developer admits he won't clear mortgage if he accepts ur lowball offer

Yes I was told this to by the developer of the Langston in Harlem (via the broker).

My offer was $700K cash for a 1300sf 3 (tiny) BR and 2 (mediocre) BA penthouse. For months--literally like 6 months--that penthouse languished on the market, and every month I kept resending my $700K offer. Finally was told the developer would rather have the bank foreclose on the unit than sell it for less than $780K.

The unit is still on the market, as it has been for 2 years:

http://www.streeteasy.com/nyc/sale/32280-condo-68-bradhurst-avenue-central-harlem-new-york

Isn't this the dirty little secret of why so many new projects are not cutting prices? Bank bureaucrats in denial, wondering what to do, developers hoping gold will fall from the sky...paralysis.

Basically, I suspect many projects are ALREADY BANKRUPT, in that they cannot pay off the financing, but decisions aren't being made to deal with this problem.

I say already bankrupt in the sense that any realistic sale price is not sufficient.

yes, yes and yes.

and unfortunately, the market cannot function until this stuff is cleared up. that's one of the many hidden costs of all these people trying to figure out angles to recoup deposits and force developers to see reality without being willing to see it themselves.

wow. so i take it i should run, not walk...

i would. now is not the time to be buying into speculative new construction---too many unknowns that are beyond your control.

I imagine it is an agency problem. The developers hold the equity, and their equity is worthless at market prices, so why lower prices even if it is best for the financers. The debtholders need to take over these projects now

se stalker,

How many developers said this??? LOL

"Finally was told the developer would rather have the bank foreclose on the unit than sell it for less than $780K."

Sorry, I'm dense. Please explain the logic of this.

Dwell: The developer owes more on the construction loan than what this buyer is offering. If he sells it for $780k, he will have to pay the bank the difference. Therefore, he'd rather not sell it and have the bank foreclose on him. He ends up saving money but by doing so, has ruined his credit.

it's called a short sale by developer... but here is the vulture in me... why wouldn't people just wait it out... you earn/save $ by renting, the developer bleeds every month... it's not long till the drops (dead). Buy on at 50% construction cost, now there is some built in equity.

40%

anon10, kind of like Trump has ruined his credit? that is essentially the crux of the unfairness in this whole developer v. buyer issue. the ramifications to corporations and their principals are real, but rarely does it result in loss of life savings, etc. most rise from the ashes, reputations intact (that guy at Related is a great one, fabulous instincts, market got the best of him, but hell, got the best of almost all of us. no reflection on his abilities, of course, hell of a good guy, we'll back him again the next go round, for sure, for sure).

The person who overextended? Not having a clue that unemployment would hit 10%, with their job being included in the statistic? Their business world isn't so kind. It could be years before someone in those circumstances can afford and has the credit to even rent a decent place in Manhattan.

The market in NYC cannot recover until many of the new developments have been sold, which will apparently will happen in auctions after the creditors take these properties. Anyone have an idea how long this will take? Are the auctions comming this summer or is it a process that takes years?

ar is right. In anon10's scenario the developer hasn't ruined his credit, he's had a project go bad. Oh well, on to the next one. Project company's credit is all that's ruined, but it's no doubt single purpose and non-recourse to developer, so he's out his equity in the project but that's all.

SLS, you want the head of the project company to go jail or something?

I want to know when the auctions are comming... The bond holders or other creditors are going to auction these units off, right? When does that start happening and how long will it take? I have a feeling that the bottom can be far, far, far away if this is the scenario that is going to play out. Aren't auciotns of new developments what completely distroyed Las Vegas and So Cal? Prices there are 50% below the peak. I am currious if anyone has any insight into the specifcs on what we're looking at in NYC...

ctime, i'm with you. i've asked this before, with no informed answers.

just to take one example, there is the "william beaver house" a few blocks from where i'm renting. its a huge tower... I see them asking 1500 s/f and more. there is no way they are selling any more apartments at those levels. i mean, not one. so either the developer has enough sales in the bag to cover his debts... or hes going to have to file bankruptcy. the thing is you can imagine how long the thing can drag on for... i've heard those loans may be 3-5 years, and if the guy sold 30% of the space then he may not run out of cash for a year or more... but when he does... then I think its gotta get ugly. decimated financial sector thats laid off tons of people and is paying the remaining in all sorts of funky defered comp plans... creditors with no real expertise who are sitting on collateral they just want to liquidate. untill i see that every (ok, 90%) of the units in william beaver are sold to occupents/ non-10-to-1 leveraged investors, i dopn't think its over. and I feel like this can be many 10%s and years from today...

i think it snowballs rapidly. there are still developments like Tempo, and until they miss some (or many) of the terms of their loan agreements they will continue onward and upward.

So Cal took about 2-3 years after peak for the real hurt to set in. We're still in early innings here, and as NYC typically goes into declines late and leads out relatively early, I think the banks are hoping against hope that things won't hit the shitter. Remember also, a risky loan is a much different beast on the books than a nonperforming one. We all know how much banks like to move things to the loss column.

i mean:
http://www.streeteasy.com/nyc/sale/343965-condo-70-little-west-street-battery-park-city-new-york
are you kidding me?

ct - no. and no idea what your point is.

my observation is simply that 'developer' and 'project' are not one and the same thing (except, I suppose for a small developer with one project, in which case they are probably equal for all practical purposes), and that the former can take their loss on the latter and move on. no value judgment in that. i don't share ar's view on 'unfairness' in the relative outcomes. people made bets on an asset/market and those bets didn't work out. no one forced the developer to undertake the project or the buyer to sign a contract to buy an apartment.

exactly. also, no one forced the creditor to lend to the developer or the CMBS investor to buy the stinky shit. so, we agree. i'm more interested in where the NYC real estate market is going...

sidelinesitter, i'm not sure that one cannot assign some culpability to a massive real estate machine that convinced people it was necessary to buy now or else. Shiller has done some fabulous work on the psychology of markets, and if you think that developers didn't know what they were doing and some potential outcomes more than the average (or even above-average) buyer, I would disagree. I would also posit that the government knew far more than it let on, and continued to obfuscate the reality the "better interests" of our society in general.

I've been saying since 2004 that I thought this was a bubble. I've been the recipient of laughter, gentle and not, raised eyebrows, the looks that are given to Great Aunt Edna when she's had too much of the sherry, etc. I don't hold the buyers free of personal responsibility for their decisions, but I can see how many of them were induced to make those decisions. I've heard some things from brokers that should have turned my hair grey (good genetics so far seem to be prevailing). Many people didn't make "bets,' they tried to find a place to live. They are not only worried about declining values, they are worried about living in developments that are simply not viable, without things that were represented, and potentially skyrocketing common charges. The offerring plan "offers" the developers almost every way out. It offers the buyers none of the same.

ar - my ignorance of the true risks associated with a decision that I may make does not, in itself, make a bad outcome someone else's fault and/or give me a right to a do-over. failure of a developer to deliver as promised, or, worse, misrepresentation at the outset, is a different story and someone who is harmed should be free to pursue any legal remedies.

Of course developers will understand their own business, including the attendant risks, better than most of their customers. That doesn't make the developer responsible for what happens to someone who took a risk they didn't understand. As to the real estate machine, I see the point you are trying to make and would never doubt your word on any awful thing that a broker might have said to make a sale. Howver, real estate brokers make used car salesmen and stockbrokers look like Mother Teresa, and (I thought) everyone knows not to believe a word they say. If people failed that basic intelligence test, I don't know what to say. [Note that I am addressing Manhattan real estate here. I have little doubt that many people were outright scammed by the real estate machine (more mortgage brokers and banks than RE brokers and developers, I think) all over the country, but we don't live in subprime land. Manhattan new construction is a luxury good consumed by a well educated, high income clientele for whom not having stopped and thought about the risks or not having read the contract are not excuses]

I guess the "bets" point is sort of semantic. People looking for a place to live have lots of choices in Manhattan real estate and don't have to buy that tiny sliver of the market represented by new construction on offer at any given point in time. However, that sliver tends to have attributes that are desirable for some buyers. Buying those attributes tends to comes with embedded risks such as high prices, long lead times before delivery of the finished product, uncertainty about the quality of that finished product, etc. Choosing to sign the contract is a bet on those risks working out favorably, even if the bet/decision/choice/pick the term you prefer is made in the service of securing a place to live and even if the buyer does not think about it philosophically as a bet. Which just brings be back to people taking risks they didn't take the time to understand...

oh, and I forgot the government point. here we agree. don't get me started on the systemic incompetence that got the economy where it is today

Thanks anon10. Got confused re: foreclosing on one unit. Wouldn't the creditor foreclose on the entire bld, not just individual units?

I understand that if the loan is nonrecourse & the developer is protected by the corporate veil, developer will walk away from the 'bad' project. It's gonna be a mess & will probably last for years.

well, since people are getting so reflective about what caused all this, there are thousands of people in the NYC who were overpaid for many years; i say overpaid, for myriad reasons too numerous and complex to go into here, but to name one, doing transactions based on "risk ratings" that everyone knew were basically a joke; MY POINT: certainly not all, but many individual buyers in this bubble were throwing around funny money in jobs where their compensation excelled any reasonable assessment of their skills, value added, or risks undertaken; the finance industry has been a mess...but many individuals benefitted greatly

Back to the main topic:

- If you wait until the buildling is fully occupied, you will miss the "steal", so..there has to be some optimum entry point where prices have crashed due to a "failed" project to such a low level that you are compensated for any reasonable spectrum of bad outcomes, such as paying excess maint. for a few years. This might mean almost free, IF you are a solvent buyer.

- I don't see how any buyer who is thinking seriously would buy right now until this WALKING DEAD DEVELOPMENT issue is resolved because it is going to affect rents and/or sales...and spook the still-deluded individual sellers.

i think you answered your own question---the price has to be close to zero.

on the other hand, i think we have first hand evidence from many of our fellow posters that there are a community of buyers who have yet and probably never will think clearly.