Andrew Barrocas, the CEO of the Real Estate Group New York, recently brokered nothing short of a real estate miracle. In the midst of the credit crunch, his client purchased a new condo Downtown with no money down.
To make it happen, Barrocas persuaded the building’s developer to let his client forego a deposit, instead using the 10 percent deposit — which came to $115,000 — from another buyer who’d broken his contract.
The developer also provided 30 percent financing to the new buyer and knocked $150,000 off the purchase price. To complete the deal, the new buyer received 60 percent financing from a bank.
The unusual arrangement worked out, Barrocas said, because the two buyers knew each other, and the buyer who walked away had suggested that his friend purchase the unit and use his deposit rather than letting it go to waste. Most importantly, he said, the deal would have been unheard of just last year when the market was strong. It came together because of the flexibility on the part of the developer, who was entitled to keep the money.
“The incentive was, he got a buyer for the unit,” Barrocas said. “In an ideal world, [the developer] would have loved to keep the deposit and find another buyer. But in a market like we’re in, he’s looking to do what’s safe.”
Given the financial crisis of recent months, many developers must now go to great lengths to sell units in new construction residential buildings.
Gone are the days when buyers clamored to plunk down millions for a new condo after a brief glance at a floor plan. Now that slow sales and falling prices have made the future of many construction projects uncertain, buyers prefer resales or projects that are near completion. As a result, developers are finding that they must be more innovative in order to sell out their units, even if it means taking risks and cutting into profits.
“Anytime you have a change in the market, people who are creative come out ahead,” Barrocas said.
In the down market, new development condos are facing challenges that resales and older construction projects don’t have. With sales volume down, prospective buyers worry that prices of new construction condos will fall in the time between contract signing and closing, which can sometimes be months or even years, explained Christine Toes, a vice president at Corcoran.
Meanwhile, the prices owners can rent their units for have in many cases fallen.
“There’s not as big of a concern that apartments are going to be flying off the shelves and they [buyers] need to get in early,” she said. “It’s kind of like the perfect storm for a lack of incentive to snatch up new developments. You can’t rent them for as much, and you’re not going to have 20 to 25 percent price appreciation in the next two years.”
Meanwhile, buyers are worried that many projects simply won’t get built at all — and with good reason, said Shaun Osher, the CEO of Core Group Marketing.
“I would say that about 80 percent of all new developments citywide have been either shelved or cancelled,” Osher said, adding that the figure includes both projects in the pipeline and those already for sale. “There are existing projects that are either under construction or about to start construction that won’t be moving forward.”
As a result, many buyers now find resales more attractive than new construction. “There’s a lot less risk in a resale from a buyer’s perspective,” Osher said. “It’s become much more difficult to sell off-plan because of the uncertainty of whether the project’s going to get completed.”
The problem has gotten so bad at some of developer Ken Horn’s new projects, including 462 West 58th Street and 303 East 77th Street, that he is planning to post large signs on the construction sites confirming that the projects have received construction loans.
“People want to see more completed buildings,” said Horn, the president of Alchemy Properties, who is holding off on marketing several of his new projects until construction is further along. “That’s a big change in the market over the past six or seven months.”
In the face of these concerns, even the freebies developers have been offering to lure buyers — free parking spaces, reduced closing costs or transfer taxes, discounted furniture — aren’t working in many new-construction buildings.
“It seems like the buildings that have just begun construction are not selling at all,” said Derrick Gross, a business analyst at StreetEasy.
As a result, developers of new construction projects have begun to step it up, taking more aggressive measures to sell units.
The 88 units at SteelWorks Lofts at 76 North 4th Street in Williamsburg went on sale a few weeks ago — just in time for the wild gyrations of the crisis on Wall Street. “It was at not so great a time with respect to the financial markets,” said developer Greg Belew, a managing partner at Fifth Square Partners.
While many buyers initially showed interest in the development, they have been hesitant to buy, he said. In response, he implemented a policy of allowing buyers to put down a deposit in two parts: 5 percent at signing, and another 5 percent several months later. “This was really to induce people to go ahead and make a commitment without having to put up so much cash at a difficult time,” he said. “The financial commitment is not as large.”
Belew knows the strategy is risky, because buyers with less money down are more likely to pull out of the deal. “It’s a worry,” he said. “But if this helps us gain market share and get people off the fence, there’s a momentum aspect to it.”
As The Real Deal first reported last month, SteelWorks is also one of several developments offering “price protection” programs that guarantee buyers discounts if prices in the building drop between contract signing and closing. Others include Clermont Greene in Fort Greene, One Sunset Park, and +Art at 540 West 28th Street in Chelsea.
This strategy also carries some risk, because the developer could lose money in the face of a drastic drop in prices. But it’s worth it to help assuage buyers’ fears of making a purchase, said Roberta Benzilio, the senior director of sales for Halstead Property Development Marketing, which is offering price protection in several of its buildings.
“People are concerned that if they buy now, the market will change between now and closing and they’ll lose out,” she said. “The only way to make people feel comfortable moving forward is to give them price protections.”
Developers are also finding that it’s crucially important to form relationships with mortgage brokers in an environment where buyers find it increasingly difficult to get financing, said Harry Jeremias, a principal at the Harch Group.
Jeremias noted that at the Renwick and Harch’s other new developments, the company’s mortgage broker, Everest Equity, proactively approaches buyers instead of the other way around. “Typically, developers hand out business cards for mortgage brokers,” he said.
He said he’s worked closely with Everest to make the necessary tweaks — an additional $5,000 discount, for example — to help make buyers’ financing structures more acceptable to lenders. “What’s driving down the prices is people not being able to get financing,” Jeremias said. “Ultimately, for developers, this is the way to go — teaming up with the right mortgage company.”