Does Buying A Harlem Townhouse Make Economic Sense?

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…

20 thoughts on “Does Buying A Harlem Townhouse Make Economic Sense?

  1. Hey, thanks for the great article. I just wanted to see if you had any new developments in the story. What’s your opinion on the market now?

  2. @Adam – Yes, it’s still definitely a great time to buy. Shells are selling for just a bit above what they were at the bottom, however the top of the market has gone up. So that means there’s more breathing room to make money on renovations. Anyone who can get in on the historic preservation tax credits get an even better deal.

  3. hi Jay.. so would you say it’s a good buy @$352/sqf for a 3 unit townhouse (doesn’t need work) in central harlem as investment property (NOI $70k)? and what do you think the future value of it say in about 2 years??

  4. @Elle – IMHO, 2 years is too short of a time frame. There’s still a fair amount of uncertainty in the market right now. I tend to believe that within 10 years there will be a time when values on the types of properties you mention will be over $500/sq ft. But who knows what will happen in the short run.

    As far as having an NOI of $70K, I’d look more closely at the Debt Coverage Ratio. How much money will you be making after paying the mortgage? If rents went down 10 or 20 percent could you still cover the mortgage and do all the repairs and maintenance that comes with a 100+ year old building?

  5. I have been looking at Brownstones in Harlem, i would be interested what the value is today for a shell per square foot, and a finished building per square foot below 125th on the west side, lets say from 200 to 300 hundred blocks.

    Thanks

  6. Hi Jay,

    Great blog! I’ve been scouring the net for info. on costs of renovating a townhouse in Harlem and this is the best I’ve found yet. Very informative.

    I am currently looking at a townhouse on Manhattan Ave, across the street from the park. The townhouse is currently configured as an 8-unit rental. It’s a mess. Linoleum floors, every historical detail was ripped out years ago. Has no character whatsoever and it’s falling apart. It’s currently on the market for $1.4MM. It’s been on the market for 3 years, initially priced at $3MM in ’08. Even with the drastic reduction, I feel that it’s too high at $306 sq/ft. In another post you said that townhouses should be selling at 40% of their ’07 sale prices. The current owner bought this townhouse in ’07 for $1.8MM. Does $720K seem a more appropriate sale price in ’11?

    I want to convert this to a single family home and am wondering what purchase price do you think makes economic sense?

  7. @Shoshanna – Is there a Certificate of No Harassment in place? If not, walk away and find another place (unless you can do the purchase and renovation in all cash AND all the renovation can legitimately be done under “repairs and maintenance” and there’s no C of O or iCard saying it was converted to multi-family).

    SOME townhouses in South Harlem seem to command more money than townhouses in other parts of Harlem. There are occasionally some fairly high comps in that area. Because of the proximity to Columbia, there’s more demand to be in that area by Columbia faculty and people who see it as the new Upper Upper West Side.

    That said… The price has everything to do with condition and square footage. Specifically the amount of demolition needed and how much of the structural (joists, etc.) are in good condition. If it has working utilities that would be another big plus.

    Based on your numbers I’m deducing it’s got 4575 sq. ft. – which is a nice size. $720K would be $157/sq. ft. – that would be a very good price based on what you described. But it sounds like the seller is unrealistic – to get it you’ll probably need to go considerably higher or find another place. Which is the whole thing about price and value – it’s worth whatever someone will pay for it. And the seller appears to be holding out for someone who really wants to be in that precise area.

  8. @Frank – I haven’t pulled comps for South Harlem recently. I recommend getting a Property Shark membership (with comps) and looking at what’s sold in the past year. There aren’t typically that many sales over in that part of Harlem.

    Do realize that prices are generally a bit higher West of St. Nick since that’s the accepted border of “South Harlem”.

    That said – as far as I know, things haven’t changed all that much over the past couple years. The bottom was probably late 2009 / early 2010, but it’s just barely higher than that now and given that it waffles a bit naturally it may be down near the bottom again.

  9. Jay,

    Thanks for the info. The realtor finally got back to me and said that there isn’t a Cert. of No Harassment. The owner had originally planned on converting it to a single family home, but hasn’t had the chance. “But now worries! It’s a really easy thing to get in order.” hahaha

    BTW, have you seen the Langston Hughes place? What are your thoughts on it?

  10. @Shoshanna – I have not seen the Langston Hughes place, but we were looking at 1990 Madison at one point which is a half block away. The neighborhood didn’t seem as stable as other parts of Harlem – it seems more “transitional”. It’s definitely not near as many restaurants, bars, etc.

  11. Very informative Jay, I’ve got my property on sale 205 edgecombe, I have had offers of 600, 680 and 720k. the house has all of it’s historic detail intact internally but needs to be renovated, the plumbing was changed to all copper 30 years ago. what would you say is a fair price for the property? thank you

    • Andre – Looks like your building is an SRO without a certificate of No Harassment. The value depends on a lot of things. If you have tenants in there at the moment the value can be quite low since it can be quite expensive and sometimes impossible to get rid of an SRO tenant. Your broker’s website says it will be delivered vacant, so that’s good. If the house has been reconfigured and no longer conforms to the C of O any buyer is taking a huge financial risk buying the building if they have any renters in units that don’t conform to the C of O.

      As far as your offers – only all cash buyers can buy SROs without CoNHs. So ignore the offers that require financing – they won’t be able to close the deal. I can’t say what the value of the building is without seeing the building and spending a few hours evaluating comps, but my gut tells me those numbers seem pretty decent for an SRO in that location with no C of NH.

      • Just to set the record straight. We qualified for a 203(k) mortgage, which is a HUD backed mortgage with rehab funds on top of the cost to purchase and they didn’t care if we had a CoNH! In fact, we did have one, but I asked at the very beginning if it was a deal breaker not to have one as the details were sketchy on our deal, but they said no, not a problem, they fund, and ultimately we did have one so wasn’t an issue! So those looking for/qualifying for a 203(k) rehab mortgage should not be turned away!

        • Kathleen – when the banks don’t ask for a CoNH they put the purchaser at huge risk. Without a CoNH DOB won’t let you do any construction, which means you have to pay your mortgage while not accomplishing anything – possibly for years. In the meantime the bank may foreclose on you. Now, if you’re confident you can get one fairly quickly, that’s different – you’ll have some downtime while you work with an architect anyway.

  12. Jay thanks for your blog, helpful insight…. I am looking for a brownstone in Harlem and pieces seem really high, sometimes over $350psf after a decent renovations. What are your thoughts on the Harlem market a year later? Have you found anything yet?

    • Shawn – Yes, prices are WAY up compared to when I wrote this blog post. In hindsight it make a lot of sense to buy back then. We’re really happy we bought.

      As far as now – my gut says Harlem has a long way to go up. It’s still one of the cheapest places to buy in Manhattan but yet way more convenient and central than Washington Heights / Inwood.

      • Jay what do you think current prices are for a shell at a per square foot value versus that of a finished building per square foot below 125th on the west side, I’m sure you know what I am getting at!!!

        Come on, use that Property Shark membership and your brilliant capacity to crunch the numbers to describe the current playing field: price psf for a shell v price psf for a finished (recently sold) renovation????
        Thanks so much and see you guys again soon!
        k
        PS: Our sheet rock started today!

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