UPDATE: See my more recent post about how now is a great time to buy in Harlem if you’ve got a long-term perspective…
There’s a bit of a fire sale on Harlem townhouses/brownstones – their down 60% or more from their 2007 peak. Actual sale prices are often $200K or more below asking. Very few people are buying and some sellers are getting desperate. But even at drastically reduced prices Harlem townhouses may not make sense to buy unless you’ve got a pretty long-term perspective on the market.
Let’s take an example… Someone e-mailed me having seen a post here on the blog. A relative of his just bought a townhouse I had noticed a few months ago and really liked. His relative paid $146/sq. ft. for the place which seems like a great deal, but is it? The architects are telling them that renovations will cost $200/sq. ft. which means the total investment will be around $350/sq. ft. Thing is, nothing is really selling in that price range. The highest price per square foot in the past 6 months was $333/sq. ft. Their location is much better than that comp so maybe they can get $350/sq. ft., but what if the market slides more? But that’s just a short term perspective. Harlem townhouses will rebound. The property in question isn’t quite prime, but it’s got a lot going for it including incredible location, which counts for a lot.
We recently pulled out of negotiations on a wreck of a townhouse in part because when I calculated how much we’d have invested in the property after renovations it came out to $303/sq. ft. and we didn’t feel that block was worth that amount of investment (it was a sketchy block). They were willing to come down quite a bit, but we just weren’t willing to invest that much in that location.
Then we saw a huge ark of a house in East Harlem North – an enormous 5 floor townhouse with 10 1/2 foot ceilings on most floors and 12 1/2 foot ceilings on the parlor floor. When we worked the numbers on the house it was depressing. They’re asking a bit under $1M, but the house needs a gut renovation. There are some original details and parts of the house are in decent shape. But it has some structural problems and original details have been stripped out of many of the rooms. On average it would probably be worth $650-700K, but I doubt the owner understand that it’s worth that little.
On top of that it’s got some unique problems – first is the tax bill – $25,000+/year, when most townhouses pay $3,000 to $5,000/year. That can’t be changed until the there’s a new C of O specifying 3 families or less. To get that you have to first get a certificate of non-harassment (a certificate that you haven’t harassed tenants to clear the building) and they don’t have all the signatures from past tenants yet. So it’s possible that it could take 3 years to get the signatures for a certificate of non-harassment (since you have to get all tenants in the past 3 years to sign). Then you have wait nearly a year for the City to process the certificate – and you can’t even start renovations until you’ve got your certificate of non-harassment. Then you’re looking at months of renovations and if you don’t get your readjustment request in by January 5th you may have to wait another year to bring down the taxes. The extra $21K in taxes you’d be paying in the meantime could buy you $300-350K in mortgage, so that reduces the value of the property to about $300K.
But there’s more since there’s a drug house next door. The short story is that an investor put over $2M into the building (he has a mortgage of $1.999M) but then he didn’t do anything with the building. Drug dealers and addicts noticed the vacant building, got in, and now use it for drug deals and more… On top of that they’re looting the house. The air conditioners on the roof are gone. They ripped out the plumbing to the point of causing a huge flood that flooded 3 other townhouses. And last time we went by there we noticed they’ve started stealing the windows and shitting in the back yard (since there’s no working toilets now that the water is off).
You can’t help but wonder what the owner of the vacant drug building is thinking. The only scenario that makes sense to us is that the owner is hoping the building will burn and he can get out of his mortgage through an insurance settlement. But what insurance company will pay out on a $2M fire claim when there are violations on the building for being a vacant unsecured building?
So back to the big ark of a townhouse… With the tax situation it’s down to $300K. With a drug house next door that could very well burn, we think that makes the building literally worthless. Now think about the fact that they’re asking nearly $1M… We feel so sorry for the owner. We’re guessing the taxes are a major burden for him. He doesn’t even have the money to pay former tenants to sign the certificate of non-harassment. It’s just a horrible situation for him. He inherited the property, but it’s looking like his inheritance is more of a problem than a benefit.
If the market goes down much more there will be quite a few Harlem townhouses that will literally lose all value in that they’ll be worth less after renovations than the cost of the renovations. That’s what happened in the 80’s – landlords didn’t see recovery in site so they walked away from the buildings and the City became the city’s biggest landlord.
Even now the issue is that townhouses aren’t worth what you put into them after you renovate them. And they ALL need renovations. Most of them have 100 year old plumbing and wiring that has to be ripped out and replaced. Most of the ones that have been renovated have soulless renovations that are just horrid and cheaply done. That means even the renovated ones will need renovation sooner than you think. We saw one the other day that looked great but when you looked closely lots of plumbing was done with PVC which is illegal in NYC. Any plumber who gets caught using PVC would probably lose their license, so that means this great looking townhouse didn’t use a licensed plumber. So even the great ones aren’t all that great. There are a few with great renovations but they just aren’t selling ’cause their priced too high for the market. People with that much money are buying the bargains downtown.
All of that will change in time, but for now even though there are great prices on Harlem townhouses, they’re really not so great after you calculate in the cost of renovations. As a buyer the challenge is to get the sellers to understand how little value their homes have. Many still think they’re worth what they were 2 or 3 years ago.
That said, we’re putting in a bid on another townhouse. We’re in a bit of a quandary on what price to bid. Our wonderful agent (Maria McCallister of Barak) just spent all afternoon doing a driving tour of 23 properties to understand how to bid on the one we’re interested in, but more on that later…