Residential Realities April 2011
April 30, 2011: The Punch List Problem...
Run That By Me Again...
In "Repairing New Construction: Five Fixes for Sponsor Transactions", I suggested a number of improvements to the process by which sponsors are given the privilege of selling apartments to the public. In the post, I discussed one of my pet peeves…the concept of the punch list. It amazes me that folks will pay millions of dollars for an apartment and will accept the fact that the sponsor does not have to deliver a completed product at the time of closing. It can sometimes take months for the sponsor to finish the punch list.
Ripped From the Headlines
In Curbed yesterday, there was a piece about The Toren, a Brooklyn condo development, in which it was reported that a lawsuit was brought as a result of the sponsor’s failure to complete a punch list. The sponsor claimed he knew nothing about the lawsuit and was completing punch lists in the ordinary course. It is, what it is...
I mention all this because of the take away from the article: that purchasers should have the punch list completed prior to the closing. Unfortunately, that just doesn’t happen…ever.
Improving the Process
As I advocate in my post, I am strongly in favor of an escrow procedure by which funds are held back until the punch list is completed. If the punch list is not completed within a specified period, the escrow should be released to the purchaser. Even this proposal can get complicated, as there can be repairs or replacements that only the sponsor can undertake. Nevertheless, something has to be done to improve the way newly constructed apartments are delivered.
Greater Oversight is Needed
The AG’s office has its hands full trying to manage new offerings and existing plans. That being said, limiting the sponsor’s get out of jail free card when it comes to the punch list would go a long way to improving new construction transactions.
April 27, 2011: A Teachable Moment
Doing Due Dilly
I will be teaching a continuing education class at the New York Real Estate Institute, on May 3rd, at 6 p.m., entitled “A Broker’s Guide to Pre-Contract Due Diligence and Disclosure”. The course will cover what can and should be investigated by the buyer before the contract is signed and the broker’s obligation to disclose material information about the listing. How dual agency impacts disclosure will also be discussed. Please join me.
April 23, 2011: Agita on the East End--That queasy feeling from digesting the numbers...
Where I'm Coming From...
I’m writing this from a woodsy area of the Hamptons that’s north of Sagaponack, around the corner from Bridgehampton and an easy ride to Sag Harbor. I like to call this conveniently located triangle “Shagaponack”. That’s my invention, but you can use it. As if the rainy weather isn’t enough to wash out Easter weekend on its own, Amanda Fung’s story in Crain's, “Tide Goes Out on Hamptons Sales, Prices”, detailing the dismal first quarter results of 2011, as compared to a year earlier, will no doubt have sellers and their brokers grumbling through Easter brunch. And rightfully so.
A living large lifestyle venue, the Hamptons continue to be squeezed by the same vice plaguing many other parts of the country: falling prices and diminished sales volume. What was worth $5,000,000, is now selling for $4,000,000, or perhaps even less. What was selling for $1,000,000, might not be selling at all. Yet it’s still the Hamptons. The Laundry and Della Famina close, as well as other local favorites, but Race Lane opens and Nobu comes to the Capri. Hope springs eternal, particularly for increased sales activity in the second quarter. So it’s really a mixed bag for those who summer in and about the enclave. The Range Rovered East End motors on.
Several weeks ago I went to a presentation given by Doug Heddings, a knowledgeable broker and True Gotham blogger, on the state of things in Manhattan and the Hamptons (where he recently opened an office). He offered an interesting insight: As soon as the press turns negative, the phones stop ringing. Apparently, the real estate buying public scares easily, luxury real estate being no exception. So it may be a quiet Easter weekend at the beach this year, but the Hamptons ain’t going away any time soon.
April 20, 2011: Public Relations in Motion
Here We Go...
An article in the Post yesterday appears to begin the real estate industry’s public lobbying effort to extend 421-a tax abatement benefits that expired in December 2010. There is also an effort to cap real estate taxes at 20% of assessed value. As the legislature considers these issues, rent stabilization benefits are also in play (those benefits expire in June). Balancing tax abatement benefits to the developers with rent protections for 1,000,000 of the Mayor’s constituents will keep folks in Albany for many weeks to come. The legislative battle to resolve these polar opposites could easily turn into a brawl of steel cage proportions, as Democrats seek to protect tenants and Republicans fight for the big guys. Expect compromises and renewals for both sides.
April 16, 2011: Is Brooklyn Hot?
Memories of Things Past
Growing up in Brooklyn in the sixties, we all longed for our last day in that borough, and our relocation to the “City”, which was what Manhattan was called by those who resided elsewhere. A family trip to see a movie at Radio City was the equivalent of visiting another planet. And Manhattan is still the epicenter of hipness and cool and where most kids from outside New York would like to wind up one day. That being said, an interesting trend may be emerging.
Crunching the Numbers
As Manhattan searches for its mojo, a REBNY report this week showed that Brooklyn was the only borough where sales improved from a year ago. As reported on April 15th in the Wall Street Journal by Josh Barbanel, in The Real Deal by Adam Fusfeld and in Crain's by Amanda Fung, one would have to conclude that this uptick in sales traffic in Brooklyn can’t be dismissed as a anomaly on the road back to New York’s real estate well being. Maybe something bigger is going on.
Anecdotal Evidence Counts
As the second quarter begins, I have done more transactions in Brooklyn this year than ever before. The buyers of those units vary greatly as do the areas in which the sales are occurring. From first time home buyers to retirees, folks seem to be turning their attention to the other side of the bridge. Although Jonathan Miller in Josh’s article called sales in Brooklyn “flat as Flatbush”, I would not be shocked to see sales continue to improve in Brooklyn for one reason: value.
The Consumer as Value Player
Whiling away the hours on Street Easy, my new favorite pastime, it’s not difficult to see why someone might look outside of Manhattan for a value purchase. As the Manhattan housing stock continues to age, which translates into higher carrying costs and downward price pressure, buying new construction in Brooklyn with great amenities and a significantly lower price point and carrying costs will continue to make sense for those entering the real estate market in post crash New York. That $700K will go a lot further for a first time buyer’s first apartment. Is it a trend? I think so.
April 10, 2011: Disclosure Paperwork is Reduced but not the Complexity of Dual Agency
A Change in the Law
As brokers continue to figure out compliance with the revised dual agency law, the New York State Department of State has reduced the paperwork burden for the seller’s broker under limited circumstances. As stated in an April 5th REBNY Bulletin from Neil Garfinkel, the organization's counsel, if a potential buyer is represented by a broker who is present at the time of the showing, the seller’s broker is no longer required to deliver the statutory form, disclosing that the broker is working for the seller. There are exceptions to the exception, including a scenario where the buyer’s broker is not present or the seller’s broker is acting as dual agent.
Dual agency reminds me of the court room scene in Woody Allen’s Bananas in which the protagonist, Fielding Mellish, is both the prosecutor and the witness being interrogated. He keeps running back and forth from the witness box to ask and answer the question. At one point he asks himself “Are you being coy with me Mr. Mellish?” Funny.
On the Ground with Dual Agency
Not so funny when dual agency is involved. A recent situation proved to me beyond a doubt how complicated the dual agent role can get when the parties have a disagreement over a material issue. Just as the contract was about to be signed, the buyer discovered that the seller might not have obtained Board approval for all of the renovations undertaken in the apartment. Although the seller vehemently denied that alterations had not been approved, the buyer insisted on further assurances, which the seller was not prepared to give. The broker, who was acting as dual agent, much like Woody Allen’s character, repeatedly changed sides and loyalties, both advocating for and against each party as the drama unfolded. Although the broker should have been there to resolve this misunderstanding, as the level of mistrust was so high, the parties elected to deal directly with each other rather than communicate through the broker. It’s always tricky when the parties start communicating without a filter, but fortunately, the buyer's concerns were resolved.
The economics of dual agency are enticing, but things can get out of control quickly when a problem arises.
April 8, 2011
Google Maps Out Foreclosures...
I just came across this Business Insider post from late January, entitled "A Frightening Satellite Tour of America's Foreclosure Wastelands", which combines foreclosure statistics compiled by Realty Trac with Google Maps and satellite imagery. The foreclosures are represented by red dots and are superimposed on the maps of twenty cities with significant foreclosure histories from 2010. For example, Miami and Phoenix each had a foreclosure filing rate of 1 out of every 14 homes. It’s hard to comprehend both the magnitude of those numbers and the graphic representations as they appear on each of the maps. When you consider the vast number of red dots, you begin to understand why the process of absorbing this failed housing inventory is taking much longer than expected.
The New York Disconnect
The maps got me thinking about the Saul Steinberg New Yorker cover from 1976, entitled “View of the World From Ninth Avenue”. As illustrated, once you got across the Hudson River, it wasn’t very far to Kansas, and not much further to the Pacific Ocean. Back then, it was commentary on New York as so called center of the universe. But as a metaphor for today’s housing crisis, the illustration covers other ground. There’s no question that the housing crash has been painful here in the five boroughs, but nothing remotely equivalent to the housing meltdown suffered throughout most of the country. Like the drawing, for many of us, that housing crisis is out there somewhere, west of the Hudson.
And So It Continues…
Today I spoke with a real estate attorney in South Florida who had just made the rounds of the local real estate brokers for his monthly face time. All about town the word the same: quiet…very quiet.
April 3, 2011: More Changes to Residential Lending
I’ve been on a lending jag lately and rightfully so. The beginning and the end of the housing crisis can be linked to stability in the residential mortgage markets or the lack thereof. Another step in the direction of improving lending standards and ridding the market of junk loans, is the establishment of a “qualified residential mortgage” or “QRM”. These loans, as proposed by the F.D.I.C. and other regulators, would require a 20 percent down payment by the borrower, thereby creating a gold standard for mortgage lending. Unless a loan meets the standards of a QRM, the bank making the loan will be required to maintain a small portion of the risk associated with the loan. In other words, the bank simply can’t sell the loan to Fannie or Freddie and be on to the next borrower.
Requiring Banks to Maintain Lending Risk
As reported in the Times over the past few days, the proposed rules, mandated under the Dodd-Frank legislation, appear to bring a greater degree of accountability to the lending process, for those loans that are less than golden. But as we’ve learned over the past decade, banks will lend money, as long as they don’t have to retain any risk associated with those loans. As pointed out in the article, thanks to Fannie and Freddie, “the government is responsible for something like 95 percent of all new mortgages issued”. Banks are off the hook financially with almost all residential mortgage products except jumbo loans.
Redefining Home Ownership Continues
Although the initial reaction to the proposed rules is positive, one has to wonder how difficult it will be to obtain a loan that does not qualify as a QRM. One could argue that banks will gravitate to the loans that allow them to sell the loans risk free, rather than make loans that require the lenders to retain a portion of the risk with more challenging borrowers. As the government and the banks continue to tighten underwriting guidelines, the number of folks who can qualify for a mortgage will decrease and home ownership could be become elusive for many.
So it Begins
As the proposed rules are open for comment, the 20 percent down payment requirement may get reduced somewhat in the sausage making process of satisfying all the players: banks, regulators, consumer groups, realtors, builders, and last but not least, the borrower. But the pendulum is swinging fast and residential lending won’t be same when all is said and done.