Residential Realities March 2011
March 31, 2011: The Troublesome Transaction
Now that activity in the New York City real estate market is increasing, so is the difficulty of actually getting a deal done. Although brokers seem to be using two favorite tools in the broker tool box with more frequency: silly deadlines and multiple bids, the time and effort required to complete a transaction has increased geometrically. From difficult buyers to short appraisals to impossible underwriting guidelines, each component has taken on its own set of complexities and can cause a closing to be delayed or not to occur.
Personal Journal
Under the Henry Kissinger rule that even though you're paranoid, it doesn’t mean that people aren’t out to get you, the level of distrust between the parties is reaching new highs as the never ending stream of scary real estate statistics continues (more on that shortly). As buyers search for the bottom, like prospectors looking for gold, the buyer’s lack of confidence that he or she is purchasing at the “right price” creates anxiety not just for buyer and seller, but for all of the professionals who shepherd them through the process.
Slam Dunk Leaves the Lexicon
The above being said, there are deals of all sizes getting done quickly, but not easily. As one of my real estate mentors loved to say, “it’s rough out there” and that’s true now more than ever. So as we finish up the first quarter, many of us are fortunate enough to say, yes things are better...but the so called “slam dunk” may be a thing of the past.
March 27, 2011: A Borrower Takes a Walk in the Mortgage Twilight Zone
On a long car trip yesterday, my wife read aloud Joe Nocera’s powerful and painful story of a bystander caught in the cross hairs of a special agent for Internal Revenue Service, who had watched one too many NCIS episodes. Through what could only be described as pointlessly diligent investigative work, including the use of an “attractive female undercover agent” wearing a wire, the agent discovered that said individual had obtained two “liar loans”, thereby violating federal lending laws. Long story short: that individual is now serving 21 months in a low security prison for fraudulently misstating his income on those loan applications and has to make significant restitution to Countrywide, now owned by Bank of America. His mortgage broker, also prosecuted, was given a reduced sentence of 10 months for testifying against his client, the borrower. Cue the Rod Serling voice over…
Not the Loan Modification We Had In Mind
The article is fascinating because the individual caught in the web fit the profile of many Americans: struggled with personal demons, overcame those demons, turned his life around and accomplished great things (including an ultra-marathon across the Sahara desert). Not the sleazy real estate manipulator who got what he deserved, but someone who did what thousands were enthusiastically encouraged to do during that crazy period of the past decade. As Nocera points out in great detail, the Government players in this story went to incredible lengths to prosecute this borrower and to a make a philosophical point about the banking crisis. But with so many bad guys in the mortgage debacle to choose from, is this the person the Government needed to punish to let us know “they get it” about what went wrong with the nation's lending practices?
March 22, 2011: The Rent Stabilization Show is About to Begin
Places Everyone...
As the spring season begins, and the thaw of the real estate economy continues, the curtain is about to rise on one of New York’s favorite morality plays: whether or not to extend rent stabilization. As pointed out by Eliot Brown in the Wall Street Journal yesterday, the regulated rent law will expire in June with the usual battle lines being drawn. As we learn over and over again, it’s usually not about the best interests of the public, but often about the political climate at the time our legislators are faced with a major decision. As the cast of characters in this drama takes the stage in Albany, the ending seems somewhat predictable.
A Good Run by Broadway Standards
Although the soliloquy of the real estate lobby to eliminate rent protection for 1,000,000 apartments will begin shortly, it’s hard to imagine that the political will exists to bring all rents to market in the current fragile economy. Grandma thrown out in the street doesn’t play well. In fact, there is a good shot that the rent ceiling of $2,000 for deregulating an apartment, which has not changed since 1993 (a very good run), will increase. But everything comes with a price tag. Extending rent stabilization will have to be connected to something that benefits the real estate industry and that something is probably a renewal of a watered down version of the expired 421-a tax abatement program, the mother’s milk of condo development.
Is it Comedy or Tragedy?
So with the expected plot twists and turns as the story unfolds, it should get interesting. Sit back, relax and enjoy the show.
March 17, 2011: Is Ilsa Winding Down?
It’s getting painful for developers hoping to escape the jaws of ILSA, a forty-year old statute that requires disclosures about development projects, originally aimed at land sales. As an escape hatch from new construction condo contracts signed at the height of the over-heated New York residential real estate market, lawyers found the statute and asserted its applicability as a means to get out of unwanted contract obligations. As each decision is rendered by the courts, the most recent by the Second Circuit, the chances of ILSA not being applicable to these developments is slim and none. Although the decision could theoretically be appealed to the Supreme Court, that doesn’t seem likely given the oversized cost to take on such an appeal, the odds of success and the limited nature of the problem.
Since a purchaser’s right to revoke a contract on grounds that the developer failed to comply with ILSA must be given within two years from the date that the contract was signed, most of the contractual time periods where ILSA might have been asserted have expired. In other words, all of the ILSA cases that could have been filed, probably have been filed.
Dollars and Sense
With an improving real estate market and with an ever increasing hurdle to jump over for developers, economics may dictate whether it makes any financial sense to continue to fight the ILSA battle. Look for a Roberto Duran moment: no mas…
For more, see "IlSA: Not the Name of a Hurricane" and "More ILL from ILSA".
March 11, 2011: Banks Get Funky--The B Side
Banks and Borrowers Still Can't Get Their Groove On
Almost a year ago, in my post “Banks Get Funky”, I wrote about how difficult the lending process had become for residential borrowers. Unfortunately, not much has changed. In fact, lenders continue to move the underwriting goal post with the result of causing closing dates to be pushed back, often to the disappointment and frustration of both buyer and seller. Here are six issues that buyers and brokers need to keep in mind as co-op and condo transaction volume finally starts to increase:
The Pre-Approval Letter
It’s time for this document to go the way of the palm pilot. Although brokers often encourage sellers to accept an offer because their customer has multiple pre-approval letters, this initial review of the buyer is basically useless. Both the buyer and the co-op or condo must withstand the full review process by the Dr. Evil of the lending process, the underwriter. So waiving a pre-approval letter as a reason to accept an offer doesn’t really provide much comfort. To prove my point, take this scenario for a test drive: The next time someone lauds a pre-approval letter, ask the buyer if he or she is willing to waive the mortgage contingency. That will tell you everything you need to know…
Good Faith Estimate
Going from the ridiculous to the sublime, as a result of changes in federal law in January 2010, the good faith estimate has become a very important document. Accuracy in disclosing closing costs is essential, as an understatement can cause banks to withdraw their underwriting, unless someone (usually a mortgage broker or title company) absorbs those misstated costs. There are specific tolerances for mistakes and some items, like incorrect origination fees, can’t be remedied. Buyers and their attorneys should carefully review this document, which has to be delivered three business days after the loan application is submitted.
Insurance Requirements
Banks are now often requiring condo purchasers to obtain a “walls in” policy also known as a “HO-6”. Buyers should be in touch with an insurance broker early in the underwriting process to insure the required coverage is available. That’s the easy part. Lenders are carefully reviewing the insurance coverages maintained by co-ops and condos. The bugaboo de jour is the building’s fidelity bond coverage, which sometimes is below current guidelines. The buyer’s attorney should obtain the co-op or condo’s insurance declaration page as soon as possible to make sure the building will satisfy the bank’s lending requirements. Get this loan condition cleared as soon as it rears its ugly head on the commitment letter.
Banks Require Accuracy
Forwarding the bank a copy of the fully-executed contract to initiate underwriting continues to be standard operating procedure. But banks are now obsessing over minor mistakes, cross outs and handwritten changes. Recently, I was asked to prepare an amendment to a contract because the zip code of the property being sold was wrong. I think that says it all.
Require a Funding Contingency
More than ever, contracts should include a funding contingency in addition to a mortgage contingency. Particularly with low occupancy condos that are relying on FHA financing, the possibility that a bank could initially provide a loan commitment and then change its mind and withdraw the financing, continues to be a real possibility. A buyer should not be left in the lurch if the bank sours on the co-op or condo and the financing goes away.
As Long as They Don’t Stay Over
Parents are often stepping up to help out the kids with their first purchase. In many cases, the parents would prefer to act as guarantor on a co-op or condo loan, rather than be named as a co-purchaser. Banks, however, usually require the parents to “be in title” with their offspring and will not accept only a parental guaranty of the loan. Buyers would be wise to investigate a lender’s collateral requirements before making an offer based upon a parental loan guaranty that very few banks will accept.
Residential Reality: There’s More in Store
Besides the usual hi jinx that you can expect on April 1st of any year, this one will be special: many provisions of the Frank-Dodd financial reform law will go in effect on that day with interesting and unintended consequences. To be continued…
March 10, 2011: An Ode to Willie
Coming back from a dinner last night, my wife informed me that a doorman at our former co-op had passed away. Willie Shuler was our late night guy. Often he would show up before his shift to hang out in front of the building and talk to the residents before he put on his uniform and assumed his post in the lobby. He was always happy to see you and catch up, ask about a family member or greet your dog with a treat from the desk. It was part of the DNA of our cooperative life.
Buildings are like organisms that expand and contract as the day begins and the day ends. Many things take place on that overnight shift to which the sleeping residents are oblivious. But not to Willie. He was gatekeeper, counselor and confidant to those in need, holding court throughout the night. Many times I witnessed sotto voce conversations at his station in which advice was given and taken.
So I say goodbye to a friend who moves on to a better place…
March 8, 2011: Digital Due Diligence
Until folks realized that New York City’s ACRIS system could be data mined to develop all kinds of statistics about real estate sales in Gotham, the public relied almost entirely on the quarterly and annual sales reports provided by the large brokerage firms. Now a number of online portals have created complex trails of transaction analysis bringing more and more transparency to answer Ed Koch’s famous question “How we doing?”
Digging UrbanDigs
One such website, UrbanDigs, recently launched by Noah Rosenblatt, is on a mission to both report that data and to understand it as well. The latter goal often not so easy to accomplish. Yesterday’s post by Noah, revealed a detail that many brokers know, but the public does not. Sales data that appears on ACRIS can reflect transactions that occurred as much as 90 days ago. How could that be? We’re dealing with a governmental filing service. The number of transactions in any given day may increase, but the number of governmental employees recording those transactions into the system remains the same, and in our current budget scenario, may even be going down. So there is a lag time between the date a closing takes place and the date that the closing becomes public knowledge, “as a matter of record”. Looking at the statistics, one realizes that the sales data on any particular day is stale and doesn’t reflect the state of the real estate market on that day. It’s like driving a car, only using the rear view mirror.
What the Public Doesn’t Know
The piece of the puzzle not immediately available to home buyers is the number of contracts signed on a particular day. Although not accessible directly, sites such as UrbanDigs are processing that information provided by internal brokerage listing websites, to determine with more accuracy exactly how the real estate market is doing on a particular day, week or month. Taking the recorded sales data and linking it to the signed contract numbers starts to produce a relatively accurate analysis of how the real estate market is actually doing without relying on spin, marketing efforts or glossy reports. Now we’re getting somewhere…
March 6, 2011: A Visit to 8 Spruce Street
A Lunch Date Sparks Memories
An unexpected invitation to lunch with the Dean of my law school rekindled memories of my three years in lower Manhattan. When I attended New York Law School in the early seventies, it was housed in a funky office building at the corner of Worth and Church Streets. At the time, one would describe the location as…the middle of nowhere. The Odeon, now a few doors down, was still to be born out of the Tower Cafeteria. I remember leaving school one day and turning to my friend and asking, “where the hell are we?” Turns out the middle of nowhere was to become Tribeca and the law school, reinvented as a brand new structure on West Broadway, finds itself at the epicenter of Manhattan hipness. Stuff happens.
If Paul Goldberger Likes It…
With downtown on my mind, I happened onto Paul Goldberger’s New Yorker Review of 8 Spruce Street, the new Frank Gehry designed rental building that opened for business a week ago. The article inspired a visit. This massive structure, rising 76 stories, with 900 apartments in various configurations, has a wavy fabric-like stainless steel skin, that towers over City Hall, Pace University and the Brooklyn Bridge. As he points out in the article, a building’s design is either controlled by the developer or by the architect, and you know who won in this case. Ordinarily, a building with this level of architectural pedigree and over the top amenities, would only be available to those with very large bank accounts, but not so in this case, at least to some extent. If you can pay the pricy rental freight, it can be yours (with a free month’s rent to boot). And if Goldberger gives it an enthusiastic thumbs up, which he did, it means something.
The Changing Landscape
In the old days, it would have been impossible to imagine a high-end rental building rising up from that weird patchwork of tiny streets and alleys, parking lots, take out places and electronics stores that surround the entrance to the bridge and the FDR. And in many respects, not much has changed in that specific location. Yet planted in the middle of all those forgettable buildings, is this gigantic structure that dominates the skyline much like the Woolworth Building must have 100 years ago. Is it a game changer for that neighborhood? As the recession winds down, the folks at 8 Spruce Street hope so.
March 1, 2011: Having a Blast on Second Avenue
At East 70th Street and Second Avenue, one of the epicenters for the construction of the Second Avenue subway, stands a restaurant I’ve frequented with my friends in that neighborhood on many occasions. As the construction of the subway works its way down Second, the heavy machinery moves along with it, together with lots of guys in hard hats and an unexpected dining experience.
"Incoming"
As we were entering the crowded restaurant, three horn blasts sounded. The gentlemen holding the door as we walked in stated without much emphasis, “the dynamite’s about to go off”. From the resigned look my friend’s face, a look that said, here we go again, it was clear that he was not kidding.
The horn sounds again. Folks in the restaurant seem to pause. A few seconds later, what can only be described as a significant underground explosion takes place, shaking the building and the patrons therein. Nervous laughter, relief that we all made it through, then back to dinner. Several minutes later, the restaurant’s owner offers a complimentary aperitif of crème de cassis with some blue stuff in it. “We hand these out after every blast”. Talk about 3-D.
Subway tunnels apparently don’t dig themselves. It is an almost incomprehensible undertaking that is impacting life along the Avenue and will for many years to come. Two things were abundantly clear from our dinner: cutting subterranean tunnels out of bedrock 100 feet below the street surface takes dynamite… many, many blasts of dynamite and many shots of crème de cassis, as New Yorkers toast their legendary coping mechanism.
