Monthlies vs sale price

If interest rates rise substantially, demand will weaken across the whole market. You'll lose more value off the $3.6M apt simply because there is 50% more value-at-risk, irrespective of the carry costs.

If you want to make a rates play / hedge, do it with a bank, not with real estate.

RB - this isn't about making money from increase in rates (and your point on the broader market is well taken). I would like a sanity check (1) if people agree with my thought process that Apt2 will be more impacted by increase in rates and (2) how absurd is $8500 of monthlies on a 2000sq ft condo.

Thanks

In general, rising interest rates imply a good economy. More buyers and real estate, especially higher priced real estate should maintain its value. On the other hand an apt with high monthlies will stay expensive on the carry side and most likely the monthlies will continue to increase. High monthlies are the kiss of death imho. Its a quick turn off for a good portion of buyers.

Why are the monthlies so high in one and low in the other? Without knowing what drives the costs, it's hard to say what's reasonable. I could easily make a story as to why $8500 is good and $4500 is bad

(sorry for the delayed responses - my comments are still reviewed because I'm "new")

Thank you for all of the responses. Apt1 is in an extremely well run building with with 50-75 units and 1 full time doorman + porter + live in super, as well as a roof deck, gym and playroom. Solid finances and great building overall. Apt1 is a PH and has a disproportionate share of the common charges - I haven't been able to get a straight answer why it was set up that was, but my guess is that the allocations aren't done solely based on sqft. [Source: I used to live in the building and loved it]

Apt2 has similar amenities but is a 300 unit building on UES

Generally I agree with OP math. The carrying cost burden is worse in a lower rate market than a higher rate market.

I also agree with this unknown of trying to predict what future markets look like. I would think higher rates would be negative for real estate value, but one pointed out to me that values and rates were both higher a few years ago. I also think this debate is a bit moot and expect rates to remain low for a long period of time. Moreover, you can speculate on the future rates market in many different ways as another poster mentioned.

It was stated on other threads that "too high" monthlies (compared to average for this kind of unit) are a huge turn off, and those units are penalized more in the downturn. That might be what we are seeing here with the PH unit? in that case this is a COVID buying opportunity.

>>Apt1 is a PH and has a disproportionate share of the common charges - I haven't been able to get a straight answer why it was set up that was, but my guess is that the allocations aren't done solely based on sqft. [Source: I used to live in the building and loved it]<<

Co-op shares allocations are rarely done solely based on square footage. Units on higher floors, with more light/views generally have a greater number of shares than apartments with the same floor plan on lower floors or with obstructed views/light. A PH may be allocated a greater number of shares than similar-sized units based on variables like views, quality of outdoor space, privacy (ie: not immediately next to another PH unit's terrace), amenities like a working fireplace, etc.

My two cents: If you love the building and prefer the PH over the condo apartment, that is something worth listening to.

Thank you everyone for your input

Bumping an old thread to recheck everyone's opinions.

There's consensus that, all else being equal, higher monthlies negatively impact price. However, the two questions key questions are:

(1) how do you quantify the impact of the higher monthlies on price?

(2) is there a point where the monthlies get so high that the approach from question 1 above no longer works and the unit becomes unsalable without a huge (and disproportionate) discount?

117 w 21st, 4th floor is an interesting example (https://streeteasy.com/building/the-twenty-1/4th-floor). New development in 2018 that sold for $4.9mm with taxes of $3800/month. Taxes jumped to $6600/month and there was a huge price cut in order to generate interest to sell the unit. From what I have heard, the unit went into contract for mid-4s after a bidding war.

First step could be to identify whether differences in monthlies are temporary or permanent.

Temporary differences:
- A coop has a big mortgage on the building but which is almost paid off, causing a step down in maintenance to come a year or two in the future (either absolute or a material relative improvement to the comp). This is probably the best way to identify something valuable that other buyers who haven't done the diligence might be missing.
- Land lease expiring. {Note -- this never actually seems to happen, or if it does is extremely rare.]
- Capital assessment for building investments is coming to an end (or, conversely, is starting up).
- Condo/NewDev has tax abatements/exemptions that are coming to an end causing RE taxes to rise.

Permanent differences:
- Building owns its commercial units downstairs to generate revenue, versus another that doesn't.
- Differences in costly amenities
- RE taxes, usually, after normalizing for abatements. Typically taxes should go up directionally the same way, to roughly same degree, over time.
- Idiosyncratic differences in share allocations, like for that penthouse in OP.

After an attempt to normalize the differences, would tend to look at it on an unlevered cost-of-capital basis. I don't want to debate what the right rate is here, but for argument's sake let's use 5% after-tax as a round number blended for debt/equity. So from OP, assuming the differences are more or less there to stay:

The $2.5 million place at 5% would be $10.4k/month cost of capital to buy it + $8.5k monthlies = ~$19k

The $3.6 million place at 5% would be $15k/month + $4.5k monthlies = $19.5k.

So, those original units seem pretty fairly price, one relative to the other. Would tend to agree that if rates rise, and you've already locked in lower cost of capital, via a mortgage, then the difference in monthlies will be less pronounced all else equal.

If one really wants to try and benefit from mispricing of monthlies, I'd go back to trying to find a low-price, high-monthlies unit, where you can get pretty confident that monthlies will come down, either on an absolute basis or on a sustained relative basis to the comparable unit. Then the low purchase price becomes powerful and more than offsets the initial difference in monthlies. just one way to look at it...

Yanks--did you wind up purchasing one of the units from your original discussion?

AVM - I appreciate your thoughtful response. In this case, the high monthlies on apt 1 is likely driven by high allocations to a PH in an otherwise well run and well capitalized building. In essence, the penthouses are subsidizing the other apartments.

Pinecone - I ended up renting apt 1 with the option to buy it locked in at a good price. I suspect I'd be in the money on the purchase but I worry about the impact of the high monthlies on resale (especially if we get normal inflation on taxes / common charges).

What is the rent you pay?

@inonada - low enough that it makes no sense to buy except for (1) landlord is an individual who will want to sell eventually and (2) if we’re going to stay long term, we’d like to renovate. I have a 1yr option to extend the lease with a 3% increase. Purchase option stays in place during the renewal term but price increases by $100k. Financially, I’m way better off renting this place than buying but it won’t be able to continue for the long term.

I’ve followed your journey closely with rent vs buy and think we were in a very similar place. I’d be happy to share more details via email. Here is my iCloud anonymized email so I don’t get a bunch of spam bc I posted my email publicly: shopper-striata0h@icloud.com

Hi yanks21
I assume "no spam" means me, since I'm a broker, and I also trust nada's ability to analyze a financial situation more acutely than I trust mine...

but I can't resist sticking my nose in because I do like puzzles!

And so I do have to wonder, without knowing where this condo is, WHY on earth the owner of a condo who paid $3.2 mm for it in 2006 would be willing to let it go for the low low price of $2.5mm now.

The obvious answer is an expiring 421-a tax abatement, one of AVM's "temporary" cases, but I'd want someone on your side (and maybe this is an attorney you really trust, rather than a broker, though I'm here if you need me) to poke at it too. I'd worry that there's a lot-line problem or something else about to come up such that the apartment five years from now might not be exactly the apartment that you're buying. You might be fine with that, but you do want to be sure you know exactly what it is.

ali r.
{upstairs realty}

The fast and furious math for me back when I was looking was;
How much more mortgage would the extra monthly cost pay off?

As an example, If at time of purchase a 30 year mortgage is at 3.5%, every $1000 per month could pay off about $225k in a mortgage. For a monthly maintenance that is over by or under by $1k a month, I would reflect the difference in value to the price accordingly.

Of course digging into the minutia of the differences would adjust this much more bueingt this is how I used to start. 421As can be a wrinkle. But I would attribute the same exercise. Early phase the low monthlies add X value based on its distance from the average for that unit and vice versa at the end of the 421A when its gonna end up being higher than average. Looking up the tax bills will show you the unabated amount.

You cant get too hung up on things like the future of rates. When I bought 10 years ago, everyone considered near term future rate hikes a fait accompli. They of course kept going lower.

The biggest problem I found was with units BOTH so far higher and so far lower than the norm in monthlies. There is always a buyer/seller that doesnt adjust correctly. The very very high monthly units would get more than they should and the obscenely low not enough.

Curious what the monthlies on the condo penthouse equal on a per square foot basis? What's the location, how much outdoor space does it have?

Truth, Obscenely low indeed do not get enough premium. Perhaps people think over time the taxes will equalize and there is some truth to that. Or if the high maintenance is indeed due to higher level of service, they will not discount for that. And than there are people who wouldn't do the math or do not care to do the math.

The worst type of high maintenance is driven by higher proportion of common interest allocated relative to square footage after adjusting for floor number and outdoor space.

I explored a penthouse unit which was originally priced by the sponsor at call it "x" and adjusting for everything else including 50% of outdoor space as inside square footage etc it was priced in the offering plan 20-40% higher vs comps as per my calcs as it had a Penthouse stamp. Common interest and taxes were allocated in proportion to initial offering price. The sponsor sold at a big discount to the offering price but the high CC+Taxes stayed. Some very rich trust fund bought it in a resale a few years back.

This is the unit for everyone's entertainment. Needed full reno.
https://streeteasy.com/building/188-east-70-street-new_york/30a
https://streeteasy.com/closing/10540276

All great comments and dialogue. Thank you

@ front_porch - definitely wasn't intending to exclude brokers (especially not you and the other frequent commenters, as I have followed this forum for a long time and have learned a ton from you and others). I was referring to the computer programs that search all publicly available websites and slurp up anything with an @ symbol in order to send spam.

Since I've already put some of the info out there, I might as well add more details:
- the original purchase for $3.2mm was a brand new unit with a 421A abatement that expired in 2018. During that time, maintenance seemingly moved in line with the market but loss of abatement + tax increases really hurt
- the building is incredibly well run with ~60 units, a full time doorman + day-time porter + day-time maintenance + live in super, as well as a roof deck, gym and playroom
- apartment is in Chelsea and has unobstructed south facing views with floor to ceiling windows in every bedroom. Bedrooms all face an internal courtyard so it's extremely quiet
- living room has 50+ feet of northern views with floor to ceiling windows and good views
- taxes are $2.11PSF (including primary residence abatement, but excluding outdoor space); maintenance is $2PSF (excluding outdoor space)
- among the 4 penthouses, the allocation methodology is consistent and this unit doesn't have a disproportionate allocation; however, relative to the highest non-penthouse floor, there is probably a 20-30% increase in common charges allocated to penthouses (some (but not all)of which is explained by the higher floor)
- indoor space is just over 2000 sq ft; outdoor space is 150 sq ft with electric and water facing north
- I wasn't bold enough to buy during COVID so the $2.5mm is realistic anymore but I have an option to buy for $2.85mm
- I owned in this building pre-COVID and it's a great building with a great staff and good board

I have withheld the address and have been somewhat cryptic with details out of respect for the seller and his broker in case I don't end up buying it (I don't want the terms of my option to be forever documented online) but I'll share full details including address via email if anyone is interested.

@300_mercer - I never thought to compare % allocation vs initial offering price. Very interesting. By that metric, the allocations are right on target and the initial selling price was in line with the initial offering price.

For whatever it's worth, my take is that there wasn't any funny business by the sponsor nor is the allocation completely out of line relative to other units (given the higher floor, PH tag and accompanying benefits -- 3 exposures, good layout, etc).

The real question is whether the price today is appropriately discounted for the monthlies and whether the even higher monthlies in the future (as a result of ordinary inflation) will hurt resale even more

Yanks, By law (came out some time around 2000; I may be off on the date), the initial offering price needs to be "generally" in proportion to the selling price amongst some other factors. As a result, Common Interest allocation before price adjustments is almost always in proportion to Initial Offering price in newish condos. Common Interest does not get adjusted for actual sale price by the sponsor as you can't change Common Interest after one of the condo units has been sold.

Unless there is an obvious situation like the one I posted, usually market does not adjust for 10-15% different in taxes/CC as each property is so different and buyers put different value on different attributes. As many buyers in NYC are very wealthy, there is significant mispricing at high-end apartments. I am not even talking ultra-luxury where prices are really made-up and there could be almost 25-30% price difference in what some would say substantially similar buildings. Just look at Billionaire row. 220 CPS vs others.

On your example, since the outdoor space seems very usable and it small percentage of indoor space, in this market, in this COVID market, some one may pay the same price per sq ft for that outdoor space as the indoor space. So you need to adjust you CC and Taxes by including the outdoor space. In addition, Penthouse is almost always 10% min premium (everything else being equal) from what I have seen as there is no one walking above you and there is ego involved with some many rich people in NYC.

Wow 300 those monthlies are brutal. And well east of park ave

I was trying to get it for $300k lower than what someone paid as that would have equalized the cost to higher monthlies vs other units. But when you are rich and if you want it, many do not really do the math even if you are perfectly capable of doing it.

Yanks, I don’t think I have anything to say that would be very helpful here. Using the numbers from the OP and assuming they are equivalent apts, the choices seem to be:

$3.6M, plus $54K/yr
$2.5M, plus $102K/yr

So in exchange for $1.1M upfront, you gain $48K/yr. That’s a 4.3% yield, which seems reasonable. The elephant in the room is that if we extrapolate, we get to:

$0M, plus $211K/yr

And we’re staring at ~$18K/mo on an apt whose rent is (say) ~$12K/mo, ignoring pandemic-special rents. The crux of your question is whether you should take the 4.3% yield, or if that skirts too close to the point at which everyone can no longer ignore kid saying the emperor has no clothes.

I dunno, that’s a hard decision.

For me personally, I’ve decided “Who says this is the game I’ve gotta play?” $211K/yr for 2000 sq ft works out to $100 ppsf/yr. My pre-pandemic rent was about that, except it was an ultra-lux apt that sells for 2x ppsf compared to these places. The apt I moved into during the pandemic is $80 ppsf/yr, except it sells for 2.5x. Maybe that resets to $100 or $120 in a couple of years after my lease is up, I dunno. Main point is that if I’m gonna blow $80-120 ppsf/yr on living space one way or another, I may as well get the most bang for my buck. I like making easy decisions, not hard ones, and to me that is an easy one.

Any rate rise is a a depressant to prices, but when the office towers start to fill up again, you can expect some buying of condos and co-ops .
Possibly an offset

Thank you all for your input. I think we've hit the quantitative analysis from several different angles. Math aside, how do you view listings with above market monthlies? At some point, do they become unsalable or is just a question of applying one of the various price correction methods that we came up with? Thank you

Most people are solving for a target monthly payment (and a manageable downpayment). As a consequence, when rates go up, it should becomes more attractive to borrow less, and therefore high monthlies/low price are preferable. When rates are down, the tradeoff means that people can/will pay more upfront for an apartment with lower monthlies. I am wondering if prices on apartments with high monthlies / lower prices would do better in rising interest rate environment.

@ionada so how can a landlord charge $12k for and apartment with $18k monthlies. What are we missing here? Why do apartments with monthlies above rent exist?

Krolik, I was not saying there is an $18K monthlies apt renting for $12K (though I have seen rare instances of slight rent vs monthlies inversion). Rather, I’m saying that if you take extrapolate from:

$3.2M + $4500/mo

And:

$2.5M + $8500/mo

You are increasing monthlies by $4000/mo for every $1.1M decrease to the upfront cost. If we take the price all the way down to zero, we’d get an additional $2.5M / $1.1M * $4000/mo = $9000 in monthlies. This would mean $17.5K/mo for an apt whose rent is (I would guess) $12K/mo.

That’s the problem with high monthlies apts. as long as it’s far away from the $12K/mo rent, people tend to gloss over that. Once it gets close, people all of a sudden perk up to the issue.

Personally, I tend to try to avoid high monthly apartments. I don't like the idea of making up for exceptionally high monthlies with a discount to the purchase price.

The negative effect of high monthlies when you're trying to sell is less evident in strong bull markets. But in stable to declining markets it becomes an issue for many buyers.

Fortunately we don't see too many co-op/ condos in New York City with exponentially high monthlies, way out of line with similar listings. However, for that reason alone, it's best to avoid them.

Unless of course after a thorough look at the budget/financials there's some reasonable explanation. Perhaps it's a very high end co-op on Park avenue with significantly more building workers? Maybe a building with hotel like amenities, that you're comfortable paying for and desire?

Keith
TBG

Krolik, I agree with your instinct that when rates go up, apts with higher monthlies and a lower PP likely do better than apartments with lower monthlies and a higher PP. I certainly wouldn’t look at apartment purchases as a way to bet on interest rates, but just thought the connection was interesting.

Keith - thank you. Your experience re: high monthlies mattering more in soft markets makes sense

"Krolik, I agree with your instinct that when rates go up, apts with higher monthlies and a lower PP likely do better than apartments with lower monthlies and a higher PP. "

I'll just say, I don't agree with this. High monthlies most likely won't go away. Eventually time on market will correct the higher priced apartments. You just need to be patient, or find that apartment that's been priced correctly relative to current market conditions. I never want to own an apartment with exponentially high monthlies. But that's just my opinion.

Keith
TBG

Everything at the right price, Keith. At $2.5M, I wouldn’t be a buyer of the $8500/mo apt. At $0.25M, I would be.

Maybe not everything : )

Probably not. If the monthlies were $18K/mo, I probably wouldn’t be a buyer at any price.

It’s similar to timeshares —- you reach a point where the carrying costs are so high that you have to pay to get rid of them. To be clear, I don’t think that’s the case here, but timeshares are a stark illustration of what runaway costs can do

good analogy