Buying Residential Real Estate in a Competitive Urban MarketApr 5, 2001 Write an essay on this topic.
Popular Products in BooksThe Bottom Line I don't think you should pick a real estate agent to buy. Doing so will probably increase your purchase price and reduce your choices.
During the two and a half years I spent relentlessly pursuing the perfect apartment in Manhattan, I realized buying an apartment in New York City is an endurance exercise. On rare occasion, it could be a sprint, but it's more likely to be a distance event. Either way, you need much in the way of training and preparation.
There are many lessons to be learned in the NYC (New York City) market, most of which I learned the hard way. Since what I learned can be extrapolated to help others in similar markets, I decided to address competitive urban markets, instead of just NYC, though I am definitely using my personal experience as the didactic device.
Brokers can certainly help, but they can also be your worst nightmare, so choose carefully (hints below). [It actually bugged me that this particular topic was about "How to Pick a Real Estate Agent to Buy a Home," as if it was already decided that doing that was a good idea. I disagree, which is why I posted this review here, but more of that below.] If you are interested in buying a co-op, and not a condo, don't miss the "horror stories" below. They might change your mind. Read on to learn everything you need to know to swim with the sharks (including competitive strategy, actual costs, steps in the process, and who you should get involved and when).
Aside from getting used to the ungodly amount of money you're about to spend, the indentured servitude you will be forced to enter and the fact that you've got to lower your "dream home" expectations considerably, you must steel yourself against the inevitable accusatory assertions from your rural and suburban counterparts.
"You paid **that** for a X-bedroom apartment?" shrieks your cousin's husband, Cletus. "Hell, I have a platinum-lined, three bedroom split-level, and got my own 500 acre-strong fiefdom, with auxiliary private island, and I only paid one-tenth of that!"
This will happen. Everyone will pay a fraction of what you will pay, and they will get logarithmically more for it. However, NYC is a different world, just as San Francisco is, for example. Sure, we all pay in these greenbacks called "U.S. Dollars," but it's like it's not even the same currency. Real estate is infinitely more expensive in NYC (and places like it) because people want to live there. Remember supply and demand curves from freshman-year economics? If something can command a much higher price, it is because it is in much higher demand.
Cletus bought a house just south of Hell, 20 minutes on the express way to Oblivion. You would rather die than live there. How do I know this? Because you wouldn't even be trying to scrape together an Iraqi Weapons Fund-worth of money to buy in NYC if any other place on earth was acceptable to you. You have self-selected yourself right into financial insanity. Welcome!
That being said, you also have to get into a competitive frame of mind, a veritable "kill or be killed" mentality. If you don't, you won't be able to compete with everyone else who wants that exact same apartment, and is willing to pay exactly one dollar more than whatever you end up bidding.
Finally, you've got to prepare for the road ahead. You've got to want this apartment so badly that you'll dedicate yourself to full-time hunting -- every weekend, every evening, and taking a long lunch when necessary, to see a new listing.
You must become a warrior with a disciplined approach and absolute conviction that you know what you want and you are going to get it.
List of Events
To give you some perspective on the advice to follow, here is a rough idea of what happens in the life of a successful buyer, from seeing the apartment to closing on it. These things are in roughly chronological order, but some things happen in parallel or a slightly different order.
This list is provided merely to begin to instill the fear, that will lead to the adrenaline, that will incite paranoia, which we all know leads to offensive and defensive strategic deployment, which will clearly lead to your success!
1. Make sure you know the maximum amount of a mortgage you can expect to get.
2. See the apartment.
3. Within 5 minutes (I'm not kidding), put your bid on it.
4. Seller accepts bid.
5. Contact your mortgage company/broker and start the process for this property.
6. Give the seller's broker or seller your lawyer's name, address, phone and fax and tell them to send a draft of the sales contract as soon as possible (this is their lawyer's job, not your lawyer's job, so don't let them tell you that your lawyer has to do it).
7. Get approved by the board (if it's a co-op)
8. The bank giving you the mortgage sends appraiser to the apartment.
9. The seller's lawyer forwards a draft of sales contract to your lawyer.
10. Your lawyer starts going through the sales contract, all building financials and by-laws.
11. Get the place inspected (not normally done in NYC, but I did it).
12. Personally go through the notes from the board meeting - this is how you find out about building problems and problem neighbors, and if you're going to be living next to, above or under them!
13. Make sure you have the down payment and all that (see "The Down Payment" below).
14. Ensure building, appraisal, by-laws, inspection, neighbors, bldg financials, etc are all up to snuff.
15. Lawyers finalize sales contract, and buyer and seller sign it. (Get a great lawyer. If you're not protected against all sorts of things going wrong, you are screwed!)
16. Schedule closing date (bank usually gets to choose location).
17. Visit property day or so before closing. Make sure it's still in great condition.
18. Close on the property.
19. Start to panic about the huge debt you've just taken on. (just kidding)
Now, that is a rough idea of what you'll be going through (I'm sure I missed some stuff) if everything goes perfectly smoothly. Just wait until you see the mayhem when reality sets in and each step requires hundreds of steps of he said/she said and negotiation!
Recruiting the Team
Do you really need a broker? When should you start calling a lawyer? Do you need to be pre-approved for a mortgage before you even start looking? And, who do you call for a mortgage, anyway? These questions and more… answered!
Broker, or no Broker?
A broker can make or break the deal. A broker is a big help if you don't have a lot of time, and you trust them to understand your tastes and filter out properties accordingly. They can alert you to purchasing possibilities that you might have never found on your own and they can push the process ahead so that the sale happens faster and more smoothly than it might otherwise. They can also turn a seller away from the buyer, in favor of their own top pick. They can unnecessarily elongate the process to wait for higher bids. They can also talk you out of your dream home. The most important thing to remember is that the broker works for the seller, NOT for you.
There are brokers that you can hire to work for you as a buyer. Don't do this unless:
1. You're willing to trust them to determine what your tastes are.
2. You're willing to trust them not to make side deals which may increase the purchase price of your new apartment.
3. You're willing to pay a higher price than may otherwise be necessary in order to get the winning bid.
If you're looking at a lot of properties and want to see as much as you can, and not willing to pay at the top of what the market will bear, I would not recommend using an exclusive broker as a buyer. I say this for many reasons, the most important of which is that brokers don't like to split commissions. In other words, if you see the home of your dreams through your broker, but another broker is the person representing the seller, then the seller's broker knows they're going to have to split the commission with the broker who brought you in. That means that if someone is willing to pay the exact same price as you, and came in through the seller's broker, you're going to have to pay more just be to be considered equally as attractive.
When you see an ad for an apartment, try your best to see it through the broker who has an "exclusive" on the property, or who won't have to split a commission. This way, you're sure not to get the price jacked up, at least not jacked up for this reason, anyway.
To sum up, of all the brokers I dealt with in the two and a half years I was looking, there was only one I really liked and I eventually bought my apartment through her. If you actually do want to work with just one broker (a must for those incredibly pressed for time) and are really serious about getting a good broker, send me an email and I'll hook you up.
The Mortgage People
Should you be pre-approved before you start looking? The truth is, it doesn't matter. Pre-approval means nothing. Brokers and sellers both know this. If you want to talk to someone about a mortgage, that's fine, but don't think that pre-approval ensures you're going to get a mortgage for the amount in the pre-approval.
I would also advise against getting a mortgage through a bank. Why do I say this? Because I tried getting a mortgage through a bank twice. It wasn't that I couldn't get approved, it was that they couldn't work fast or smart enough. I have found that you will end up paying more out of pocket and you will get a significantly higher interest rate if you go through a bank, instead of a mortgage broker. Also, especially in a competitive urban environment, you need quick responses and someone who knows the market and all that goes along with it.
Let's go to a horror story to demonstrate:
--------------begin horror story---------------
Ahhh, it was the apartment I'll always regret losing. Within one minute of seeing it, I knew it had to be mine. I immediately called my bank (not mentioning any names, but it's the largest bank in the world, OK) and started applying for my mortgage. They assured me they could work fast. I just had to send them around $600 for the process to start. Oh, they accept Visa? Great. We can get started even quicker!
Well, once the paperwork started going back and forth between NYC and St. Louis (!) - that's where they're mortgage office was -- I started to see how slow this whole thing could go. Everything contract takes at least 2 days to send, receive, sign, sent back and confirm receipt. Finally, the bank schedules an appraiser to visit the apartment (they have to do this, you can't). The appraiser is obviously from some appraisal company in New York City, so clearly, THEY know the market. As I'm panicked for the report, I continue to call this mortgage department of the biggest bank in the world over and over again. (Why am I panicked? Because the bank won't give an unconditional approval without it and a few other things and because the buyer won't sell to me if I don't have an unconditional approval by next Friday and because the appraisal report determines how much you have to put down as a down payment!) Five days later (it shouldn't take more than an afternoon, BTW), I get news of the appraiser's report. Great. It's all good. It appraised for the purchase price. Well, it doesn't get better than that. We proceed toward buying!
Wait a minute. The bank calls me the next day. Sorry, we have to completely reappraise the apartment. Someone has to go out there again and re-do everything. Why, why does this have to happen? Well, it's because the bank didn't realize there was commercial space in the building. Hello! Every damn apartment building of any size in Manhattan has commercial space in it, not to mention this particular building, with SIX full floors of commercial space and very conspicuous retail stores all over its first floor! The appraisers clearly must have noted this. The bank screwed up, because their mortgage flunkies are in St. Louis and know nothing at all about NYC real estate.
Oh, I'm sorry, did I fail to mention that not only did this same bank loan money for other apartments in this very same building, but it gave the sellers of this VERY apartment their mortgage to buy it! Aaaaaaargh! So much for good data management!
And, to think, to have the bank help me lose this apartment, it only cost me $600 and weeks of hell. And, they were going to give me an 8.375% interest rate! (Note: Almost six months later, and in an environment of higher interest rates, my mortgage broker got me 7.75%, and I paid much less to get the process started! Oh yeah, I got my appraisal report that afternoon, and it was completely understood by the bank my mortgage broker chose to use!)
--------------end horror story---------------
Moral of the story -- use a mortgage broker, but get one you trust. You'll save a ton of time, money and stress. Plus, you'll get a better interest rate from a broker than you will from a bank. In addition, a smart mortgage broker, like mine was, can hedge your bets by making sure the appraiser is from a company several banks will accept, so that your bank can't pressure you at the last minute into crazy terms because you've got no choices because you can't start the whole process again.
I loved my mortgage broker. She was a force to be reckoned with, and I've recommended her to several friends since! Again, if you're really serious, email me and I'll send you her contact info.
If there's one thing you need when you're buying a home, it's a damn good lawyer. There are so many contracts, financials, by-laws and legalese that flows back and forth during this process, that you better have someone smart to filter it for you. Also, you have to trust him or her completely. Literally. When you're sitting there in the closing, you're going to be handed an endless stream of thick contracts, and you must sign every single one of them. There's no time to read anything, not even what appears on the page you're signing, let alone the whole contract. You better trust that your lawyer knows what's going on and what it is you're signing or else you could be in for a world full of hurt (Deliverance-style, OK?).
Again, I was very fortunate. I had a fabulous lawyer, and he had no easy time of it. For reason I won't go into here (hey, this article is long already, and I'm just getting started!), my deal was very, very complex and there were quite a lot of parties involved. All together, I signed over 80 documents during the closing. Just think about that, if you want to determine how totally and blindly you need to trust your lawyer. Email me and I'll send you his contact information if you need it.
The Trusted Friend
You need a trusted, sensible friend to reality check your situation and also to listen to you gripe and bemoan the entire purchasing process. Besides, don't you really need a trusted friend for everything in life?
How Much is This Going to Cost/Down Payments?
A fortune. Bill Gates' ransom. Three times as much as every cent you'll ever have. Ok, seriously. This is what it's going to cost.
Why reinvent the wheel? Most of the costs of urban ownership are listed (quite well) at http://www.manhattanlandmark.com/closing.html
I noticed a few things missing from this list:
* The amount of money you pay up front for your mortgage (just to get the process started, I'm not talking about points)
* Tips for the Title Closer. Yes, in traditional American fashion, you even tip this person. And, it's going to be anywhere from about $75 - $X00, depending upon the price of your property.
* The seller may try to get you to pay a flip tax or transfer tax. Just know what your responsibility is and what the seller's responsibility is. You can pay these kinds of things to gain competitive advantage if you need to, but don't do it out of ignorance!
In addition, the down payment may change, depending on your appraisal. Suppose the bank agrees to give you a mortgage on a $100k home if you put down 20%. Well, if the appraisal doesn't come in at the purchase price, you may end up paying more than $20k. Suppose the appraisal comes in at $70k instead of $100k (this can happen for a variety of different reasons), but you're still going to buy it for $100k. The bank that agreed to give you 80% for a mortgage will only give you 80% of the $70k appraisal value. That means, you have to come up with $44k down instead of $20k. Scary, isn't it? Usually, the difference isn't that drastic, and if it is, you need to reevaluate how much you're willing to pay for the apartment (and what kind of cash you can come up with)!
Condo vs. Co-op: The Eternal Debate
Plain and simple, a condo is considered "real property," and owning a co-op really means you own shares in the "co-operative organization" that owns the building. You may be required to put more of a down payment on the latter. Condos are typically more expensive, which according to economic theory, means they are either more desirable and/or in shorter supply. Both are true in NYC. I don't know why they are in shorter supply, but here are my reasons for thinking they are more desirable:
1. You don't have to be board approved to live in a condo, which means you'll have an easier time buying (and an easier time selling!).
2. A condo usually isn't as restrictive as a co-op regarding renovation and construction.
3. You can usually rent out your condo, where you may (with varying levels of difficulty) or may not be able to in a co-op.
4. You are at the mercy of everyone else in the co-op (in a way), whereas you are somewhat less so, in the case of a condo. Let me explain…
--------------begin horror story---------------
I know a guy (this isn't an urban legend, I know the guy this happened to) who used to live in a beautiful co-op apartment. It was his dream home, and he spent loads of money and effort on renovations to make it into his palace. His apartment was the largest in the building, so he had more shares in the co-op than anyone else. Why would ever think that something bad would happen? Well, to make a very long story slightly shorter, all of the other owners decided to sell the building as a whole (his apartment included) during the great Manhattan real estate boom last year. There was nothing he could do, because even though he owned the largest single amount of shares, everyone else together owned more than he did, and there was no co-op by-law to protect him in the event that some unfair tragedy such as this came upon him.
Some of the owners that voted for this sale just moved out of town. The rest of them apparently were too stupid to realize that when there is a real estate boom, it's not just their building that gets more expensive. When they found out they couldn't get as nice of an apartment for what they sold theirs for, they wanted to back out, but it was too late. The sales contract had been signed.
Now, the guy that I knew moved out by the time the scheduled closing was to occur. Of course he did, he was required to. He didn't want to have anything to do with the sale. Unfortunately, that meant that someone else was in charge of doing it right. It was done wrong.
The closing didn't happen for another four months, so this poor guy was paying rent on a new apartment, and still paying maintenance and taxes (and maybe a mortgage) on the old place, while the problems got sorted out.
Cut to almost a year later. A suit was brought against the co-op because the new owner's move-in was delayed by all the problems that pushed back the closing date. And guess what? This poor guy who owned the biggest single chunk of the co-op will have the single biggest legal bill to settle a suit for a sale he never wanted.
--------------end horror story---------------
Granted, this is the only such co-op horror story I've ever heard, but you've got to admit, it's a doozy. I know many people who live in co-ops their whole lives without any such problems, but I wanted to demonstrate a worst-case scenario for you. I hope I've proven my point.
I purchased my place in an extremely competitive market. Some might even say it was the peak of the Manhattan real estate boom. And I have the acid reflux to prove it! After you get over the shock of people stampeding over you to spend hundreds of thousands of their hard-earned dollars, you must become supremely competitive, just to keep up.
One interesting competitive strategy is the "no mortgage contingency." This one is for the gamblers out there. Sellers like cash buyers, and hey, who doesn't? But, can you really come up with 200, 300, 800 thousand in cash?! Sure you can. It's called a "no mortgage contingency," and all you have to do is gamble away your down payment. Basically, you sign an agreement called a "no mortgage contingency" (it's usually built into the sales contract) that states that you are so positive you'll get the mortgage that if you don't, they can keep your down payment.
If you are willing to do this, you can consider yourself a cash buyer, because the sale is guaranteed. (Guaranteed, or the seller gets a lot of money for nothing!) Being a cash buyer makes you a much more attractive buyer than someone else offering the same amount of money, especially in a market in which many deals fall through. Just be sure you know what you're getting into with doing something like this. A down payment is a lot of dough to bake away. Talk to your lawyer extensively about this if the thought so much as crosses your mind. And, don't ever suggest something like this, unless under extreme competitive duress.
Another competitive strategy is to have a fill-in-the-blank bid sheet with you when you go to see apartments. This is how I was able to bid on apartments within five minutes of seeing them (or less). This is kind of a dangerous thing, and my lawyer was never very pleased with the idea of it, but when all else is equal, huge amounts of money are flowing and that which isn't equal is way richer and more liquid than you are, you start having to take risks to gain an edge.
I must warn you, however, don't even attempt strategies such as these in any market less competitive than NYC or San Francisco. People will just think you're psychotic if you do, and you'll never get an apartment. These are extreme measures -- treat them as such.
A good, solid, non-extreme measure to gain an advantage is just to have all of your ducks in a row. If you are a very serious buyer, make sure you have your mortgage company/broker ready to work for you (all forms filled out, start-up fee paid), ensure you have a trustworthy lawyer (that specializes in they type of real estate you're looking to buy) ready to go to bat for you and ask everyone you know to give you advice and recommendations. Also, get a copy of your credit report from all three bureaus as soon as possible and clear up any potential problems before the lending bank sees them. (See my review on Identity Theft -- http://www.epinions.com/content_1237426308 -- to get the phone numbers.)
There were many things that I thought were good competitive strategies and turned out to yield nothing for the effort. One example was posting on real estate and regional newsgroups didn't get me anything except realtors spamming me with irrelevant listings.
For a time, I went after "for sale by owner" (FSBO) properties, hoping to save money. I figured that if they didn't have to pay the standard 5-6% realtor commission, they would be willing to sell at a decent price. In a competitive market, this is not necessarily the case. In my experience, owners typically list at the same price as a broker would (or higher, in some cases!), and can't get their act together enough to move through the sales process. A broker is great for pushing this along.
--------------begin horror story---------------
About a year ago, I was proceeding along with buying an apartment directly from the owners. For eight months, I tried to find the husband of the selling couple a job, so that they would finally sell, like they promised they would. They told me what price they wanted. I didn't haggle, I just wanted to pay it. I would have gone to the ends of the earth for that apartment. My lawyer was working on the contract like a madman, because I wanted this sale to happen, and they told me speed meant everything. Unbeknownst to my lawyer (or me), the couple was purposely having their lawyer stall for time, while they were getting a better price out of a broker. Basically, they ran my legal bills through the roof for no reason. (I also sold a huge quantity of stock at an inopportune time to show them that I had cash for the transaction, which they insisted upon.) I would have waited until the end of time for that apartment. They didn't have to do it that way. They were evil, terrible people who broke my heart when I lost the apartment I had worked toward getting for so long. Even now, a year later, I am still hurt and disappointed.
--------------end horror story---------------
Not every FSBO transaction has to be that way. In fact, many brokered transactions could turn out the same way. My point here is to demonstrate that FSBO sales are not without their risks.
I hope this advice helps you. Buying a condo or a co-op in NYC (or any other competitive marketplace) is not easy, and you have my sympathy.
This article was written while listening to: Soulfly - Primitive, Coroner - Punishment for Decadence and Bjork - Selmasongs.
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