Harlem Townhouse Shells, Rehab Loans & Fannie/Freddy

At our mortgage closing the other day our loan officer made an interesting comment – “there are no jumbo rehab loans”. Jumbo loans are really big mortgages that are bigger than Fannie Mae or Freddy Mac are willing to insure. They’re purely a bank product. People can still get regular jumbo mortgages, but jumbo rehab loans simply don’t exist – the banks think they’re too risky. The line between “conforming” and “jumbo” is determined by Fannie Mae and Freddy Mac. Currently conforming loans in New York max out at $729,75o for a one family, $934,200 for a two family, and $1,129,250 for a three family. Where this comes into play vis-à-vis Harlem townhouse shells is that it limits who can buy and renovate shells and how the townhouses are configured. Let’s take a few examples and see how this plays out…

Harlem’s little townhouses – 12.5′ x 53 x 4 stories

Dotted all around Harlem are 12 1/2 foot townhouses where the original developer fit two homes on one 25 foot lot. These have 2,650 sq. ft. including the walls, 2,350 sq. ft. inside the walls (586 per floor).

If we assume $165/sq. ft. for an average shell, that puts the purchase price around $450K. Then add $530K ($200/sq. ft.) for a nice renovation and the total cost will be just under $1M.

Owners are probably going to want the entire house for themselves – 2,350 sq. ft. isn’t that much when you subtract the space taken by the staircases, etc. Since only $730K can be financed with a conforming mortgage that means the potential buyer needs nearly $300K in cash to make it work.

If the buyer converts it to two family then only about $100,000 of cash is needed, but then the buyer gets a pretty small space and won’t get much rental income since the unit will be pretty small.

The standard “smaller” Harlem townhouse – 16′ x 50′ x 4 stories

All over Harlem you see 16 footers that are roughly 16′ x 50′ x 4 stories (3200 sq. ft. total, 2880 sq. ft. internal sq. ft. internal, 720 sq. ft. per floor). These will probably cost $525K to purchase (plus or minus depending on condition and location), and cost $650K to renovate – so $1.175M in total investment.

Chances are the buyer will want to configure it as a two family – so they’ll need about $250,000 in cash to put down (minimum).

If they configure it as 3 family their unit will be less than 1,500 sq. ft. and they’ll lose the back yard and only have a roof deck (much less desirable for the owner). But then they only need about $50K down and they can go with low-money down FHA-backed 203(k) loan.

The popular 18 footers – 18′ x 55′ x 4 stories

18 footers are popular because they’re wide enough to have floor through rentals which are popular with developers. But putting developers into the equation ups the prices. They have about 3,950 sq. ft. (3,600 interior, 900 per floor). With developers in the picture I’d expect the cost to be around $710K for the building and $790K for the renovation – so $1.5M total investment.

Configured as a two family the owner would get 2,700 sq. ft. but would need $575K in cash to make it happen.

Configured as three family the owner gets 1,800 sq. ft., but loses the back yard and still needs $375K in cash to pull it off.

While a developer might make it 4 family, there’s really no point. The increased taxes on 4 family (compared to 3 family) and having just a small apartment make it not worth while to the owner.

The coveted 25 footers – 25′ x 52′ x 4 stories

25 footers are just elegant. The space in them is incredible – 5,200 sq. ft. total (4,800 internal, 1,200 per floor). Typically 25 footers have 12+ foot ceilings on the parlor floor so they just feel cavernous. They’re wonderful houses. But with that space comes higher cost… Probably $900K for the building, plus $1M for renovation for a total cost of about $1.9M.

The most spectacular configuration is an owner’s triplex over a ground floor rental. That would give the owner a 3,600 sq. ft., 6 bedroom house with substantial rental income from a legal two bedroom apartment. But they would need $1M in cash since the 2 family rehab loan maxes out at $935K.

The other configuration is two floor-thru tenants over an owner’s duplex. But with that configuration the owner still needs to come up with $775K in cash.

5 story townhouses

In each of the scenarios above it’s possible you could buy a 5 story townhouse instead of the more common 4 story. In some cases it makes adding a unit easier and more desirable since the owner’s unit will have an additional floor. But it ups purchase and renovation costs.

The bottom line

The bottom line is that the lack of jumbo rehab mortgages means that potential buyers either need a lot of cash or they need to be OK with not having a very big owner’s unit. That severely limits the pool of people who realistically are suited for rehabbing buildings. The other thing to note is that this is a bigger problem for bigger townhouses since the costs go up and there aren’t jumbo mortgages to offset the increased costs. Even the little townhouses can easily exceed the max amounts for conforming mortgages.

If you look at some of the posts I’ve had on what things are selling for you’ll notice the gap between shells and livable townhouses is bigger than you might think. I think part of that spread is due to what I just described above – the potential buyers for shells are limited because the loan amounts for rehab mortgages are limited.

But it gets worse…

The problem looming on the horizon is that politicians want to scale back Fannie Mae and Freddy Mac. If that happens it means no more Fannie and Freddy mortgages. There are proposals to make this happen over the next two to ten years. NYC already has increased loan amounts because we’re in a high cost area. As Fannie and Freddie get scaled back all of that will just go away. In fact people think 30 year fixed rate mortgages will go away if Fannie and Freddie are eliminated or severely scaled back.

The politicians who are advocating getting rid of Fannie and Freddie aren’t thinking about what it will mean to neighborhoods with blighted buildings – but it will have a huge effect. They understandably want to  stop the federal government from taking on such big risks, but rehabbing blighted neighborhoods is a risk I think it’s appropriate for governments to take on since even if the mortgages default the community benefits. If Fanny and Freddy go away it’s possible next to nothing will get rehabbed in Harlem – or the rehabs will only be done by developers – not by homeowners who are investing themselves in the community. I’m not saying Fannie and Freddie are perfect, but very few Harlem townhouse shells would get rehabbed without them.

Limited Supply of Manhattan Townhouses

I was looking through The Real Deal the other day and they have an article on Manhattan townhouses

Recession notwithstanding, the median sales price of a Manhattan townhouse jumped 13.2 percent between 2009 and 2010 … One reason for the jump is that, unlike condos, very few newly built townhouses have been added to the housing stock …

If you’re trying to choose between a condo and a townhouse the supply of each should be one of the things you take into consideration. Think twice about the fact that 1) it’s easy to find a condo or coop, but 2) difficult to find a townhouse. Limited supply = scarcity = higher prices. This will only become more true in the next 10 to 20 years as far more condos are built than townhouses.

The article goes on to explore why Manhattanites prefer new construction for their condos and old historic buildings for their townhouses…

In Manhattan, “new construction [townhouses are] not well received,” Miller concurred. “Gut rehabs are fine, but it’s got to have the bones and the façade.”

Failure to heed this preference can damage a house’s value.

“I’ve seen houses that had contemporary interiors linger on the market,” Desmond said. “One of the reasons people like houses is because they like the way they were built originally, with all the different kinds of woods for the floors and that kind of thing.”

When advising Manhattan homeowners who are renovating, he said, “I always tell people that you should keep as much of the original detail as you can … because that is what will sell the house.”

Well, we’re doing a contemporary interior inside a historic exterior – so not exactly following their advice. Then again we don’t have any original details and we don’t have the budget to recreate a high quality “original”(ish) look. I’d love to ask “Desmond” more details about his statement. Was the level of finish equivalent on the contemporary interiors? Were the contemporary interiors taste specific or dated in anyway?

One of my mantras in the design of our place was that the space not feel particularly dated in 10 years. We saw some (nice) townhouses on our search that were already feeling dated just 5 years after they were completed. There was on on 130th Street that had an “infinity” bathtub where the water came from the ceiling. A more classic bathtub with contemporary details wouldn’t have felt so dated.

There’s a difference between “dated” and “classic”. If you can manage to hit on something that becomes “classic” it won’t ever really feel “dated” – at least not in a negative way. Take Poliform / Varenna as an example. If you saw a kitchen they did 10 years ago, I’m guessing it would be difficult to tell it wasn’t done last year – they understand how to do a “classic minimalist” aesthetic.

The other way we looked at it was whether it’s easy to “freshen” up the space to make it more current. We wanted fixed elements to be classic and we’re OK with more replaceable elements being a bit more “on trend”. For example, I was worried about the design of our staircase until our architect proposed a staircase with removable panels. If the shape or materials we use become dated, we (or the new owner) can always replace them with something else without replacing the entire staircase. If the new owner doesn’t like the fact that we have open risers, they can fill in the space and have closed risers, etc. If the new owner doesn’t like our flush baseboards and lack of crown mouldings, they can add baseboards and crown mouldings over what we’ve done.

But I digress… The point of the article is that Manhattan is only so big and as the space in Manhattan becomes more valuable “extravagances” like townhouses will be come more and more rare. On top of that there’s a limited supply of historic townhouses in Manhattan and that leads to the prices of those townhouses increasing faster than other types of properties – especially when the interior feels historic as well as the exterior. Ergo, Manhattan townhouses are a good investment. I really do think Harlem will be the Manhattan neighborhood with the highest price increases over the next 20 years and I think the best investment within Harlem right now are townhouse shells. But that’s just my opinion – I’m a bit biased 🙂

Our House’s Sordid History

Last night I started looking through ACRIS at our house’s history. I had looked at some of it before, but not really tried to fully understand it. It’s had a pretty rough life, though the records only go back to the mid-70s (when NYC was going bankrupt)…

1884 -Our house was built along with 6 others that are adjacent to it. We really don’t know anything about it’s early history.

1884 was also the year The Dakota was built at 72nd and CPW and about the same time that Thomas Crapper popularized the indoor flush toilet (we’re not sure whether our place had an indoor toilet initially or not). 1884 was also a mere 19 years after the end of the Civil War.

March 1966 – The building was given a vacate order because it had been vacant for over 6 months…

adm code above premises has been vacant and untenanted except for caretaker for 60 days or more, and cannot be reoccupied until a new certificate of occupancy has been obtained. premises has been vacant since aug 26 1965.

That vacate order still has not been cleared. What this means is that our building has been a troubled building for longer than I’ve been alive – pretty amazing, when you think about it…

April 1968 – Following the death of Martin Luther King, Jr., a race riot raged around our place with major disturbances along 125th Street in the vicinity of 8th Avenue (FDB), 7th Avenue (ACP) and Lenox Avenue. Mayor Lindsay was almost overtaken by an angry mob just a few blocks north of our place at 127th Street and 7th Avenue. Many stores were looted on 125th Street and Lenox Avenue. This riot was the last straw for many shop keepers who closed their stores permanently – deciding it wasn’t worth the risk to do business in Harlem. The next 10 to 20 years was the darkest time in Harlem’s history.

October 1975 – The City of New York went bankrupt. The fiscal problems that followed hit Harlem very hard.

November 1976 – Joseph Monroe (who lived in the apartment building next door) put a mechanic’s lien on the building.

July 1977 – Harlem was in chaos for two days during a city-wide blackout. While police protected most white neighborhoods, in Harlem there was widespread looting. Following the blackout Harlem looked like a bomb-out, war-torn city. More and more residents moved out of Harlem and landlords found it difficult to get enough rental income to maintain the buildings, which only made things worse. Ed Koch leveraged the blackout to get elected mayor a few months later. He put severe austerity measures into place that brought the City back to life fiscally, but those austerity measures cut vital programs in Harlem and made Harlem’s situation even worse.

July 1978 – Joesph Monroe wins his mechanic’s lien case and is given title to the building to settle the case. What’s most interesting is that it wasn’t clear at the time of the court order who owned the building. 4 owners were named (Kilroy Jones, Catherine Quillinan, Peter Quillinan, Percival E. Vasquez), but then there were a whole bunch of John and Jane Does listed. The fact that they didn’t quite know who owned the building says it was already a troubled building.

The tax photo from 1980 shows that the ground floor was in use as “The Happy Game Room” and the storefront had not been added yet. So apparently Joseph Monroe fixed up the building somewhat and had it operating reasonably well. It was a good thing the building had a caretaker during this time – considering how Harlem was hitting rock bottom during these years.

March 1988 – Joseph Monroe died and the building was sold by his estate to Zion Temple Church, Inc. for $40,000. What’s odd is the deed said $125,000 but someone crossed out $125K and wrote in $40K. How can you make an $85,000 adjustment to the price after you type up the paperwork for the sale? Something was off or shady about that transaction… [It’s also worth noting that Zion Temple Church, Inc. was just incorporated a few months before – in December of ’87. What legitimate church buys townhouses 3 months after coming into existence?]

This is when things start getting really interesting… In the mid to late 1990s, when the building was owned by Zion Temple Church, our building was a drug house. So clearly Zion Temple Church was at best neglectful, and at worse they were slumlords who were OK with the drug activity in the building.

March 1994 – The second vacate order was issued.

December 1997 – The third vacate order was issued. We guess it was around this time that a neglected child was found in one of the closets in our house. That alone would be grounds to get everyone out of the building.

July 1998 – The fourth vacate order was issued. We know there was a fire in the building around ’97/’98. We suspect this is when the fire happened and it was at this point that people stopped “living” (doing drugs) in the building.

What’s really sorta disgusting is that all of that happened while a church owned our building. Talk about “missions start at home” – if they were real Christians they should have started practicing their religion at the buildings they owned.

Curiously, one guy from down the block stopped by just after we bought the building and said he used to live in the building. Then he hesitated and said “well, I sorta lived there”. Given what “living” in our building meant back then – I’m just glad he’s alive and appears to be doing OK…

February 1999 – After owning the building for 11 years Zion Temple Church sells the property to “168 West 123rd St. Realty Corp” but the address is “c/o Maywood Capital” in Paramus, NJ. The sale was for $0. Maywood Capital was convicted for fraud in 2005… Quoting the Attorney General of NJ…

The defendants placed newspaper ads offering interests in “safe” mortgages. Joseph Greenblatt solicited investors in the states of California, Florida, Massachusetts, New Jersey and New York, among others, to invest in residential properties in New York City that were in need of repair. The ads claimed the investments were ideal for IRAs, Keoghs, pensions and personal portfolios.

Corporations formed by the individual defendants would allegedly purchase properties for renovation and/or resale through Maywood Capital. Investor funds were purportedly invested in the entity owning the property and secured by mortgage interests in the property. In reality, many of the properties controlled by the defendants were over-mortgaged and did not produce the unrealistic profits promised to investors. In many cases, investors’ mortgage interests were never recorded or were extinguished without their knowledge so that new investments could be secured by mortgages on the buildings in question. In certain cases, the defendants did not even own the properties that they mortgaged to investors.

There was $42M in fraud and our place was in the center of it all since it was one of the buildings Maywood was telling it’s investors it was fixing up.

The fact that Zion Temple Church owned a crack house and sold the property for $0 to someone who was engaged in fraud makes Zion Temple Church appear to be party to the fraud. But honestly I don’t know what their role was – I’d like to learn more…

August 2002 – While the Attorney General of NJ hadn’t won his case yet, other things were happening with the building legally. I don’t know the particulars, but there was a court order and somehow Beulah Church of God In Christ Jesus, Inc. got our building along with 12 others in similar condition. If I had to guess I’d say they must have invested in Maywood and they got some of the collateral in return for their lost investment in the fraudulent scheme. But again, I don’t know what happened. I do know that one of the lawyers going after Maywood (James E. Hurley) was their lawyer and he helped them sell the buildings a couple years later…

November 2004 – Clearly Beulah didn’t want to actually own the buildings, so they sold them pretty quickly. The buyer of our building was “148 West 121st Street Associates LLC” which was c/o Tahl Properties (a big Harlem landlord). As you might guess from the name of the buyer Beulah sold both our building and 148 W 121 at the same time. The purchase price for both buildings was $1,130,434. That means the value of our building at that time was roughly half that.

July 2005 – Tahl Propp actually bought all of Beulah Church of God in Christ Jesus’ townhouses – they just bought them in several small transactions. Once all the legal issues were resolved Tahl Propp transferred ownership of all of the buildings under one LLC – TPE Townhouses Harlem.

Tahl Propp took out big rehab mortgages, but as a big developer the money just went into their operating budget. They started getting plans done on some of the buildings (including ours). They even pulled permits in 2007 to convert our building to two family and add a floor to the building. They did demolition, then stopped.

Then the market crashed in 2008 and Tahl Propp put all but two of the townhouses on the market.

March 2010 – We bought the place.

Apparently 168 (our house number) is supposed to be a lucky number in Chinese, but so far our building hasn’t had much luck. Since Dan’s Chinese maybe it takes a Chinese person buying a place to make 168 give you good luck… Then again maybe not – in talking to an expediter yesterday she said it sounded like we had been “particularly unlucky” in our dealings with the DOB. I’m hoping the building’s luck will change in the near future…

Construction is starting today! Later this afternoon I’ll go down to see the new construction fence… 🙂

Mortgage Decisions – Points? Fixed/ARM?

It’s that time… We have to sign our life away and start a mortgage that’s bigger than I ever thought I’d have. It’s scary how much money the banks will give us – but at the end of the day once we’ve got our C of O and have rental income coming in, the numbers really do work (quite nicely, actually).

We were pretty set on a fixed rate mortgage, but weren’t sure whether whether we wanted to pay points to get a lower rate. Then after talking to our accountant I started wondering whether we should go with an adjustable rate mortgage.

Our options are:

  • 5.5%, 30 year fixed, 1.25 points
  • 5.25%, 30 year fixed, 2.5 points
  • 4.5%, 7/1 ARM (5/2/5), 30 year term, 2.5 points

The trick with the 5.25% fixed and 4.5% ARM is that we have to come up with the money for the extra points at closing (1 point = 1% of your loan value). That will make our cash flow problem next year worse, but after about 7 years we’ll start saving money (compared to the 5.5% loan) because the lower mortgage payments would finally save more than the points would cost us.

Here’s how things work out (I’m using the mortgage calculator at HSH.com – it’s the best I found)…

March 2041 – regular pay off date for a 30 year mortgage

March 2036 – date we’d pay it off just by making biweekly rather than monthly mortgage payments (that’s a no brainer!)

February 2035 – date we’d pay it off if we went with the 5.25% fixed but paid the amount that would be due with the 5.5% loan and paid biweekly.

July 2032 – date we’d pay it off if we went with the 4.5% ARM but paid the amount that would be due with the 5.5% fixed, paid biweekly, and the rate never adjusted (unlikely).

I’m couching the discussion in terms of when we pay off the loan. Our goal is to pay the mortgage off as quickly as possible so we have the equity in our place to use to make another real estate purchase during the next real estate downturn (or the one after).

The biggest thing to notice is you can pay off your mortgage 5 years early just by dividing the payments in two and paying it every two weeks. I wish I had known that years ago. That’s a huge difference! That much we’ll definitely do, so the next question is how can we make it even shorter?

Paying extra points, but keeping the amount we pay the same shaves off just over a year. Given that it’s going to take 7 years to see the financial benefit and it makes our cash flow issues worse, I’m not so excited about that any more (it was the option we were planning on).

Going with an adjustable rate mortgage can have the biggest impact. But the problem is you never know how the rates will change. If they go up we could have big problems. The worst case is we couldn’t afford the house and had to sell during a slump. If the rates go down it could be great – we could pay the loan off even more quickly. We just don’t know what will happen and it’s an awfully big gamble. Dan and I have always been really conservative when it came to mortgages. We’re not gamblers. We’re the tortoise that gets there slowly but surely. Yes, it could almost shave another 5 years off the loan, but it just feels like too big of a gamble.

We’ll give the bank the final answer tomorrow morning. But I’m thinking we’re going with the 5.5% fixed rate with low points. It just makes the most sense for us.

One last note: If you’re renovating a townhouse and need a loan – contact Michael Stein at Wells Fargo (212/805-1055). Last I checked Wells is the only lender who are offering “conforming” (Fanny/Freddie) loans to rehab shells. Plus, Michael’s a great guy who’s literally worked with us for two years – telling us whether we could afford the mortgages for different types of properties, and then double and triple checking our numbers to make sure things went through smoothly.

NYTimes: Wouldn’t You Like Some Tasty Spam?

I got this e-mail today from the NY Times. I’ve never seen anyone actually try to market spam and try to make it seem like it’s a privilege to be subjected to advertising and marketing…

That’s right… Subscribe now to our TimesLimited service that will send you spam – after all spam is tasty, right? Everyone likes spam… How can you resist? And the best part is that it’s a limited offer… Yeah, right… If receiving spam is limited to a special club membership – sounds like a good reason not to be part of the club.

All in all – pretty funny.

Nice boat in the picture though… It’s even beating upwind 🙂