Buyers begin to boomerang

When the buyer of a new development condo on the Upper West Side broke his sales contract last spring, he didn’t regret forfeiting the $250,000 deposit. By his estimate, the $2.5 million condo had lost far more of its value — some $800,000 — since he agreed to purchase it.

“He thought, ‘I’m losing less money walking away from my contract deposit. I’m not going to throw good money after bad,'” said Steven Sladkus, a partner at law firm Wolf Haldenstein Adler Freeman & Herz, and the buyer’s attorney.

So Sladkus was surprised to get a call from the buyer a few weeks ago asking if the sponsor would sell him the unit after all — for the right price.

As Sladkus discovered, these proposals are becoming increasingly common in the current climate as more developers turn to a surprising pool of customers: their former buyers.

Over the past year, a bevy of purchasers, nervous that they were paying too much in a declining market, walked away from their contracts, often leaving their deposits on the table. But with the darkest days of the real estate crisis seemingly over, some have reconsidered and are now looking to buy the same units they once fled — or at least others in the same building.

These buyers are often still attached to the properties they had originally planned to purchase, brokers and lawyers say. And now that prices have dropped, they’re hoping to get better deals.

Rather than spurning these wayward buyers, many developers are welcoming them with open arms, sometimes even applying the original deposit to the new purchase.

“The truth is, they still love their apartments, and the prices have come down,” said Allison Scollar, head of the real estate practice at Manhattan law firm Guzov Ofsink. “They feel a lot better about the projects.”

The most high-profile of these “boomerang buyers” is telecom mogul and restaurateur Michael Hirtenstein, who has rapidly acquired real estate since selling his company, WestCom, to JPMorgan Chase in 2005.

Two years later, Hirtenstein made headlines by agreeing to pay more than $25 million for six units at the Tribeca development One York. He hired the building’s architect, Enrique Norten, to help him tailor the 11,000-square-foot space to his specifications, as well as a 5,000-square-foot outdoor area with a rooftop pool, a hot tub and European-designed pergolas built to withstand winds of up to 140 miles per hour, “in case there’s a hurricane,” Hirtenstein fondly told The Real Deal.

He’d spent some $6.5 million on construction by November 2008, when, spooked by the financial crisis, he pulled out of the deal, forfeiting a deposit to the tune of $7 million.

“I walked away because with what was going on, I didn’t think it was a very prudent thing to be doing,” Hirtenstein said.

“I closed the door on it,” he said.

But he and the project’s developer, Jani Real Estate principal Stanley Perelman, remained friends, and Hirtenstein said he never quite managed to get the apartment out of his mind. As the months passed, he’d sometimes e-mail Perelman after driving past One York on the way back from New Jersey, telling him the project “looked great.”

Perelman was still attempting to sell the apartment, but his heart was never in it. “I couldn’t imagine anyone else living there,” said Perelman, who maintains that he doesn’t blame Hirtenstein for walking away.

“He did what a prudent, smart investor would do,” the developer said. “None of us ever thought Bear [Stearns] would be gone, and then Lehman Brothers. A lot of people just said, ‘Time out, let’s see what’s going to happen before I make a large acquisition.'”

By the summer, the economy seemed to be more stable. Hirtenstein sold a townhouse at 23 Gramercy Park South in July for $18.5 million, according to city records, making “a reasonable profit,” he said.

Meanwhile, real estate all over the city had tumbled. Prices at One York had been lowered by up to 25 percent, Perelman said.

Eventually, Hirtenstein became serious about repurchasing the units and the two entered negotiations. Under the terms of the new deal, which closed on Aug. 27, Hirtenstein paid $16.85 million — far less than the original purchase price — for five of the six apartments he’d originally planned to buy. He was also effectively able to apply his original deposit to the new purchase.

“I think we’re both thrilled,” Perelman said. “I was really happy that he didn’t lose any money and he’s going to live there and enjoy the space.”

One might think that a developer, having been burned once, might hesitate to work with a contract-breaking buyer again. But in a market where buyers are scarce, most developers infinitely prefer to sell an apartment — even at a discount — than to be left with only a 10 percent deposit, Sladkus said.

“The sponsors have to pay off the construction loans,” he said. “If the purchaser gets a concession and they’re happy, and the sponsor can live with it, the bad blood fades away in five seconds.”

Buyers are now returning to the table because they feel that prices are unlikely to fall much further, Perelman noted.

Still, not all the negotiations are as drawn-out as Hirtenstein’s. Scollar said she has seen buyers change their minds soon after backing out of contracts, especially in buildings where they’ve been given the right of rescission because of a delay or change to the offering plan. Developers in those circumstances are often more likely to negotiate, since they fear losing large numbers of buyers at once.

“You send a letter rescinding the contract, and the developer will say, ‘Can we negotiate? We’ll lower the price and throw in a parking spot,'” Scollar said.

That was the case for another one of Sladkus’ clients. The buyer was walking through the building in the West 20s where she was about to close on a $1.25 million apartment when she discovered that the living room was half the size she’d expected.

“She walked through and said, ‘Are you kidding me?'” Sladkus said. “I called the sponsors and said, ‘Don’t even think she’s going to come to this closing.'”

The buyer missed her closing date and Sladkus filed an application with the Attorney General’s office requesting her deposit back. While the parties waited for a response, the sponsor offered to knock $85,000 off the price, and the two sides made a deal.

While some buyers may threaten to walk away as a negotiating tactic, that’s a risky move, Sladkus said. “There are some well-known developers who don’t like to budge,” he said. “You don’t want to look too desperate as a developer.”

And negotiations aren’t easy, even in a tough market.

The fact that Hirtenstein and Perelman were able to come to an understanding “says a lot about our personalities, and also about the project,” Perelman said.