer whom I thought was qualified, my sales manager thought was qualified, and the seller thought was qualified was turned down by a co-op board.

A board turn down is frustrating for everyone involved. Buyers may have already given notice to their landlord that they are moving & may suddenly find themselves scrambling to find another apartment. Sellers may have moved out in anticipation of the sale and now have their apartment sitting vacant. Mortgage and maintenance payments may be flying out of the seller's pockets while they start the lengthy co-op process (a three month minimum "to do" unless the buyer pays all cash) over again. The brokers who negotiated the deal and put together the lengthy co-op board package start all over again. The mortgage brokers/bankers get nothing, the attorneys get only a portion of their fee. Basically everyone loses.

With this particular board rejection, there were a few issues at hand:

1. A New Management Company: The building had recently hired a new management company & they were unable to give insight about what this particular board was looking for as far as financial requirements. My buyer had the qualifications co-op boards generally look for: 20% down, 2 years of mortgage + maintenance payments in reserve in liquid assets, a 25% debt to income ratio (although a large part of her income was bonus, which I will get to in a minute), and a 770 credit score. Often, we can feel out the managing agent for what the board has/has not approved in the past, but since this was the first board package this M.A. had submitted to this board, the M.A. didn't know what to expect. We were going in blind, which is a real estate agent's nightmare.

2. My Buyer Was In Finance / Nervous About Future Bonuses: Although my buyer was at one of the very few companies not hit by the credit crisis, I think the board may have been nervous about bonuses. I suspect that they were probably harder on my buyer because of what is happening on Wall Street now. Even though my buyer was in a "Future Leaders" program at the company, perhaps they also feared the projected layoffs. In short, if it had been last year, my buyer might have soared through with flying colors.

3. Sale Prices Too Low: After the board turn-down, I brought a new buyer for the apartment. This time, the managing agent was willing to run the new buyer's profile by the board (this rarely happens). The response we received regarding the new buyer was that the "board liked the new buyer's financial profile better than the previous buyer's profile...And they liked the sale price better as well."

Then it dawned on me.

The first transaction happened when I brought the buyer for an apt that was For Sale By Owner. Since the owner was selling it, the apt was really not getting the exposure it would have gotten on the open market. My buyer and I knew we were getting a great price on the apartment.

After the co-op board turned my customer down, luckily for me, the seller still really liked me and she gave me the exclusive on the property. Within a week of the apt being officially on the market, I sold the apartment for over $35K more than what the first deal was for in a bidding war. (Even after adding in the additional commission she ended up paying me, the seller made $20K more using a broker).

I don't want to give exact numbers, but basically it was a difference in the sale price of about 770K and 810K. Although I never really thought about it before, I think there is another issue to consider when looking at why co-ops turn buyers down: the board wasn't happy with the sale price. Particularly in a smaller building, every sale counts because every sale is going to be scrutinized as a comparable when current owners sell their apartments in the future. Makes you wonder.

Toes Says:

1. Steer buyers with low income and high bonuses towards condos whenever possible even if you (and they!) think it is crystal clear that they can afford the apartment. You never know when a co-op board is just not going to be comfortable with people who make so much of their income in bonus.

2. If you are getting a fabulous price on an apartment, don't rule out the possibility that the board might turn down the buyer, not because they aren't qualified to buy the apartment, but because they are afraid that a sale at a low price will hurt future sale prices in their building.

3. Never rule out the possibility that just because a buyer of a certain financial profile passed a board last year, that a similar buyer might not pass this year because of what is going on in the economy and/or news media.

4. The strict financial requirements of co-op buildings in Manhattan have helped keep NYC's housing market healthy and prices stable despite the loose lending standards of the past few years. We are certainly being saved from the high foreclosure rate affecting other cities. However, in some cases, I think boards have become too strict. I highly recommend that if you have an opportunity, get on your co-op board so that you can make sure your building is not keeping perfectly qualified buyers out. When you go to sell, you'll be very happy that your board doesn't have a reputation for being the most difficult board in the neighborhood!

Links: Co-op Board Ratings via WallFly.com!
The Attorney General speaks out on problems with co-op boards

• Comments (8)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

80/20 Rule Expanded: Co-ops Should Thank Bush

A: Did you know that the recent Mortgage Forgiveness Debt Relief Act of 2007, recently signed into law on December 20th by President Bush, contained an amendment that should make co-op owners rejoice! The 80/20 rule now includes more options for co-ops to qualify and receive market rate commercial rents that otherwise wouldn't have been realized due to tax laws.

80/20 Rule - A federal tax rule that requires residential co-ops to get at least 80 percent of their gross income from their tenant-shareholders and no more than 20 percent from other sources like commercial rents.

According to a release by attorney Aaron Shmulewitz of Belkin, Burden, Wenig, & Goldman, LLP:

On December 20, 2007 President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007. The law contained an amendment to §216 of the Internal Revenue Code (the “Code”) that is of immense importance to many co-ops.

In order for a co-op to qualify as a "housing cooperative" (and, thus, enable its shareholders to enjoy the same tax benefits available to home owners (i.e., the $250,000 per person exemption on the gain on sale of a residence, as well as the tax deductibility of interest paid on the shareholder’s apartment loan, interest paid on the co-op’s underlying mortgage, and real estate taxes paid by the co-op), a co-op must satisfy various requirements stated in Code §216.

The most difficult requirement to satisfy has usually been that at least 80% of the co-o’s income for the year must come from its shareholders, and no more than 20% could come from non-shareholder sources. As a result, co-ops whose buildings contained large stores or other commercial spaces were often forced to keep the rent payable by such commercial tenants artificially below-market, or keep the maintenance payable by the co-op’s shareholders artificially high, or impose assessments on the shareholders, so as to preserve the 80/20 income ratio. Some co-ops resorted to even more complicated efforts.

However, the new law radically changes that by adopting two additional alternatives that would also satisfy the “80/20” requirement. Now, a co-op can also qualify if, for the tax year in question:

(i) at least 80% of the total square footage of the co-op’s property is used or available for use by shareholders for residential or residentially-ancillary purposes, or

(ii) at least 90% of the co-op’s expenses are for the acquisition, construction, management, maintenance or care of the co-op’s property for the benefit of its shareholders.

The change became effective immediately, and will benefit co-ops whose tax years end on and after December 31, 2007.

This new law expands the ability of the corporation to qualify and charge market-rate rents for commercial tenants that otherwise would not have been allowed by tax law. As a result, co-ops that can now qualify should be able to realize significantly more revenue from commercial tenants assuming the raised rents are agreed. Interesting little find here!!

• Comments (3)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

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."

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.

• Comments (9)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

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.

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

• Comments (1)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

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!!

• Comments (13)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

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.

• Comments (8)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

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

What you are looking for is multiple price cuts in a short period of time OR one really big price cut in the past week or so. Once you see 2+ price reductions in a 4 week period, you know the seller is either getting nervous and needs to sell soon OR was ridiculously overpriced to begin with and is choosing the small but more frequent price cut strategy to stimulate interest (not a good strategy heading into the summer!). When you see one real big price cut in the past week or two, you get that same feeling. Here are some examples.

251 West 19th - Price Cut $650,000 Yesterday!

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?

• Comments (2)
• Permalink

• Add to del.icio.us
• Digg this!
• Add to Technorati
• Add to Reddit
• Add to Newsvine

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!

As for my own business, I am noticing continued activity from brokers via appointments scheduled during the week. Most of my deals are co-broke and I usually rely on the Manhattan brokerage community heavlily to bring to the table the most qualified and highest bidder for my sales clients. Once this starts to slow I know I am in the dog days of summer.

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