Delusional sellers and their brokers -- what am I missing re appraisals?

Yes. It's a pathology.

But you should ignore asking price, determine what you're willing to pay, and the appropriate negotiating strategy to match, and make an offer, while having a well-reasoned explanation of how you arrived at the value in case it comes up in conversation. And don't get so emotionally attached to any particular property that you're willing to let discussion drag on.

Kiss: I was looking in the same price range and found the same thing. One apt had a direct comp much lower and the broker said, "Well that was due to bad marketing." It actually went to contract and they told me it was close to ask. So I am anxious to see if that contract goes goes through -- seems like the bank would be crazy to let it go through when there is a direct comp at 300,000 lower just 2 months earlier listed in the same condition. On the other hand, one broker said on the phone that they would not really move off the ask on an apt. I wanted to see. When I expressed surprise because it was listed 25% higher than the 2007 closing price, she refused to show it to me. . So far that apt is on the market for 101 days. I could have been a cash buyer for that apt because it was at the lower end of my range. We will see what happens.

In the meantime, I have decided to rent for a year and watch the market go down from the sidelines.

Would you value the purchase price you're willing to pay today against 2006 markets or earlier? How do you see other factors affect value ie 2009 bonuses or weak dollar vs foreign demand? I am looking in the low-end range and find that the asking prices are ridiculous but are coming off only 5%.

econ: I'm looking at what I see as mkt clearing prices, approx $1000 sq ft in prime hoods. I think that takes us back to 2005 prices. I'm not even haircutting for future depreciation whih many here think is likely, e.g., $800/sq ft.

I'd love to hear some perspectives from the brokers on here (both selling and buying side) -- do you not try to tell your clients that the apt won't appraise for anything close to the ask price, and thus may not be able to close?

Why are you looking to buy if your view is 2005 prices plus 20% depreciation? I don't think the seller would be willing to work at that level until after the bonus rush. I'm expecting to make an offer this weekend, but if the seller refuses to budge I will have to take my own advice and wait on the sidelines until early spring.

dude, that's not what I'm saying. I'm saying ~$1000/sq ft is mkt clearing now, but the asks are ~$1500/sq ft.

Kiss: This is an example of what perplexes me. Take this apt., 32B at the Element 555 West 59:

STREETEASY HISTORY
04/24/2007
Previously Listed in StreetEasy by Corcoran at $3,290,000.
06/06/2008
Corcoran Listing sold.
06/06/2008
Previous Sale recorded for $3,290,000.
07/06/2009
Listed in StreetEasy by Steven Kopstein, LREB at $4,000,000.

The same apt, 29B sold for $2.5 mm five months ago. What bank is going to look at a mortgage application for this apt and think that even though it was bought at the top of the market in 2007/8 for $3.3mm and even though a comparable apt just sold for $2.5, they would provide a loan at even a penny more than the comp, let alone $4mm - 20% over the original purchase price just one year ago. This is the kind of craziness that happened in the other bubble markets until gradually all the air (like this windbag) left the market.

You are assuming the borrower is maxing out. If they are putting down more than the minimum, they may still get a loan even if the sale price is above the appraisal.

I bought an apt last year and put down 35%. The bank was very concerned about the appraisal -- from their own appraiser. It was a couple days of discussion and new comps delivered. I think this seller would be better off with a cash buyer -- one that is so flush, they don't care that they are overpaying.

The building Apt23 pointed out has a few comprable apartments going for 2.5M where the price wasn't hiked up & those are going into contract. If you take into account the broker fees, closing costs, mortgage taxes and improvements the other apartments are selling at a loss.

Econ: Both 32B and 29B both have 2000 sq ft and a small terrace. The other apts I think you are referring to in the B line have 1689 sq ft so are not comparable with those higher floors. However, I do believe 16B is comparable which closed by the developer in early 2008 for $2,460,000. 11B just closed for $1,850,000 which I believe sets a new low for that line. We'll see what the two others close for. If we assume they paid close to the price of 16B, then their ask probably reflects a desire to break even after mansion tax, closing costs, etc. And that is a more reasonable stretch as opposed to the huge price spike in 32B.

In Contract:
$2,640,000 - 555 West 59th Street #22B 3 beds 1,689 ft²
$2,610,000 - 555 West 59th Street #21B 3 beds 1,689 ft²
$1,995,000 - 555 West 59th Street #11B 3 beds 1,689 ft²

There is a rare disease out there that has certan sellers believing that its only 'pockets' of weakness out there. We read the posts of such people all the time. It reminds me of when I went to renew my rental lease in summer 2002. My landlord (who was a personal owner of the condo) said - oh yeah, I know 9/11, it only impacted downtown (this was an UWS rental).

Rhino, I have to disagree. It's not "rare" at all.

I think by this time, it is rare that people are asking peak prices. I exclude new dev condos from this statement. I think there, the developers have simply abstained from guessing what the market will bear and/or dont want to trigger issues with their banks.

What about those who took their apartments off the market?

I guess when a seller takes their apartment off, they are no longer a seller. I respect that. At the current market price, they are not sellers. That is their perogative. If they are hoping to sell next year at a higher price, I think their assessement of the future will prove incorrect. However again, that is their right. Improperly priced places that sit on the market with no interest for six months of year, that is what I find annoying.

Will the bank do an appraisal prior to my offer? Perhaps I could use that information to gage my offer amount.

Manhattan Condo Listings Snapshot
Size (ft²) $ per ft² Price
Studio 544 1,127 600,000
1 BR 791 1,091 855,787
2 BR 1,304 1,221 1,625,000
3 BR 1,970 1,467 2,999,000
4+ BR 3,108 1,752 5,615,000

It would be useful to see these stats over time...

I live (rent) in Tribeca and have also been looking in this same price range.

I could be completely wrong, but I am getting the impression that many of these $2-4+ million dollar priced apartments were bought by people with the financial means to "carry" them indefinitely. This is especially true given how the government didn't let many high paying institutions (such as GS) fail and helped fuel a remarkable recovery in the equity markets (in the US and worldwide).

If the equity markets truly crashed and several other large financial institutions went under, there would have been a huge drop in high end prices (which obviously would have been market-wide as well) because many of these "high net worth" individuals would have been potentially forced to sell. Their whole fortunes would have been on the line and they probably would have looked to take some action. Now that is the furthest from the truth.

For example, I live down the street from a condo that has several Google employees that paid $3M-$6M+ for their places... know of various owners that work for the surviving (and thriving) financial firms... I understand that much of this evidence is anecdotal in nature, but there is a whole class of buyers (recent and past), that essentially have the means to look at their $2M+ apartment as a LUXURY item (like a large diamond or piece of art). Mid-high to high end real estate in Manhattan has unfortunately become cemented in the hands of an economic class that not only made tons during the bubble, but were saved by ridiculously favorable government policy when everything exploded. The economic collapse was one moment when they might have been forced to look at their real estate holdings RATIONALLY - instead, they now can return to thinking about willing their SoHo loft to their grandchildren (regardless of its value).

Believe me, it pisses me off to no end to know that many of these apartments were selling for below/slightly above $1M just 8-12 years ago and today people are asking for $3-5M for the same space. The problem seems to be that a whole new class of owner - one that can openly ignore real estate economics and fundamentals - has arrived, and with tons of taxpayer support, has seemed to have weathered the economic storm (which was partly their own doing) that would have pulled them (and prices) back to earth.

This isn't to say that you won't see deals closing FAR from the astronomical offer prices out there (ie; $4M offers closing at $2.5M) - just that even these "reduced" closing prices are STILL going to be far above the cost of renting and still will be inflated given the combination of the economic class of some buyers and the flexibility of many high net worth sellers. But again, these recent buyers (who overpaid) don't care about their apartment's cap rate or that identical apartments rent for under half of their carrying cost. They seem insensitive to such economics because the purchases weren’t calculated economic ones, but discretionary - even frivolous - ones.

It is hard to have an "efficient" market when many of its participants could careless about efficiency.

I'd say it's 50-50 in my area of interest (UWS). Half the people come from family $ or have 10m+ stashed away. The other half need things to go the way they have to sustain their lifestyle. The market is made by the latter, so it's irrelevant whether the 1st group of ppl ever put their place on the market.

Well, to *specifically* answer the original question, as far as appraisal goes, comps from 2005 and 2007 are too old to be used and therefore totally irrelevant to an *appraisal* on a current sale. In addition, as was previously pointed out, you don't need an ALL cash sale to complete a transaction even on properties which seriously under appraise - each loan is made based on a certain LTV: Loan to Value ratio. Let's say you've got a property in contract for $3,000,000 and it appraises for $2,400,000 for a loan with an LTV of 75%. The bank will STILL lend 75% of $2,400,000 - or/meaning $1,800,000. that's not all cash. That's not even 50% cash. It's 40% cash. If the contract is written that it's subject to obtaining a loan for 60% *which some Coops REQUIRE anyway so no one is going to write a contract with a contingency for financing more than that amount* the deal still goes thru and the buyer can't back out due to the under appraisal.

"I'd love to hear some perspectives from the brokers on here (both selling and buying side) -- do you not try to tell your clients that the apt won't appraise for anything close to the ask price, and thus may not be able to close?"

I can tell you one thing brokers DON'T do and SHOULDN'T do, which is to build in an assumed 20% further drop in prices for CURRENTLY listed apartment just because buyers thing prices are going to drop another 20%. If you think prices are going to drop another 20%, guess what? STOP LOOKING and wait till they actually do. Expecting a seller to take less than the current market because you THINK prices are going to fall is no more reasonable than a Seller expecting to get 20% MORE than the current market because they think prices are going to rise. you get to buy in today's market, not yesterday's, not tomorrow's.

"places that sit on the market with no interest for six months of year, that is what I find annoying. "

Well, that's pretty much the same interest they would get if they sold and the money put in the bank.

memito: Yes, the irrational wealth factor is hard to contend with in a market place that demands rationality. I think we are dealing also with a generational attitude of entitlement that will take a while to get washed out of our markets. But it does catch up. I know of 3 children of an extremely wealthy man who got equal shares of inheritance. The two sons continued to live the life their father provided for them -- lavish apts, expensive private schools for their children, fancy clubs, expensive restaurants and vacations. The daughter sold her luxe CPW duplex with wrap around terrace at the top of the market. She moved to a beautiful small town that had no cache (horrors!!). Her children are in a wonderful private school and that is her only luxury. She has quadrupled her inheritance and lives a simple, beautiful life. The sons are both hanging on by their fingernails. They have both borrowed from their sister to keep their kids in school. They both swear they will sell their fancy park ave apts when the kids are out of the fancy schools and pay her back. But if there are any more disruptions in the financial markets, they won't be able to wait. Yet to the world, they are fine. There is a big house of mirrors out there.

Apt23: that sort of stuff always happens with inherited wealth. Princes to paupers in 4 generations. So that makes up another fraction of the market (estate properties).

"I'd say it's 50-50 in my area of interest (UWS). Half the people come from family $ or have 10m+ stashed away. The other half need things to go the way they have to sustain their lifestyle. The market is made by the latter, so it's irrelevant whether the 1st group of ppl ever put their place on the market."

People who come from family money and buy apartments from the spare change in their trust funds have been, and continue to be, part of the the Manhattan real estate market - though it could be argued that the sparing of so many "bubble" rich has simply added to their numbers.

As for those that "need things to go their way", our government has done them a great favor by ensuring that things continue to "go their way". Fortunes were made due to the over inflating of the real estate market and now, instead of truly dealing with the downside of the bubble, many have had not only their real estate values saved, but also their bank/investment accounts as well.

People that probably would have had to sell in the UWS or Tribeca now are sitting back wondering if they should buy a "cheap" vacation home instead. It is absolutely unbelievable.

Unfortunately, our government's policies have institutionalized asset inflation that has helped the bottom end from falling thru (yes, even further than it has in Miami/LA/Vegas - but also here in NYC) and the top end here in NYC from dropping back to even "reasonably inflated" levels from their present obscene ones. (BTW, I don't think a $40M apartment selling for $20M has a sign of weakness - just a continuation of lower-priced insanity.)

IMHO, prices in the $2M+ market are probably going to moderate, but far slower than they would have without taxpayer money supporting them. It just seems as if the real estate game here in NYC has changed given the willingness of government to prop up prices and support those that gained the most during the last 10-years of our ponzi scheme economy.

Economics reminder: The market is made by people who must sell. They always exist. People who don't have to sell or want to buy do not matter AT ALL. This is what is called the MARGINAL seller and the MARGINAL buyer.

Memito: It only feels like that to you, because as a potential buyer, it looks like prices are slow to fall. I think the number of people who have to scale back is much larger than you think. Patience.

Has there been a market in the US during this downturn that has fallen more than 30% in a year? This fall has acually be very fast. The argument that if Manhattan was to fall much more it would already have is sad sad.

NYC10023 - You are right. I am impatient. It isn't that I HAVE to buy anytime soon, just that I can't stand irrational economic / price behavior. I liken what is going on to a short position that just won't come off (even though the stock is up because CNBC put up PZE's chart while taking about PBR - if any of you remember that doozy). I have to sit back and let things unfold at the pace they are going to, without getting fired up over how slow it is taking place.

Rhino - I am not saying that Manhattan isn't going to drop more - I am probably a bigger bear than most - just that I am coming to the realization that certain neighborhoods have fewer MARGINAL sellers thanks to our government's inflation-loving policies.

Additionally, yes, the market has come off 30% - which seems like a lot - but when you put things into perspective, 30% is NOTHING. If a stock goes from $100 to $300 and then falls to 30% to $210, it might seem like a lot, but it still is up over 100%. Parts of NYC seem to need to fall at least 50% to get back in line with rent costs. But as NYC10023 stated, that takes time.

Memito: prices will probably keep coming down, but another thing to consider - the apt you want may never come on the market when you want it to, at the price you want (or at a break-even buy/rent ratio).

I don't know the DT loft housing stock well, but given that some people like me never want to make many tradeoffs (e.g. close to Fway but not too close, no Trump Towers, etc.), housing stock is the furthest thing from fungible. My "dream" property - vacant or well-situated RS/RC tenanted TH on my desired 4 or 5 blocks on the UWS is likely never to come on the market at a price point/cap rate I consider reasonable before my eldest goes off to college or we need to relocate for some other reason. There are a few other apts/lines of apts I like but again, they either don't come on the market or come on the market at the "wrong" time.

If, for example, you are very flexible on the location and type of property you desire, then you may find something
sooner approaching the break-even buy/rent point.

memito, re: your earlier comment about how the gov didn't let some large banks/institutions fail.

A lot of people work for these firms lost their jobs regardless. When prices of the company stocks tanked, current and ex-employees also lost a significant amount of their net worth.

Good point about how a stock going up 200% and then dropping 30% still result in a significant gain. Similarly, when the S&P dropped 40% last year, then gain 20% this year, it's like $100 going to $60, and then coming back to $72.

It's one thing to go from a net worth of $100mm to $70mm, but quite another to go from $2mm to $1.4mm. I only care about what the latter will do.

memito: don't forget too that many people had a significant part of their wealth tied up in stock options -- which they were given as part of a pay package. Many people counted those options as part of their retirement plans or their net worth. Many of those options are still under water. If they lose their jobs they generally only have 2 yrs -- or less-- to sell those options or lose them. So do you think GE employees, for example, can depend on the options that they received in the $40's will get back to par before they retire? Only if they are very young. That wealth diminishment will take a while to work its way through the market as well.

apt23, I believe stock options have expiration dates even if you continue to be an employee. 10 years is probably typical; many of which were probably granted a few years ago.

yes, sunday they do. but if you are still an employee, you at least have some hope of recovery. if you are fired or forced into mandatory retirement, you have generally at most, 2 yrs. Which pretty much means your options --depending on company -- are toast.

I believe the marginal buyer is the wall street bonus recipient. If the US Treasury special pay master restricts bonuses at Citi and BAC/Merrill, we are only seeing outsized bonuses from Goldman and to a lesser extent, JPM (which is a bank after all and pays less). So we have one group with outsized bonuses. Let us assume that is about 1000 people at Goldman and about 1000 at JPM. This is your buyer pool. But of that buyer pool already 85% have bought (you only need to buy your 4 bedroom 2000 SF trophy apartment once). And about half of those choose to live outside of the city. So you have about 150 people who are going to "throw away" money and take the offer at the inflated price. I think that against a pool of 9600 listings on SE, of which may 25% fit their ultra lux requirements, your talking about 150 people chasing an inventory of around 2400.

The bottom line is that those sellers in the Element will never get their $4 mm price and that someone will sell you an apartment -- in the Element, or the Rushmore, or another building near by for your price if you bid your price now (end of October) and are willing to wait until middle of March for the sellers to ratchet their prices down to your level.

I believe that you find that the developer of the Element sold out their inventory at 20% below their asking levels in the past four months. The Rushmore developer just cut their prices by 30% to get people to close. You may not be paying 1000 psf for new construction on these size units, but you will pay $1100 within 3 to 6 months.

For the seller's broker who put that wish price of $4 mm up, you can send them an email saying how you believe their price is away from the market and they are not serious. They can ignor you, or they can privately come back to you with an more serious offer and you can negotiate from there.

Finally, as I have said (and done), it was cheaper and is still cheaper, to buy high quality apartment REITs and use the dividends to pay for high quality rentals in the same buildings. Its not as cheap as it was, but it is still cheaper. You have to remember that the apartment REIT is already levered (typically 2:1), so that you don't need a lot of REIT to hedge your rental. The cap rate (rental - maintenance)/acquisition after adjusted for the fact that you don't pay tax on your rental savings comes out to be about (pre tax equivalent) 4% for most of these apartments, vs. the REITs have cap rates in the 7% range on their assets and dividend yields around 4.5% to 5%. (The raw cap rates for the apartments are around 2% to 2.5%, and divide by your tax rate, i.e. 60% to get after tax cap rates). Its a bit complex, and you have the risk that the REIT may not be able to rollover their debt, but I think it is a good alternative. Why buy a $2.5 mm apartment when you can buy $1.25 mm of REITs, and $1.25 mm of muni-bonds, pay for your rent, have the rent increases more than fully hedged, and have money left over. (Remember you aren't hedging the full rent, but the rent - (maintenance + REtax). You have to pay the maintenance and RE-tax no matter if you buy or rent and that is not covered even if you lay out $2.5 mm of cash.

With these kind of economics, you can rent in 111 W 67th on a high floor with the same space for the same effective cost as buying all the way over by the power-plant on West 59th street. I saw an apartment that has gone unrented for 5 months and I am sure that they are negotiable.

The only issue is that when the market comes back, your landlord may decide to sell your rental unit and you would have to move. This means that every two years you may have to do something.

In my case, my landlord lowered the rent 5% without asking.

Good luck.

budda: good points all...but one point of clarification. When an IB talks about performance, compensation, bonuses, stock, cash yada yada...these are global numbers. NOT only NYC numbers. I don't work at GS so I would be only venturing a guess, but of the top 1000 paid folks, it is substantially less than 100% that are NY based.

23G:

08/01/2008
Previously Listed in StreetEasy by Corcoran at $2,859,000.
05/19/2009
Corcoran Listing is no longer available.
06/16/2009
Listed in StreetEasy by Brown Harris Stevens at $2,859,000.
07/03/2009
Listing entered contract.
10/09/2009
Listing sold.
10/09/2009
Sale recorded for $2,200,000.

I believe that I saw this unit, thought about bidding it, and then passed it up when I decided I didn't want to live that far over. The broker said that she would represent all offers to the developer, which was an indication that the seller was serious. This confirms what I thought about the true market price in that building.

#23G. Its interesting in that they bought on their block more or less.

Seller

Element - West 59th Street LLC
C/O Bcre-usa Corp.
885 Third Avenue
New York NY 10022

Buyers

Mcconchie, Stuart
124 West 60th Street
Apt. 51F
New York NY 10023

Evans, Sarah
124 West 60th Street
Apt. 51F
New York NY 10023

Most people do, budda. When I was researching some sales at 200, 220, 240RSB, many of the people were repeat customers, both at the investor & end user level. They bought at 200RSB, sold and bought at 220, etc.

Buddha which REITs specifically? I see a lot with 4-5% yields and the charts look like they are ready to roll over. I have been accumulating FLTMX which yields 3-something. You also assume from the perspective of a cash buyer... Not practical for most, but arguably the appropriate analysis. I am skeptical of any decision that doesnt make sense on an all-cash hypothetical that can be made to work with leverage.