There’s a reason why I named this blog “beating upwind” – it’s because beating upwind is the hard and somewhat dangerous sailing practice of trying to sail into the wind. If you have a good boat you can do it. If you have a crappy boat you might as well anchor and wait for things to change or pull down your sails and motor. To say the least real estate is dicey right now, but we’ve decided we want to take the opportunity and upgrade to something significantly bigger which feels like sailing into the prevailing real estate winds.
We’re lucky to have bought into a building that’s now considered “stable”. The prime apartments in our building (of which ours is one) have gone down about 10% from the peak, which is pretty good considering the market. Meanwhile what we want to move up to – a townhouse in Harlem – has done done about 50%. So if we’re ever going to do it, now is the time to get off the crest of our wave onto the trough of the bigger townhouse wave.
Harlem townhouses have been particularly hard hit in the downturn because they were always rather speculative. I remember years ago looking at them and realizing that it was the same price for a run down, but habitable townhouse as it was for a façade where everything had falled down inside. They peaked about 2 years ago and have gone down about 50% since then -at least at the lower end, which is where we’d be looking.
On top of that nothing is selling. We haven’t confirmed it, but one broker told us only 2 Harlem townhouses have closed since the stock market went down in late September. People who need to sell are getting desperate and there’s one townhouse that sold for $1.5M in July of 2007 that’s now asking $350K in a short sale. That’s 75% off, and the purchase price will probably be even lower. [That property does have “issues” in that it’s a fully occupied SRO with a stop work order issued against it, just to name a couple of its problems.]
The problem is everything in our price range needs $500K in renovation. Nearly all the townhouses in Harlem were built around the turn of the century. Electricity was a new thing back then, so they’ve got crappy 100+ year old plumbing and electrical all of which needs to be replaced. Completely replacing all the plumbing and electrical means ripping out a lot of walls, ceilings and possibly floors. On top of that many of the ones in our price range became SRO’s (rooming houses) which mean heavy use. It’s actually amazing how many of the details survived, but to bring things up to “upper middle class” standards requires pretty much a full gut renovation, which is why everything needs $500K in renovation.
While everything needs a $500K renovation you pretty much can’t get a construction loan to do the renovations given the crisis in the banking industry. But we still have a few options…
Buy something all cash
A while back I didn’t think buying something all cash was even an option, but recently the townhouse you see to the right went on the market asking $350K in a short sale. We’d actually be able to buy that all cash and have enough left over to do basic fix ups, though not a proper renovation.
The thing is, properties like that come with a lot of strings. This is the one I was referring to earlier that is a fully occupied SRO (4 SRO units, 2 regular apartments), and has a stop work order on the building, and a ton of building code violations. Given the number of building code violations it would seem the tenants are mad and making life miserable for the owner by calling the City and reporting problems with the building. That’s not a great situation to get ourselves into.
It also comes with a pile of legal issues since we can’t just cancel people’s leases. SRO tenants are pretty well protected in New York since they tend to be the poorest of the poor. So we’d have to work with a lawyer and pay people to leave the building. But at $300K it may be worth the trouble.
If we bought something all cash it means we’d have to fix it up over time. That’s easier said than done since we go back to the fact that they all seem to need new electrical and plumbing and that rips the building apart when it’s done.
Have the current owner hold a mortgage
To get a mortgage on a building it has to be “mortgageable” which means no building code violations, working kitchen(s), working bathroom(s), etc. Quite a few of the place we see listed have been partly demo’d and then the owners ran out of funds and didn’t complete the renovations. We can’t touch buildings like that because there’s no way to finance them.
Since we’ll need a construction loan for many of these places, but can’t get one, one option is to go with a place where the current owner will hold the mortgage. This option is sorta win-win for us and the seller since it gets the seller out of a money losing proposition, they sell at a price that’s not the bottom of the market, and they get regular income. The townhouse to the right is one of the townhouses where this is an option, though it’s probably just out of our price range at the moment.
The way it would work is we’d put down 20% ($150K+) and then we’d have enough cash left over for a very minimal renovation. Some things just wouldn’t get finished. We might rough in bathrooms and then leave them essentially as closets until we have the money to finish them since we won’t have a full $500K left over once we’ve done a down payment.
If I had to guess I’d guess this is the route we’ll take. But for a lot of townhouses it’s not an option since the current owner often has a rather substantial mortgage on the building.
Buy one that doesn’t need immediate renovation
The problem with buying one that doesn’t need renovation is that they’re currently a bit above our price range. We can go up a little over $1M, maybe $1.1M. The one to the right is a good example – it needs some work, but much of it can be deferred and it’s going for $1.25M. I think it’s safe to assume prices will go down this fall, so this is still an option for us since we don’t want to buy until fall or winter…
Still, the one to the right is a good example of how everything really needs a $500K renovation. That one has had some of the plumbing issues resolved and the electrical was “upgraded” by running conduits on the outside of the walls, which is hardly aesthetically pleasing. The owner put in new windows, but they’re cheap pine windows that won’t last all that long. The rear exterior of the building looks like a mess and probably needs a lot of work. The floors have a thin parquet veneer on them that will be destroyed the next time they’re sanded which means it needs new floors in many places as well. And the renovations that have been done were done cheaply – and that’s just what I can see with a naked eye.
The bottom line is that if we can get one like that one it still needs a big renovation. Sure it’s mortgageable, but the long-term cost of the place is really high.
There’s a lot more I could say about all this, but I’ll leave it for another post… By putting our place on the market we’re sorta taking a leap of faith and hoping that there will be something we like that we can afford when it comes time to buy. Our back up plan is to look at other parts of Harlem (we’re only looking in Hamilton Heights and Sugar Hill right now since we want to be near the 145th Street stop on the ABCD trains), and then there’s always Brooklyn. A couple months ago we went and saw open houses in Brooklyn and saw enough to know we can always find something there that will suit our needs and be in our price range. But we’d really prefer to be in Manhattan…
I am as far in the process of buying a brownstone in Harlem as you were at the time of posting this entry. Your site has been the most useful source of information I found so far. I’d love to chat about your experience – please email me if you have a bit of free time. Thanks!