Walking from a deal

Any chance renting it will fully cover your monthly expenses if you decide to go through with the sale? If not, how much off would it be?

Which property?
Tina
(Brooklyn broker)

Would probably be negative$1000/mo realistically.

Have you tried talking to the developer? See what they may be willing to do to help you before you have to give up your deposit. They could do cheaper financing or pay your closing costs. Best of luck.

52inc, without knowing much detail, it's hard to say, but I would guess that unless you negotiated a very good deal, it's probably more prudent to walk away from the 10%. There are circumstances that might make closing a bit more appealing, but again, hard to tell without knowing. Is the building mostly or completely sold out? Is there a C of O and people already living there? If so, how long, and how are the finances to date? How was this priced relative to comparable properties? I would at least try to approach the sponsor if you think there's any chance at working something out.

Losing 10% is certainly better than losing 30%.

That being said... here is one reason... cash position.
If you want to buy eventually.... if you will have down payment money, cool.
If you won't be able to raise it otherwise.... you could make a case that this is your only way to get into an ownership position, if this is what you desire...

Not saying that makes it a smart move - and I'm figuring in most cases, just let it be - but you might want to think about limiting long term possibilities for yourself.

I'm not a Brooklyn broker -- I would refer to Tina for advice on specific buildings -- but if you're still employed, walkaways because of price drops don't make any sense to me.

If the price had gone up 10% or 20% or 30% you wouldn't be beating the developer's door down to pay him more money.

Presumably, when you decided to buy an apartment, you thought that buying made sense, that you were financially capable of it, and that the unit you're buying was the best unit for you ..unless you've lost your job, which changes factor #2, why not continue to buy?

I don't know what your original time horizon for this unit was, which is obviously one of the inputs to this decision, but presumably it was at least a few years.

So what is the price of the unit going to be in a few years when it becomes time to sell? No one knows now, post-crash, anymore than they knew pre-crash.

However, you are making assumptions that you now know what it is, which doesn't seem fully rational to me.

If you were walking away and moving to buy something else where the price had dropped that would be one thing, but it doesn't sound like you're doing that. You've moved from "A versus B" to "A versus Z."

Financial theorists tell us it doesn't make sense to try to market-time stocks, which are fairly liquid and fairly substitutable; along those lines, I don't understand the theory behind trying to market-time a fairly illiquid, not very easily substitutable asset.

Just my two cents.

ali r.
{downtown broker}

ali, i think financial theorists are being proven wrong for both markets. timing does matter, particularly in bubble situations.

52inc,

exactly why did you buy the unit in the first place?
1-To live in
2- To flip immediately after closing
3- to live in 2 years and then flip for tax free profit. Because you can't imagine/stand living their for lonegr than that

If its 2 or 3, walk away

Also, the negative 1000 if you rent. Does that take into account depreciation on investment property. Can you live in the place and get a room mate?

I appreciate the comments and thoughtful posts.

bjw: building is barely past their hurdle for conversion to a condo; C of O coming in the next few weeks. Sponsor may be willing to negotiate but I figure a very large concession will be necessary to make this deal worthwhile. Pricing is in-line with other luxury Williamsburg properties.
nyc: cash is not an issue, thankfully.
ali: your comments are helpful. However, I think this is more analogous to the following: I bought a one-year call option for a stock a year ago; now the stock is trading under the strike price. Why buy at the strike price? There's no market timing in that logic.

While that cash is

While that cash is a sunk cost, you can still use it in your negotiation. They would be foolish not to offer you concessions, they should prefer to get market rate today versus 10% down cash and a vacancy. And you should be more willing to pay market rate today versus waiting for prices to drop since you can salvage your downpayment this way. There should be a win win if both parties are open and smart about it

52- I am in a fairly similar situation as you are. And probably will walk as well. I think there are many risks to closing, not just that the market is down x% now. since your bldg like mine has many available units, what will happen to those. will they be rentals, will the bldg be >half vacant for a long time, migth you have to cover more CC's. what happens when they really drop the prices and the guy upstairs with the same unit paid half of what you did. you are not going to be happy even if you are in it for the long haul, or at least you will have many moments of aggravation before you are happy you went through with the deal
Of course I agree with trying to get some sort of concessions that would make it worth it, but I haven't heard of many people who have been able to obtain that from the developers. I agree, it would take a very large concession for me as well/

I just don't understand the logic of throwing good money after bad

What would be considered market rate for such a unit (new construction condo in williamsburg) in terms of price per sq ft? I know there are many factors in figuring this but am wondering the general consensus.

frontporch / ali said "If the price had gone up 10% or 20% or 30% you wouldn't be beating the developer's door down to pay him more money" This is a spectacularly senseless argument that only a broker could make. The buyer is asking whether he should forfeit his 10% deposit, or throw more money at a depeciated asset. That is the question.

The buyer, 52inc, is looking at the question in a much more sensible way - he or she views the 10% deposit as an option premium, giving him or her the right - not the obligation - to buy the asset at a way above-market price. Why would anyone exercise that option?

I personally walked away from my own 10% deposit -- after negotiating with the Developer, and threatening a lawsuit, I got my entire deposit back. However, I would have walked away and left the entire deposit on the table if my only other choice was to buy it at a 25-30% premium over current market value. I was ready to do that.

The financial decision is actually VERY VERY simple. Take an example: If you are in contract to buy something for $1 million, and it is now worth $800k, and you put $100k down, then just lose the $100k, and buy the same place for the current market price of $800k.

The emotional part of it is more difficult.

52inc - I recommend you walk and threaten lawsuit, and see if the Developer will come back to you with some concessions. If they are smart, they will.

By the way, even if you have no grounds for lawsuit / recovery of your deposit, I would just walk away anyway. Tell the Developer it's just not worth it. Because, it reality, it isn't. See what they do.

PJC--I agree with your statement and am quite envious that you were able to get your deposit back. I will hope for such luck, but even if I get nothing, I think it is still the wise move to walk.

pjc,

Making the decision to buy depends on what the subsitutable good is -- your best alternative.

Obviously, if you can now buy the $1MM thing you loved for $800K, you walk away from your $100K deposit, and then buy the $800K thing.

But in actuality, it's not that simple. Just because the market has dropped 20% overall, does not mean that you can necessarily find an equivalent to the particular $1MM thing that you loved that is now priced $800K.

Why not? Because you were A NEW DEV BUYER IN THE FIRST PLACE. Your universe of substitute goods is very very small.

The psychology that said "I want it new, I want it never lived in, actually untouched, I want the hottest technology, I want the latest finishes" ...that's generally not a person who's going to go, "oh, okay, I can get more space and a bigger master bedroom in a 60s-era co-op."

The OP presented his/her alternatives as "closing" and "renting." Given that scenario, and given OP's probable psychology, I would pick "closing."

If the OP had presented his/her alternatives as "not closing" and "buying something else at current market price that would make me pretty happy" I would have picked the latter, but that wasn't how the choice was framed.

ali r.
{downtown broker}

Run. Run now. Run far. Run fast.

front porch
i disagree with your statement:
"Because you were A NEW DEV BUYER IN THE FIRST PLACE. Your universe of substitute goods is very very small. "
esp in regard to wmburg
there are a ton of new units coming onto the market, with an apparent dearth of interested buyers. I think an adequate substitute can be found. Its not even too far fetched to think that he'll be able to pick up the exact same unit he walked from for a big discount down the road.

There have been numerous articles about new dev auctions so what you are saying makes no sense Ali.

Why lose the 10%....the market will eventually come back....you have to live somewhere....wont you be spending X dollars on rent PLUS losing 10%.....the profit/loss is fictional until you have to sell....if you can stay in this property for 3 to 5 yrs...you might break even.....where would you live instead now?

there are hardly any auctions. The media, mainly the NY Times, is taking the small number of auctions in NYC and blowing them way out of proportion as if they are the norm.

> .the profit/loss is fictional until you have to sell

it's not fictional if you haven't paid the remaining 90% yet. The 90% is inflated relative to something purchasable if not in the same building, then in the same general area.

If the building is 421a tax abated, the rising taxes in the coming 10 years is something more meaningful now than when the original contract was entered into and there was a greater expectations of rising prices to offset.

and the part about rent - why do people think servicing a mortgage and paying maintenance/taxes is not a cost? At best, the two are at parity right now.

A friend buying in prominent a Brooklyn condo conversion development was able to walk away and get about 90% of his deposit back due to a small provision in the offering plan that the sponsor's lawyer failed to address--namely filing some standard paperwork with HUD that could have easily been done but was overlooked. He was lucky.

mhill you make a very ignorant statement...and like most dopes you ignore that a mortgage is money rent and maintenance is an added cost renters do not have. so its not PLUS rent. if you went through with the deal, look at the shitty return on your cash that it represents as an after-tax monthly savings vs rent (if any at all) and that will answer your question.

Stevehjx, would be most interested in your opinion, since you seem to be pretty cold-hearted when it comes to financial decisions.

lol
remember, Steve is the one who tells you to buy equities instead of real estate. ok, well, then look at his postings from November where he admitted losing 95% of his investments. Yes, that much.

He will tell you that a roof is a roof, and no one wants to pay for finishes. And then he would make fun of a building just because it is ON 6th avenue, or because a retail tenant is Modells or Duane Reade.

Steve is a joke.
And his "cold-heartedness" really is just an anger that after being a native NYer for a couple generations he's got little to show for it.

Ali is a respectable individual, BUT

front_porch
about 10 hours ago
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I'm not a Brooklyn broker -- I would refer to Tina for advice on specific buildings -- but if you're still employed, walkaways because of price drops don't make any sense to me.

: Ever studied options? This is a walkaway on an option. Nothing else. He's giving up 10% because the price is presumably more than 10% lower.

If the price had gone up 10% or 20% or 30% you wouldn't be beating the developer's door down to pay him more money.

: You are confusing the person who is just talking about walking away from the purchase option from the irresponsible bullies who think they deserve their deposit money back because the price dropped. Those are very different positions. One is totally logical. The other is a reprehensible.

Presumably, when you decided to buy an apartment, you thought that buying made sense, that you were financially capable of it, and that the unit you're buying was the best unit for you ..unless you've lost your job, which changes factor #2, why not continue to buy?

: See first point above.
Additionally, if now the cost of renting has declined, the equation changes again for the better of renting and not going through with the option to buy.

I don't know what your original time horizon for this unit was, which is obviously one of the inputs to this decision, but presumably it was at least a few years.

: Short term + short term + short term = long term

So what is the price of the unit going to be in a few years when it becomes time to sell? No one knows now, post-crash, anymore than they knew pre-crash.

: True, we don't know, but we do have a window into the price today, and can re-evaluate the buying decision today. The 10% "down" is an option only.

However, you are making assumptions that you now know what it is, which doesn't seem fully rational to me.

: No, he's not making an assumption. He's making an evaluation of the current market.

If you were walking away and moving to buy something else where the price had dropped that would be one thing, but it doesn't sound like you're doing that. You've moved from "A versus B" to "A versus Z."

: Why would it be sensible to re-evaluate if it is a buy vs. buy decision but not re-evaluate a buy vs. rent decision?

Financial theorists tell us it doesn't make sense to try to market-time stocks, which are fairly liquid and fairly substitutable; along those lines, I don't understand the theory behind trying to market-time a fairly illiquid, not very easily substitutable asset.

: Simply because it is is illiquid. So the price today can be viewed and because of illiquidity, it is unlikely to zoom up. The reason why market timing in equities doesn't make sense is because big moves occur suddenly.

Just my two cents.

ali r.
{downtown broker}

If you are envisioning walking away then you are already half there. Prices settled a year ago are way in the hole especially for new contruction in marginal neighborhoods. Run!

The best advice given in this discussion was the following: "Run. Run now. Run far. Run fast."

That is exactly what I did in my deal. If the Developer insists on 2008 prices (i.e, a 20-30% premium over current value), then: run, run now, run far, run fast. Forget about the 10%, as painful as that may be. If the Developer has any functioning brain cells they will negotiate to save the deal, rather than simply pocket their 10% penalty.

You are in an even-better situation if there is some legal grounds for getting your deposit back. In my case, there were some misrepresentations. But even if I had no legal arguments, I would (and did) run (far and fast) from my 2008-priced deal, and would have sadly accepted the loss of my 10% deposit as my better alternative than going forward.

Someone also brought up the expiration of the tax-abatement. This was something I stupidly didn't think about when I signed my contract, but it is like a huge cloud hanging over the property and will really hurt it's future value. Another thing to consider.

So, to repeat my advice: unless the Developer is ready to negotiate - I would walk - even if it means losing the 10%. The only person who would advise otherwise is a broker, or someone who likes to throw good money after bad. This is a very painful situation for everyone - one of the most stressful situations I ever lived through -- but the financial calculus is simple - the world has changed, and both parties should come together as sensible adults, and re-fashion a deal that works.

rhino...your statement is ignorant....we dont know the situation of this buyer.....ie was he/sher renter, how long did they plan on staying in apt, etc etc etc..perhaps he was paying a boatload of money on rent.....but in the end....even if the value goes down shortterm...he has tax writeoffs which he/she didnt have if he/she was renting, equity and the market will eventually come back...

No your statement is ignorant. We are discussing after tax carry costs, so your tax writeoff comment is ignorant. You are also ignorant of the fact that it took 10 years for values to recover in the prior cycle. You are a buffoon. You believe the buy and hold bullshit like the rest of the masses. You don't understand numbers. You don't understand momentum. You don't understand the historical context.

pjc: thanks.

For the rest of you, go look up "sunk cost". It's an economic concept most people ignore when their own money is in any deal.

Sunk costs don't matter. They are irrelevant to your decision as to whether to buy.

lincolnrameses,

your statement fascinates me, because in Manhattan numerous developers are going to court over this regulation and whether there have been technical violations of it. Interesting that in Brooklyn, they didn't fight.

disturbing,

I like your point about liquidity/illiquidity a lot, thank you.

ali r.
{downtown broker}

rhino......your comments speak for themselves.....let go of the anger.....life is too short...

Only skimming responses above, assuming you're walking away, there is leverage in some cases, that may result in your forfeiting less than your entire downpayment, depending on the developer's circumstances, contract provisions, offer plan prerequisites for closing-

What is the likeihood that the sponsor will meet the calendar deadline for the first closing in the building to occur?

Did your contract have a negotiated deadline for your closing to occur and cancellation if the sponsor isn't ready to close by then? and how close are you to it where waiting this ut may be worthwhile.

Is therer any basis at all for alleging that the sponsor has not fulfilled every offering plan obligation? the prospect that you might start a proceeding with the Attorney General's office claiming that the sponsor hasn't fulfilled its oblligations and that you are entitled to a refund of your donwpayment, is an easy and inexpensive step to do yourself, if your attorney loses interest, ties up the downpayment for a considerable period of time. The nuisance value might shake some of your money loose from the sponsor.