In late 2006, when the Manhattan residential sales market was red hot, Lawrence Rich, an associate broker and vice president with Prudential Douglas Elliman, decided to put his money where his mouth was and buy some investment property.
Rich chose a duplex at ThreeTen, a luxury condo tower at 310 East 53rd Street that boasts valet service and a private garden. He put down 10 percent and waited for construction to end so he could close and flip.
But when January 2008 and the opening of ThreeTen rolled around, the market had changed dramatically. The fallout from last summer’s subprime debacle left buyers, once desperate to get into the market, more cautious, meaning sellers like Rich had to adjust their expectations. He put his new property on the market and hoped for the best.
“I was a little nervous,” he admitted. “There were several other similar apartments in the building that were also for sale. It was a very competitive process.”
Within a month, he had an interested buyer, but there was a problem: closet space. The buyer wanted more room for her approximately 200 pairs of shoes and 200 handbags. So Rich did something that he probably would have never considered during the boom times: He offered to have a professional company renovate the closets to her specifications. The price tag? A little more than $37,000, which Rich shelled out of his own pocket.
“I decided I wasn’t going to be greedy,” said Rich. “I thought, I have an opportunity to sell and make a good profit; I should do it.”
The scheme worked, and by March, they’d closed the deal. “I consider myself lucky to have gotten my money and gotten out,” he said. “Buying and flipping is a much more dangerous game now.”
His fellow brokers agreed.
“It used to be that if someone fell in love with an apartment, they’d make an offer that minute and close within a week,” said Louise Phillips Forbes, executive vice president of Halstead Property. “Now, people fall in love but aren’t necessarily prepared to make a decision right away.”
This kind of cooling off, brokers throughout the city said, means that these days, sellers, whether they’re investors reselling units or big development companies peddling sponsor units, have to work a little harder, and in many cases give a little more, to make a sale that a year ago would have practically made itself. And when the two come into competition, the stakes are even higher.
Forbes pointed to 10 West End Avenue, where she has a two-bedroom listing for $1.55 million, and the sponsor is selling a similar unit — but with a better view — for $1.8 million. Forbes said she and the building’s broker have a friendly relationship.
“If somebody comes to see the apartment I’m representing and says, ‘I like it, but there isn’t enough view,’ I’ll send them to her,” she said. “Of course, she tells me I’m not making her job any easier because having my resale on the market forces potential buyers to put a price tag on what they’re willing to pay to be on a higher floor.” (In this case, said Forbes, it’s an extra $331 per foot.)
Forbes admitted that this kind of I’ll-scratch-your-back-you-scratch-mine relationship is rare. And in the competition between resellers and sponsors, brokers said creative incentives, like the closet make-over, are becoming more common.
Sponsors can waive some closing costs, and also offer perks like a reduced fee at the health club or a storage bin downstairs.
Adrienne Albert, president of the Marketing Directors, also points to advantages such as appliance warranties, which go to the first buyer but often won’t transfer at resale.
“You have to look at each deal and evaluate,” said Albert. “You have to think, ‘What are the hidden benefits? Are these two apartments really the same?'”
According to data compiled by analyst Derrick Gross at StreetEasy, there are several Manhattan buildings where resales have hit the market before the developer has sold all sponsor units.
At 40 Bond, three of the four resale listings have cut their asking prices. Apartment 5D, a one-bedroom and the only unit in direct competition with a sponsor unit, has been on the market since September 2007, and dropped its asking price twice, from $3.6 million to $3.5 million in January 2008, and to $3.1 million on March 17. The unit had been listed by the Modlin Group, but is now being sold through Corcoran. The sponsor unit, on the market since November, is holding steady at $3.5 million.
Cipriani at 55 Wall Street has 23 sponsor units and 16 resales available, and the Avery on Riverside Drive had 13 sponsor units and 9 resales as of late May. According to Gross, the Avery dropped asking prices on five sponsor units in mid-May, including a one-bedroom now going for $95,000 less than its initial listing. Neither 55 Wall nor Gramercy by Starck have cut prices on their sponsor units, but “are most likely giving concessions.” The Gramercy by Starck had a total of 22 sponsor and resale units on the market in late May; one resale recently saw a price chopping of $75,000.
Karen Skinner bought a studio in a new condo building on East 100th Street in February 2007 for $287,000.
Skinner, director of operations of the Sept. 11 Families Association, and her husband both work in Manhattan and planned to use the apartment on weekends or when the weather was too bad to commute back to their primary home in Westchester. A year later, however, they’ve decided to sell the Westchester house and settle permanently in Manhattan. They’re upgrading to a two-bedroom on 117th Street. They had put the studio back on the market for $375,000, but reduced the price to $350,000. As of mid-May, they had two offers.
“East Harlem is really changing,” Skinner said. “A lot of people are looking to downsize, and there aren’t many studios for sale.”
Skinner said she’s not at all anxious about making the sale, but admitted she has thrown in amenities — she’s including the wall-mounted flat-screen television and a Murphy bed and sofa to sweeten the deal.
Roberta Benzilio, senior director of sales at Halstead, said that although they may have some advantages, developers are somewhat wary of going up against investors to sell units in new buildings. “A few years ago, when there was a frenzy of investors flipping and making huge profits, sponsors started to realize that these buyers were becoming their competition,” she said.
As a result, said agents, developers inserted “lock-in” clauses, which stipulate that a buyer can’t resell for a certain period of time after closing, or until the building is sold out. Benzilio said she’s heard of buildings telling buyers that if they resell at a profit, they have to share it with the sponsor.
But even when they aren’t competing with sponsor units, some sellers are still finding it difficult to unload apartments. The solution, for many buyers, is to rent their property for a few years and wait it out. Rich said he has clients who bought early at 15 Broad Street, ThreeTen and Sheffield 57, all of whom hoped to sell for a big profit. But in the wake of the credit crisis, they decided to rent the property and wait for the market to stabilize.
“Units in new developments are very desirable for renters because they offer services and amenities,” said Benzilio.