The Real Deal New York

Michael Stoler – Buyers should get a grip

Unnecessary fears paralyzing the residential market

March 31, 2009
By Michael Stoler

Enough bullshit. We all know it’s a lousy market, but it’s not as bad as some people make it seem.

But unfortunately, some buyers are letting their fears of worst-case scenarios run their lives now.

As one of my dear friends, a developer of two highly successful sold-out condominium developments said to me, “We know psychology plays a large role in influencing the decisions of the prospective buyers of residential real estate.”

He added, “Unfortunately, the angst [some media reports] create clouds the decision-making process, forcing the consumer into believing they should buy only when the market has reached the bottom and only pay a price that has been heavily discounted. If they don’t believe they succeeded in achieving both, they are apt to sit on their hands and do nothing until the so-called experts tell them the storm is over and it’s time to buy.”

I agree with this developer, and a number of other experienced developers of residential condominiums, who said that while sales are down from their peak, the sky is not falling and the world is not expected to blow up before the summer.

No one can deny that buyers are indeed cautious these days, but there are transactions taking place. With treasury bonds at record lows, aiding to reduce residential mortgage rates to the lowest in decades and mortgage rates dropping, people who have been staying on the sidelines should evaluate the prospects of jumping into the market.

Kenneth Horn, president of Alchemy Properties, one of Manhattan’s most successful niche condominium developers, said, “It is obvious that the condominium market has indeed slowed down and pricing has fallen. However, there are many distinguishing factors that need to be discussed. First, in buildings — new and resale — where pricing was extremely high, there have been adjustments to the market. In other buildings, where pricing was not beyond the realm, there has been an adjustment — [but] not anywhere near the figures of 30 to 40 percent.”

A senior vice president for development at a prominent development company who prefers to remain anonymous, said, “Except in a few oversaturated neighborhoods where significant product has been on the market for a couple of years, you are not seeing discounts that the press is reporting. Even in those markets, there are price reductions not of 40, but rather 20 to 25 percent off of the peak numbers. In certain markets like Midtown and Murray Hill, deals are there and [they] are building momentum; the discounts are getting shallower, not deeper.”

A number of new condominium developments planned for marginal neighborhoods — especially in the outer boroughs of Brooklyn and Queens, as well as Harlem and in the Riverdale section of the Bronx — by inexperienced developers are having difficulty making sales. In certain instances, the condominiums may be discounted by the developer or the lender who takes the property back to sell it for what it should have been originally offered for in the first place.

Anyone selling a quality product that was realistically priced to begin with nevertheless recognizes that “discount” is a word that must be in their selling vocabulary today. As one developer said, “A 20 percent discount is a legitimate number to be applied against a realistic original offering price. If they don’t sell units at that discount, then they should be rented or warehoused until the storm is over.”

Units are selling if the product is priced correctly and if the purchaser is able to secure mortgage financing. Perhaps the biggest obstacle facing condo developers is the inability of purchasers to obtain permanent mortgage financing. In many instances, developers, as well as lenders for projects, are offering financing to aid in the sale. So it is no wonder developers are responding to Fannie Mae’s new restrictions for condominium financing with great concern.

Horn said, “In our two completed buildings at 50 West 15th Street and 125 West 21st Street, we closed on 90 units in the last four months of 2008 — at 99 percent of the Schedule A prices. Since mid-January, we have sold four of the remaining 10 units left in these two buildings at about 90 percent of asking. Bids came in about 15 percent below asking prices and we reached an average discount of about 10 percent. All of these deals were able to procure financing and will close.”

“We continue to have traffic at open houses, although buyers are being extremely cautious. Many buyers may come back three times before they make an offer. The key here, though, is that these two buildings are completed and ready to be moved into. With that in hand, buyers feel more comfortable that the buildings are completed and that there is no issue as to whether the developer has financing to complete the project,” Horn said.

The key factors are that buildings need to be finished before they sell, financing for buyers needs to be made available and pricing needs to be reflective of value — in specific markets. If there is not a lot of supply in a particular geographic area and there is a demand, prices will not be as affected.

I agree with Ken Horn when he says, “If people want to buy, now is the time. Prices have moderated and interest rates are low. There is no better time to buy.”

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