Morgan Evans-New York City Real Estate Expert

When I first started selling real estate in Manhattan an experienced broker said to me, "Sometimes you either co-broke or go-broke." New York City is a different animal as far as the exclusive broker being the gate keeper to every single one of their exclusive properties. As I have blogged before we don't have keyboxes on our properties. Any time an appointment is made to look at an apartment we have to show it ourselves. In years past when the market was red hot getting appointments to see a great apartment could become very difficult. The listing broker would have a variety of reasons why they couldn't show you or accommodate anything. This is a reason why building a relationship with big listing brokers is very important. Many times I was able to view an apartment with my customers before an official open house to the public because I knew the listing broker personally or they were from my office.

Now that the market has changed listing brokers are bending over backwards to accommodate any type of appointment. You could ask for that 730pm Friday night appointment and they will try to make it happen or call them the morning of and they will rush over to show. I know this myself because with my own listings I try to do everything I can to work something out to show the apartment every chance I get.

Getting back to that sage advice I received, in a hot market selling the apartment to a buyer who is unrepresented coming direct would obviously enable the listing broker to not have to co-broke or share the commission with another side. This is why some listing brokers would make it very tough for agents to see property, trying to buy enough time for a direct buyer to make an offer. Not the most ethical thing to do, but it happened. Now that buyers are scarce showing an apartment to any interested property is the name of the game.

Walking away from $152,000.00!!

When a buyer signs the sales contract in New York City they also make a deposit of 10% on the agreed upon sales price. Essentially this is their earnest money deposit. Considering that the average sales price is over a million dollars in New York City, this deposit can become a small fortune.

Some unfortunate new construction buyers have been forced to walk away from their contracts because at the time of contract signing they put down their 10% deposit and qualified for a specific loan program. While they were under contract and the building was going up, the credit crisis hit, and now their lender requires a more extensive down payment or other requirements that they are not able to satisfy. These buyers forfeit the deposit because they cannot satisfy the original sales contract.

When I read a recent article in the New York Times, I wouldn't say I was surprised, but very interested when I read that a set of buyers walked away from a deposit of $152,000.00 on a $1,520,000.00 co-op apartment, not because they couldn't qualify, but because they thought their property was worth considerably less from when they originally went into contract two months prior.

The buyers had lost confidence in the real estate market and wanted to renegotiate the sales price. Their contract didn't have any type of contingency clauses so the buyer didn't have a way out of the contract that would enable them to take their 10% deposit with them. The buyers wanted a reduction in price of $150,000 and the sellers weren't willing to budge.

Ultimately, the buyer didn't show up at the closing and the seller kept the $152,000. The seller has taken the property off the market and plans to use some of that money to renovate their bathrooms and the agents were still due a commission.

What's the moral of this story?

It's tough to tell, but for the sellers the risk they face is that by not renegotiating another $150,000 off their original agreed upon price and if they decide to go back on the market they will be doing so in a weaker sales environment. I am going to be making some assumption here but my understanding is that the brokers depending on the listing contract will still receive their commissions based off the original sales price of $1,550,000. That's going to be about $90,000 based on a 6% commission that leaves the seller with about $60,000. Will the seller be able to sell for at least $1,490,000 (1,550,000-60,000(their portion of buyer's deposit)? That's anybody's guess. They would also have to pay another round of commissions again, so what does that do to their final net proceeds after all of this?

The buyer said that they believe the same type of apartment will be selling for $1,000,000 a year from now. The same property will be trading for 30% less a year from now? Obviously nobody can get out their crystal ball, but prices are clearly dropping. I would be interested to see what those buyers end up purchasing and how much for. So what do you think you would have done if you were those sellers? If you were the buyer would you have walked away from the $150,000 deposit if you think you could potentially save hundreds of thousands later this year? It's a lot of cash to walk away from, what a crazy market!!

The closing table at a New York City closing is organized chaos to the casual observer. New York is an attorney state, no escrow companies who handle the closings in most of the rest of the country. Depending on the type of property being purchased will determine the specific players who will be at the closing, but let's take for example the co-op closing that I was at last week.

Both the buyer (husband and wife) our customers and the seller (husband and wife), both buyer and seller have the attorney's who have been representing them at the closing, the bank that is financing the purchase has sent their attorney, the bank that holds the mortgage for the seller has sent an attorney, the co-op sends their attorney who represents the building, then both the buyer and seller's real estate agents showed up. Finally the managing agent who is responsible for the co-ops day to day operations is also present. So in total there are 12 people present!!

Now this is not always the case, in a condominium closing, a title representative will be present, and there are many other permutations of this scenario that I won't go into. There is a walk through of the apartment before the closing and any repairs or problems are noted and then negotiated at the closing, which can and has been very contentious at times. The broker typically wants to answer any questions that might arise and needs to collect the commission check once all is said and done.

The buyer's attorney is doing the bulk of the work going over the contracts one final time and negotiating with the seller's attorney on any issues that came up at the walk-thru. This can be a very calm easy negotiation or it can on rare occasion blow up the entire transaction. I have seen a transaction fall apart for a million dollar plus property over a $300.000 dishwasher. Depending on how the initial negotiations went, getting so many people packed in a room, emotions can flare up and tempers erupt! This is a rare occurrence and fortunately nothing happened this time at my closing.

Each attorney is shuffling papers back and forth, signing, copying, and somehow keeping everything organized. Each attorney literally has a stack of paper in front of them. The bank attorney's are cutting checks, the co-op attorney is finalizing the new co-op certificate for the new buyers. After a good hour or so everything winds down, all the T's are crossed and I's dotted, checks handed out, papers authenticated, and the buyers get the keys to their new apartment.

The stacks of paper seemed to find their way to their respective places and the dozen or so people who were engaged in this organized chaos all go their separate ways. Closing on your first property or your twentieth is always an exciting experience. I am always excited for my customers and look forward to speaking with them in a few weeks once they have moved in and made the apartment their own.

Part 3 - KNOW THE FINANCIAL REPORT OF THE BUILDING:

Whether you are a first time buyer or a seasoned investor buying a New York City Condo, Co-Op, Condop, or Townhouse it is important to understand the full financial picture of the building. When you are buying an apartment, besides buying the single apartment unit in the multi-dwelling complex you are also buying into a building. Having a financially sound building can help avoid any future unexpected costs. A number of common questions usually asked by prospective buyers are does this building have any upcoming assessment, what is the underlying mortgage, if so how much, and what is the tax deductibility in this building. Your attorney as part of their due diligence will go over the buildings financial documents, but here is an overview of the major areas that you as a buyer should be aware of.

A building's financial statements are made up of three different areas: Income, Expenses, and Assets. The amount of cash and/or reserve fund that is held by the co-op or the condominium makes up the asset portion of the financial statement. The cash on hand is the amount of liquid assets held by co-op or the condominium. The reserve fund typically refers to the money that is used to make improvements or repairs that occur throughout the year.

When the building decides to make improvements or when major repairs occur such as, boiler change, elevator upgrades, updating the hallways or lobby the buildings reserve funds are tapped into to finance these expenditures. How much money should be in the reserve fund? Typically the reserve fund should be equal to one-third of the annual maintenance income of the building. So that number can fluctuate depending on the size of the building, what major improvements or repairs have been made and a number of different factors. So what happens when the reserve funds are depleted? Some co-ops replenish the reserve funds by receiving income from a "flip tax." Flip tax is a bit misleading, it's not a "tax" but rather a charge imposed when a unit is sold. It is important to ask to see if the building you are considering has a flip tax. This flip tax can be the seller's responsibility, or possibly the buyers and sometimes will be split between the two parties. The flip tax is very important to consider.

Next, look at the section on the income and expenses for the building. This section will indicate whether or not the maintenance or common charge payments cover the operating expenses. If it does, the result will be a cash surplus to the building. If it does not, the result will be a deficit. If there is a deficit, the money received from flip taxes, sublet fees, commercial rents, laundry income or any other revenue source will be used to cover the shortfall. If there is still not enough income there could be a maintenance increase or a special assessment to cover the shortfall.

The Underlying Mortgage and Sponsor-Owned Shares

The status of a co-op building's underlying mortgage is extremely important to understand and investigate before you purchase. Many of the co-op buildings will have a mortgage like any other real property. The buyer's attorney will review as part of their due diligence what type of mortgage exists, how many mortgages there are and how long is the mortgage for.

A condominium does not have an underlying mortgage on the building because each individual unit is real property. However, it's important to know how many units the sponsor owns in the building. The reason being is that the sponsor has to pay real estate taxes, common charges and any possible mortgage they have for the units. If for some reason the sponsor is unable to pay for all those expenses, the building as a whole will be affected. This information is usually disclosed in an amendment to the offering plan and will be a part of the due diligence of your attorney to examine.

The financial statement will supply a lot of insight for the building but you need to consider other areas as well. The following areas to consider are whether there have been assessments, is there a tax abatement and when will it expire, is the property on a land-lease, the common charge or maintenance history, how many apartments are investor owned, is there a flip tax, are any major upgrades or repairs in the near future, any pending litigation, and if there are commercial leases that bring income to the building and when are those leases expiring.

Hiring an attorney that is an expert with New York City apartments is such a crucial step for any buyer especially first time apartment buyer. Your attorney will have the expertise in understanding the financial documents and will be able to discover the inner workings of the building you are looking to purchase into through their due diligence. As an educated and informed first time buyer you should always team up with a Real Estate professional to assist you navigate through this complex process to ensure you make the right decision.

This is part three in a series centered on first time buyers in New York City, our next post will focus on the next step in your process, WHO MANAGES THE BUILDING!

If you are first time homebuyer or investor and would like to receive more free reports and information about New York City go to www.nycaptinfo.com

New York City First Time Home Buyer Series:

• NEW YORK CITY FIRST TIME HOME BUYER: KNOW YOUR PRODUCT - PART 1 OF 5

• NEW YORK CITY FIRST TIME HOME BUYER: KNOW YOUR BUYING POWER - PART 2 OF 5

• NEW YORK CITY FIRST TIME HOME BUYER: KNOW THE FINANCIAL REPORT OF THE BUILDING - PART 3 OF 5

• NEW YORK CITY FIRST TIME HOME BUYER: WHO MANAGES THE BUILDING - PART 4 OF 5

• NEW YORK CITY FIRST TIME HOME BUYER: BUYING WITH YOUR HEAD AND YOUR HEART - PART 5 OF 5

For more information, please contact Morgan Evans or call 917-837-8869

Disclaimer: All information in this post is subject to change without notice. Subject matter: is an opinion, is not guaranteed, may be time sensitive, and may be based on information collected from several sources which may or may not be reliable at the time of sourcing.

According to the appraisal firm Mitchell, Maxwell & Jackson the average home price in Manhattan has fallen 8.8% since the beginning of 2008. The number of contracts signed in September and October is 75% lower than the same time last year.

These numbers are not that surprising but are the first to specifically indicate that the once red hot real estate market has slowed down significantly . Manhattan is the epicenter of the financial markets and is directly affected by the job losses and turmoil. The lag time between properties going into contract and closing in Manhattan is significantly greater than in other parts of the country.

The first quarter reports from the major real estate companies will be very interesting as these reports are predicted to show a decrease in prices for the first time in a very long time.

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