Falling in love again

While price is still key, brokers say the emotional connection to an apartment is becoming important again for buyers

Residential real estate broker Elaine Clayman has noticed a change in her buyers lately.

With prices falling for the past year, buyers had seemed entirely focused on one thing: cost. How much they actually liked the apartment was less important than getting a great deal.

“Liking it was not part of the equation for a while,” said Clayman, a managing director at Brown Harris Stevens. “I felt like I was selling commercial real estate.”

But in the last few weeks, she’s noticed a shift in her buyers. Suddenly, they seem willing to pay slightly more for an apartment they love.

Thanks to a number of factors — from steady sales activity to simple relief that the worst seems to be over — buyers are allowing themselves to become emotionally attached to properties in a way they haven’t since the boom, according to brokers.

This shift, while impossible to quantify, is crucial to a market recovery, because buyers who have their heart set on a property are more likely to engage in bidding wars and pay higher prices.

“For the past six months, everything was value-driven,” said Charles Homet, a senior vice president at Halstead Property. “Now, they’re back to looking for their ideal space. I see buyers saying, ‘This is the property for me; I’m going to do what it takes to secure it.’”

As enthusiastic as these buyers are, the trend is just starting to take hold, and lending needs to loosen before the full impact of this renewed confidence can be translated into price increases. In the current credit crunch, banks quickly bring besotted buyers back to reality by rejecting deals where the price seems too high.

“If they make an exotically high offer, the deal’s not going to stick, because the banks will kill it,” said Brian Lewis, an executive vice president at Halstead. “The memory of what we went through is not going to be forgotten anytime soon.”

Buying a home has always been an emotional purchase, especially as prices skyrocketed in the mid-2000s.

During the boom, Lewis saw buyers cry when they didn’t get the apartment they wanted, while others slipped notes under the seller’s door begging to be reconsidered. Overpaying was rarely a concern, since buyers believed their homes would quickly double or triple in value.

“Some people just melt when they see an apartment, and their logic goes out the window,” Lewis said.

All that changed in the months after the Lehman Brothers collapse. Confronted with falling prices for the first time in years, buyers fixated on getting steep discounts, and little else.

“People just seemed very price-driven,” Clayman said. “They didn’t care if it had a view — it had to be the right price per square foot.”

In the chaos of the post-Lehman months, buyers and sellers have often disagreed about what the right price should be, making deals elusive, said Mabel Cheah, a sales associate at Core.

“There was all this uncertainty about prices, and we didn’t know where the economy was headed,” she said. “Buyers were trying to lowball a lot. You couldn’t make deals happen with lowball offers.” 

During those months, Clayman noted, no matter how much a buyer liked an apartment, they’d walk away from the deal if the price wasn’t right.

“People weren’t buying what they loved,” she said. “It was a financial decision.”

Sign Up for the undefined Newsletter

As recently as the past few weeks, however, that has started to change. One of Clayman’s clients, for example, recently went into contract on an Upper West Side one-bedroom after three months of looking. Coming from a noisy building, he loved that the newly renovated apartment had “quiet construction” to keep out noise from the neighbors, and faced a courtyard rather than the street.

The asking price was $649,000, and Clayman’s client initially offered $615,000. But the seller received another bid, and asked for both candidates to submit their “best and final offers.” Clayman thought her buyer would walk away, as many of her clients have done in recent months. Instead, he bid the full price, saying he would have regretted not getting it.

“He decided to follow his heart,” Clayman said, noting that in three of her other deals the same week, “price did not rule.”

“Even two weeks ago, head versus heart would have won,” she said. “There is a definite shift in psychology.”

One reason for this change is healthy sales activity since the summer, which has given buyers a greater sense of urgency, Homet said.

“There’s a herd mentality,” he said. “They see others buying property.”

Others are simply relieved that the worst of the downturn seems to be over.

“Buyers are very much tuned in to the zeitgeist, what’s in the air,” Homet said. “They see that the sky’s not falling, the world’s not coming to an end. They feel like they can take a risk and pay a premium for a property they really love.”

Homet recently represented a client who signed a contract at Dumbo’s 70 Washington Street, a former factory that was converted to condos in 2005. The price set a record for that line of apartments in the building. But the bank’s appraisal came in lower than the contract price, so the buyers couldn’t get the mortgage they needed.

At that point, the buyers could have walked away, Homet said, since there was a mortgage contingency clause in their contract. There were also other apartments in the building to choose from.

But something about that unit had them hooked. “This is the one that spoke to them,” he said.

They fought with the lender, finally getting permission for another appraisal, and making sure the new appraiser saw newly signed contracts for comparable apartments. The second appraisal was accepted, and the deal went through.

“That’s incredible confidence on the buyers’ side in this market, to stick to their guns like that,” Homet said.

His clients may have salvaged their deal, but not all buyers are willing and able to do that. As a result, the obstacles Homet’s buyer encountered — lower-than-expected appraisals and tight financing — will continue to temper price increases as the market gets back on its feet.

“It’s never been tougher to get financing,” Lewis said. “If [an apartment] doesn’t appraise out, the banks won’t lend.”

Appraisals present a challenge anytime values are rising, since appraisers look at older sales to determine prices, Homet said. In addition, many brokers say that the new guidelines known as the Home Valuation Code of Conduct are causing falsely low appraisals in New York City.

“With the new restrictions on how appraisers are selected, that’s going to be a real challenge for brokers as the market improves,” Homet said.

Even so, buyers who get carried away and make overly high offers will quickly get a wake-up call from banks forcing them to come back to reality, Lewis said.

“No one’s staying drunk on the emotion of the possibility of that terrace on the park,” Lewis said. “The banks will not let us get into an irrational exuberance.”