Why a gut reno isnt trading at a discount?

why would you discount your list price?

Just for reference, apartment has one P, and these are not cattle futures, they do not trade.

You are missing the fact that brokers tell clients that the market is picking up again -- that the financial industry restructuring in NYC over the past 2 years has had no affect on prices. That the economy is recovering and now is the time to buy ( pretty much direct wording I heard from a broker last week). So there are always people who are willing to overpay. De leveraging in RE is slow. Only when losses begin to pile up from sellers that need to sell will the sentiment change and prices smooth out.

Even in your statement you think prices should be flat with 2010. Other than national unemployment down since then ( which Bernanke basically said today was a fluke of excessive layoffs and not to expect payrolls to improve in near future), what economic factors do you consider to have improved to the point where the 15% down from 2007 historic bubble is the bottom? Forecasts for US GDP is 2% for years to come. Today JPM called to fade any overweight in equities because of projected weaker earnings -- and they are positive to the point of not calling for hard landing in China. It is a GDP call.

Apts requiring a gut reno should sell at a huge discount. Of course when you are done you could have a beautiful apt with finishes that you love. I would think that ultimately that is worth more than another comp sale from 2010 that probably required some form of renovation or updating by the new owner. So gut reno when done is worth more than the 2010 comp. If not to you, then to someone else.

In my experience, gut renos just don't get discounted like one might expect - people say for square feet.

If you are looking at the apartment, it hasn't traded yet.

If a renovation will cost x, sellers think it will cost x/2. They also don't care about your 6-12 months of carrying costs.

Problem is that there are enough people with money who think they can renovate a 2000 sqft apartment for $100k and it'll only take a month. They're the same people who also think they're buying a 2000 sqft apartment when it reality its only 1600 sqft.

Check out the activity in 200 w 79th, N line. 11th floor renovated listed at 1.25 and into contract quick. 10th floor unrenovated sat on the market at 999 for a while, the listing was just removed, not sure if it sold or just pulled. Seems like a hefty discount to me.

flarf nailed it!!!!

jhochle, it all depends. In general, 2010 comps are still unreasonable to informed buyers. However, to uninformed buyers, they think it's a bargain.

"They're the same people who also think they're buying a 2000 sqft apartment when it reality its only 1600 sqft."

So true!

Here's the thing: the numbers won't ever make sense for renovations.

First, a renovated apartment and an estate condition identical apartment virtually never sell at a price differential that reflects the full value of the renovation for the higher priced apartment. The reno'd unit simply sells faster and for maybe a bit more than the wreck.

Second, the new owner's carrying costs reno (including living somewhere else) during the reno count for nothing in NYC RE and just are not effective leverage during negotiations. Argue all you want, I'm telling you these charges do not figure into negotiations from a seller's point of view.

Third, the OP's estimates of reno costs are one of the reasons you cannot recover reno costs when selling and why a seller won't consider your reno costs completely when negotiating the initial sale. $350/sq.ft? Seriously? You think ANYONE would pay you for a reno that cost that much? No way. Similarly, a seller won't accept that just because you want to spend lavishly on a reno they should discount their property accordingly so you can buy it. don't get me wrong. I understand fully what high end reno costs. But much of that expense is a sunk cost you will never recover. You spend it to live in it and enjoy it--it isn't an investment you'll ever be likely to recoup. And thus, at the same time, it isn't an expense a seller will deem reasonable when you say, "Hey, your unit is priced to high because if I buy it at that price I'll never be able to renovate it to the standards of a robber baron."

So here is how it really plays out. A unit needing a gut reno will trade for only slightly less than a fully renovated comp. The fully renovated comp will sell at a price that allow's its seller to recoup maybe 40-50% of the reno if the reno is in great shape, taste neutral and still fresh. To recover the rest of the cost of a reno, the market has to rise so the sales price, irrespective of the reno, is sufficiently higher than the purchase price to cover the reno cost.

Why don't basic economic principles apply perfectly here? Because "basic" principles are just that--basic. They are crude tools. They do not take into account "externalities" that are ever present in NYC RE: there's an emotional compenent to NYC RE that isn't all that rational; there is the impact of taste and quality; there are shifting tides of fashion that affect buildings, locations, and what buyers want in terms of emphasis on space versus view versus light versus location versus layout versus ...

So again: if you renovate, do it only because you want to create a wonderful space to live in and use. Assume you will not recover most of that money. If the reno is still worth it to you, great. If not, and if you insist on thinking of it as an investment, you don't get it. The moment you finish the reno, your "investment" is worth about 60% of its cost and only goes down from there.

As usual, I would say that KyleWest is correct. You think it's a complete gut; I might think it only needs paint in the bathroom. The seller has set a price & what our costs will be is really not their concern.

If this is true, then flippers who buy, renovate, and sell have been losing their shirts. Have they?

KW, +1000

@23, you're saying that the market is 15% down -- but that's in terms of nominal prices, but remember the cost of money sank too.

So some of the deflation that you're looking for has already happened, because buyers now are getting 4.5% interest rates instead of 6% ones.

ali r.
DG Neary Realty

@Eric: what flippers? Since late 2008 there has been no money to be made in flipping as a business in Manhattan. Without rising property values, the transactions costs and reno costs and carrying charges make flipping unprofitable these days.

kw -- well said!

As usual, Kylewest nails it. Also you never get compensation for the worry and angst of the renovation (plumber not showing up, unexpected problems when you take up a floor or try to put in new plumbing). I would go for the renovated apartment almost every time.

Kylewest,

I posed that question because I found the lack of much price difference surprising and I saw this as a natural experiment, if you will. Same apartment, just different because of the renovation, including time.

My next queation is whether a lack of return for renovation is a longer-term phenomenon or just something that has been happening in the down market. I've always been skeptical of the "big money from flipping" hype (and I've always condidered the TV shows outright frauds), but has the down market just made a bad investment much worse, or has it always been about like this?

I think in the overheated market of the last decade, lots went out of whack. Maybe reno's recovered a bit more of their cost in 2006. But generally, I think what I said above holds true in Manh over time. You have to really add value with a reno to make money on it. For instance, without rearranging the floor plan to undeniably improve it, I don't think you're off to a good start on recovering money. You can add value in some case by re-assembling units in pre wars that had been diced up over the years so that the whole is more than just the sum of the parts. But for run of the mill apartments, I don't think flipping works or has historically worked in Manhattan all that well. Better ways to spend one's time and money. What do others think?

I don't understand .. if you think an apartment is worth x then offer x. Sellers have no say in how you arrive at a offer ... they only accept or decine offers. Let someone else waste money.

Kyle stated it perfectly --and beautifully.

However I do know several people who made a living flipping NYC RE. But those days are over. It is easy to do when the RE market is on a slow steady uptrend. It is near impossible to do when the market is flat or trending down -- although I still think it is possible in the very high end luxury market which is above my pay grade. I think it is exactly the same in the stock market. When the stock market is in a powerful uptrend, it is hard not to make money. But in an economy that is difficult to fathom, correlation is high and it doesn't matter if you pick great stocks, if the market goes down, you are going down with it.

@ali: Do you think a 1.5% difference in mortgage rates for 4 years is enough deflation to tame the 300% bubble rise in prices? Do you think the bottom in pricing is now set in Manhattan?

23, I think this is a stream with many different currents. I think some markets bottomed in the summer of '09, while others (say the $500K downtown market) continued to fall. That market may be bottoming out now, or it may fall a little further ... I would want another couple months of "spring" in order to call that one.

I do think the bears will never see that entire 300% reset. The city is more desirable now as a place to live than it was before the boom, especially to people with children who for whatever reason seem to see the suburbs as relatively less desirable. And fundamentally, housing prices follow employment, and while the job market in the city is lousy, it's not lousy enough to cause a reset to pre-bubble prices.

ali

Ali...in your opinion, when did the bubble start (in order to define "pre-bubble")?

That, in my mind, is a big question. If you mean 1999 then $400-500 /sq ft. If you mean 2003 then $600-700 /sq ft. If you mean 2005 then 800-1000 / sq ft.

It was such a steep slope that picking a spot to the downside is daunting.

Ali: There is a great deal of distance between a 15% retrace after the bubble and 300%. As you say, inflation will take care of part of it but again -- not 300%. It is difficult to believe the NY RE market will not test some lower pricing since no matter how much better NYC might seem, there has never been a 300% bubble rise in the history of housing in this country without a near retracement to the mean. To call for a 15% retracement as a bottom in any micro market in NYC is as bold as calling for $500 psf. IMHO. Thanks for the response.

apt23 you understand that prices can't go down more than 100%?

yes of course. I am talking about reversion to the mean and had 300 in my head. so yes, big diff between 15% and 100

23, there is a big difference between 15% and 100% .. but I am arguing that we've seen more than a 15% discount. We got the discount of, what, maybe 25% in nominal terms, plus we got the cut of 150 bips in the cost of money.

So even with the post-2009 bounceback in prices of maybe 10%, we got maybe 15% nominally, plus 25% off in terms of how cheap the money got.

To some people, that looks like around a 40% haircut off peak.

I understand that's still not 100%, but it's enough to make some buyers jump in. I know they exist, because I was just at a closing with one earlier today.

ali r.
DG Neary Realty

Yes. I know they are selling. Two apts that I was considering but rejected because they were asking over 30% over 2007 prices, just went into contract.