Now that buyers have the upper hand amid a weakening New York City real estate market, they are using increasingly aggressive tactics to drive down apartment prices.
The latest move: renegotiating an apartment’s price after having already signed a contract and placing a down payment in escrow.
Buyers, keen to the fact that the city’s real estate market has grown substantially weaker in the past few weeks, have responded by generally angling for additional discounts and perks in all stages of negotiations. And while many have taken more demanding stances during initial discussions, others have tried to tweak agreements that in past years would have been considered set in stone.
Brokers have seen renegotiations most frequently among buyers who settled on contracts several months or a year ago, but have watched the market decline while waiting to close.
These buyers usually ask for discounts of 5 to 10 percent to compensate for what many believe to be a fundamental shift in the market. Some, however, have demanded concessions like having the seller refinish an apartment’s floors.
“People are trying to call the sponsors’ bluff and the sponsors are trying to call the buyers’ bluff,” said David Maundrell, president of Brooklyn-based aptsandlofts.com.
Maundrell, who focuses on new developments, called buyers’ attempts to overhaul a deal at the last minute “very frustrating.” It throws yet another kink into the mix for brokers dealing with hesitant buyers and a volatile economy, he said.
The last time some brokers saw this magnitude of renegotiations was during the city’s last major real estate downturn, which started in the late 1980s.
The renegotiations come while some New York developers have begun offering so-called “price protection programs.” As The Real Deal first reported last month, SteelWorks Lofts in Williamsburg and Clermont Greene in Fort Greene are among the developments offering the programs, which guarantee that buyers in their new construction buildings get a discount at closing if other units in the building sell for less than they paid (see Developers staking out new selling strategies).
Michael Guerra, director of Brooklyn sales for Prudential Douglas Elliman, said buyers are having “an emotional response” to the market. “The variables include buyers wanting to negotiate until the 11th hour,” he said.
One of Guerra’s buyers who had already placed a $58,000 down payment on a $580,000 Boerum Hill condo now wants to negotiate a price decrease, Guerra said.
“There’s no incentive for the seller,” he said. If the buyer walks away from the deal, the seller gets to keep the down payment while putting their apartment back on the market. He said few sellers give in to these last-minute requests.
But other brokers say buyers and sellers alike may have reason to renegotiate.
A buyer who believes the apartment has declined in value may be willing to sacrifice a down payment rather than go forward with the purchase at the agreed-upon price. Meanwhile, a seller who thinks the market will continue to fall risks losing money by putting an apartment back up for sale — even if it means keeping the first buyer’s down payment.
As the market enters the traditionally slow winter months, and as property price drops become more evident, brokers think that even more buyers will leverage their new found power into last-minute discounts.
At issue in all these negotiations and renegotiations is how far New Yorkers believe the city’s real estate market will fall. So far, Manhattan’s prices have remained fairly stable, while home values in Brooklyn and Queens have fallen further. But the larger instability in the economy and the difficulty in getting financing have shaken the market to its core.
Quarterly reports will not reflect recent price declines until February or March, said Jeff Krantz, vice president of sales and marketing at City Connections Realty. That is when homeowners who have been keeping their properties off the market will start creeping back in, he said, even if it means dropping their prices. “There comes a point when you can’t hold on anymore,” he noted.
In the meantime, Krantz expects the number of completed sales to drop as sellers hold out for buyers willing to pay prices the sellers consider acceptable.
Even though prices have not plummeted, Gil Neary, managing partner of DG Neary Realty, said, “The people who are out shopping now are the people who are shopping for bargains.”
Sometimes a bargain-hunting buyer just needs a small, additional break from the seller as a form of recognition that the market is suffering, he said. Neary described one such buyer who recently bargained for an additional $25,000 off the price of a $2 million condominium in Soho.
The buyer, who agreed to the cash deal in early September, said, “Well you know, it seems like the real estate market is changing,” recalled Neary. “I’m seeing other opportunities out there. Would the seller consider making an adjustment?”
In another case, Neary said, a couple that had intentions of trying to renegotiate their agreement has been forced to do just that. The couple, who agreed to buy an $875,000 apartment in the lower part of the Upper West Side, had hoped to pay for the property largely in cash. But in the months between signing the contract and the closing date, the couple’s financial situation changed dramatically. Their stock portfolio shrank, and they failed to sell their current apartment, which they had expected to fetch the same amount as the co-op they agreed to buy.
“The buyers are very, very unhappy about approaching sellers in this type of situation,” Neary said.
That couple is not alone. Neary said many buyers who signed contracts for apartments in new developments months ago, expecting to get 90 percent financing, have since learned at closing that they were approved for only 70 percent financing. The need to come up with 30 percent of an apartment’s cost up front, rather than 10 percent, can easily be a deal-changer — or, in many cases, a deal-breaker.
But frequently, brokers say, buyers who end up trying to re-tool contracts are doing so not because they have no other financial option, but simply because they want to get a better deal.
Some brokers believe buyers are more apt to attempt a renegotiation if they are buying new construction, rather than a resale unit. Many new condos, after all, pre-sell apartments far in advance of the buildings’ openings, leaving a longer time between the initial contract and closing.