What It Costs To Just Own A Townhouse Shell

Posted on September 17, 2010 by BeatingUpwind

As the months waiting for DOB approval have been clicking by we’ve been telling ourselves “it’s no problem, it doesn’t cost us much at this point”… Relative to what it will cost once we have the rehab loan, that’s true, but a couple days ago we added up the costs and were a little shocked at how much we’re actually spending on an empty building…

Taxes

Our taxes are relatively low… $3,441/year or $286.75/month.

It’s worth saying that we’re lucky we have low taxes. Some of the places we saw in our search were paying over $2,000 per month in taxes, though $3K to $6K per year is more typical for Harlem townhouses.

Assuming we get construction started before the end of the year, one trick I learned from a friend is that you can file the change of occupancy with DOF as soon as you start construction – you don’t have to wait for construction to be complete. That means our taxes will drop to the rate for 2 family before we’re done with construction, so next year they’ll be even lower and will go up more slowly than they do now.

The “Building Super”

The apartment building next to us has a bodega with rather messy customers. Unfortunately the prevailing wind drives their garbage down the block in front of our building. Also, by the time some of them walk past our building they’ve gotten their purchase out of it’s bag or wrapper and they throw what they don’t need in front of our building. We’re not on some brownstone-only block that’s relatively clean. As a result, it’s cheaper to pay someone $200/month to keep things clean than it is to pay the ECB tickets for garbage.

The first day we owned the building we went to it and there was a $100 ECB ticket waiting for us – the snow was melting and we got a ticket for the garbage that was in the melting snow. The City needs money and they’re pretty aggressive about ticketing for garbage.

Paying the $200/mo also helps build relationships with our neighbors. We went with the (self-appointed) super of the apartment building next to our townhouse (the building has a mostly-absentee landlord, so he approached the landlord and worked out a deal to watch over the building). He has a group of guys who watch that building and they now watch ours. Those eyes are worth something. We plan on continuing to use him even after we move in (though at lower rate).

Our Line Of Credit

We bought our place mostly with cash, but we took out money from a line of credit to make up the difference between what we had available and what we needed. Our accountant suggested taking out more than we needed since he was seeing lines of credit get reduced and didn’t want to see us in a position where we didn’t have access to cash. We took out $80K, and a fair amount of that is sitting in our checking account which means we’re paying interest on money we’re not really using… Luckily, the interest is low since it’s tied to the prime rate (lower than the rate we’d pay on a mortgage – and with a MUCH lower principle amount), so we’re just paying about $345/month in interest on the money.

Grand Total

So that means we’re spending about $835 per month on an empty building – not including all the architectural fees, permits, etc. for the actual rehab of the building. It’s not a huge amount, but it does add up. Still that’s a lot less expensive than getting something wrong and having costly delays and change orders during construction. I’m sure we’ll have some, but the fewer the better.

With Townhouses, Width Means A Lot…

Posted on April 13, 2010 by BeatingUpwind

When we bought our place we kept having people tell us “that’s narrow” (it’s 15′ wide – 13 1/2′ inside brick-to-brick). It’s not as narrow as some – we looked at a few that were 12 1/2 footers, but it is narrow. Harlem Bespoke’s post about 148 W 121 reminded me about the importance of width… Consider the following…

	168 West 123 (our place)	148 West 121
Dimensions	15′ x 60′	18′ x 50′
Stories	5	5
Square footage	4,500	4,500
Sale Price	$530K	$750K
Previous Owner	TPE Townhouses Harlem	TPE Townhouses Harlem
Sale Date	9/15/09	3/3/10

To me that’s pretty remarkable… Same previous owner, same neighborhood, same square footage, yet they paid 41.5% more for their place than we paid for ours.

But the reason is pretty simple – width… 18 feet is the width when developers start getting interested in a townhouse. Building code requires a 3′ wide staircase and 3′ hallways. You’ll need one public hallway for the staircase and then another inside the apartment. Even if you do exposed brick, you’ll have at least 8″ of wall, so you need 9′ 8″ just for the required parts. In our building that leaves less than 4 feet for a bathroom, which isn’t enough. On a standard 18 footer that has about about 17 feet brick to brick you have over 7 feet of room for the bathroom, closets, etc. – which is plenty…

That means if you’re looking for a bargain on a Harlem townhouse shell and you just want it to be 2 or 3 family, then you should go narrow… You’ll get a better price on a 15 or 16 footer than you will on an 18+ footer, ’cause you won’t be competing with developers.

UPDATE: One thing I forgot to mention is that once a narrow townhouse is renovated it can sell for good money as is evidenced by the recent comp over on 119. So this really does seem to be a supply vs. demand issue. There’s just more demand for wider shells than there is for narrower shells. You pay a premium at 18+ feet because you’re competing with developers.

Looking For A Shell In Harlem? Check out 243 West 120th Street

Posted on April 3, 2010 by BeatingUpwind

After we took the first look at the place we wound up buying, we noticed 243 West 120th Street and had our broker get us in even though it wasn’t officially on the market. I really liked this building. We bid on it, but our bid wasn’t accepted. It’s now officially back on the market and the price has been reduced to $795K. If you’re looking for a shell I think it’s one of the most interesting townhouses on the market – and possibly one of the best investment properties – if you can get it for the right price.

There are two big things the building has going for it. First, location – it’s practically in the heart of all the redevelopment and buzz that’s happening in South Harlem. Walk across St. Nicholas Avenue and you’re in the middle of everything that’s hot and trendy in Harlem – Nectar wine bar, Moca Lounge, etc. And it’s also close to the A,B,C and D trains at 125 – so it’s just 1 stop from 59th Street.

The second thing the building has going for it are its development possibilities. You can (and probably should) invest a $1 million in this building, and when you’re done it’ll be worth more than you put into it (if you’re smart about how you spend the money). Because most of the lot is within 100 feet of St. Nicholas Ave, it has a FAR just under 6 (which means you can expand the building far bigger than you can other townhouses that have a 3.44 FAR), and it’s got a C1-4 commercial overlay, so you can have the option of a commercial tenant on the ground floor (but it has to be one that services the immediate neighborhood).

It’s currently a 4 story building. If I were buying the building I’d push the back wall back to maximize square footage and add two partial floors on top. I’d configure it with three units. Because the building is only 17 feet wide you don’t really want to make it more than 3 family. The basement would be one unit with the possibility of a commercial tenant. The parlor floor could be a two bedroom apartment, and the top two existing floors plus the two floors I’d add would be a large quadraplex. You could step back each of the additional floors and allow for outdoor terraces making the quadraplex an incredible space with tremendous outdoor space…

In the picture above you can see that there is an alley along the west side of the building. There are a number of existing windows in that wall. The rules about lot line windows apply, but it’s a great to have windows in your bathrooms and a wall you can exhaust vents out of.

As you can see the façade and the stoop need a lot of work. But as you move inside the original floors and a some original details are still intact…

243 West 120th Street top floor

(click on any image to see a bigger version of it)

I have to say going through the building was a bit unsettling. There were clothes and sleeping bags left over from when homeless used to live in the building. The staircase was a bit rickety, and there was a dead cat in the basement. But all of those things are easy to fix.

While you can buy this building and not expand it beyond it’s current 3,400 sq. ft. it’s best if you plan on making the building substantially larger. The construction will be pretty expensive given that you’ll want to add two floors and push the rear wall back, and you may need to reinforce the foundation to support the additional floors and you might want to lower the floor in the cellar – none of which comes cheap. But given the area, you can spend the money and have it come back to you.

In terms of price it’s currently at $795K. Townhouses typically sell for around $200K off their asking prices, so I’d guess it’ll sell for around $600K, maybe a bit higher. $600K would be $176/sq. ft. which is high for a shell, but the location and development possibilities explain why it’s at the high end for a shell. Even if you spent $200/sq. ft. renovating it (no expansion) you’d still be under $400/sq. ft. which is supported by the comps. If you want to expand the building I think you’ll find that cost effective as well.

I should also say something about the tax situation. The taxes are quite high – $9,664/year. Most townhouses pay about 1/3rd that amount. The current owner sorta messed up. He should have pulled a permit to convert it to 2-3 family, started construction, and gotten Department of Finance to reclassify the building and bring the taxes down. This is actually a good example of what I was talking about in the previous post – you don’t want to convert this building to 4 (+) family because the taxes will remain high and the additional rental income may not cover the higher taxes. 2 or 3 family makes a lot more sense in this case. If you can get it reclassified as 2 or 3 family, then the assessed value will drop to $10,200 (6% of the market value of $170K), which is far lower than the current transitional assessed value of $72,990. The taxes on $10,200 would be $1,745 – nearly $8K less than what’s being paid now. DOF will up the market value because you’re doing work on the building, but you’ll still pay substantially less than what’s being paid now.

It’s probably worth mentioning that we bid $575K on it back in November 2009 and it was rejected – we were told we weren’t even close. I would have gone up to $600K and possibly a bit higher if we had access to the money, but the ‘no’ was so resounding we never went back with another bid. It wouldn’t surprise me if the owner currently feels a bit firm at $795K, so it could take some negotiation to get the price you want…

Whether you get this building or another I recommend you have a real estate broker who’s an aggressive negotiator. Norman Horowitz (the listing agent) is a good guy, but I wouldn’t go to him directly since you will be wanting to negotiate a significant amount off the asking price. If you’re looking for a tough negotiator who really works for her clients, we recommend Maria McCallister of Barak Realty – she’s proven herself to us in both the sale of our apartment and the purchase of our townhouse.

Differences Between 1, 2, 3, 4+ Family Townhouses

Posted on March 23, 2010 by BeatingUpwind

In our process of immersing ourselves in every thing townhouses we’ve discovered there are some big differences in the way NYC law treats similar townhouses that differ only in the number of units they have.

Big Differences In Taxes Between 1-3 Family and 4+ Family

The first thing we noticed as we got to know Harlem townhouses was that there was a huge difference in how taxes are calculated once you hit 4 or more units. To the point where it can make no sense to have the 4th unit – it’s better to stick to a 3 unit building in many cases.

Let’s say you want to buy 1990 Madison. It’s a huge ark of a building – 20′ x 54′ x 5 stories. That’s a whopping 1080 sq. ft. per floor, and 5,400 sq. ft. in total. You probably think it would be great as a 5 family building… Let’s see if that’s right…

The current appraised market value is $673K. That’s going to go up after you do renovations on the place. Let’s say you do $100/sq. ft. in renovations and spend $540,000. Typically people don’t report the entire cost of renovation to the City since the building permits are priced based on the cost of work being done, so let’s say you report 1/3rd of that amount ($180K) to the Department of Buildings. The Department of Finance seems to be in the habit of picking up the renovation amounts and adding them to the market value, so your market value will wind up around $850K.

Next, the City takes 45% of the market value to determine the assessed value which comes out at $382,500 for buildings in tax class 2 (residential with four or more units). However, the City has what it calls a “transitional assessed value” to ensure that if property tax values fluctuate rapidly that actual taxes only go up at a rate that people can deal with. Right now the transitional assessed value is on that building is $243,990. Since that’s lower than $382,500, you’ll pay based on the transitional assessed value rather than the actual assessed value. The owners have some tax exemptions, but we’ll assume you don’t have any since you don’t know whether you’ll get the same exemptions they get. You then apply the tax rate of 0.13241 to the (transitional) assessed value and you come out with taxes of $32,307/year.

Now, let’s see what the taxes would be if it were a 3 family… Start with the market value of $850K but instead of taking 45%, you take 6% to determine the assessed value because you’re in a different tax class – tax class 1 instead of tax class 2. That comes out to an assessed value of $51K. That’s WAY lower than the transitional assessed value of $243,990, so you’ll pay taxes on $51K instead of $244K… However, the tax rate is higher on 1 to 3 family homes – 0.17088 instead of 0.13241, but even at the higher tax rate the taxes come out to $8,715/year instead of $32,307/year! In other words, you’ll save $23,592/year having it as a 3 family instead of a 4 or 5 family.

So, you’ll be losing $2K/month just in taxes and that will get worse as time goes on and the 5 unit scenario loses the benefit of the transitional assessed value and starts paying market rate taxes like the 3 family scenario was paying all along. Imagine taking the top 3 floors and making them into a triplex. If a single floor went for maybe $2,000/mo, the triplex could easily go for $4,000/mo and you’d be ahead because the taxes situation would be on your side as time went on.

In 5+ family buildings it’s often hit or miss in terms of which will do better – a 3 family or a 5 family. But in most cases a 4 story building configured as 3 family will be more profitable for the landlord than the same building configured as 4 family. In other words, you pay more in taxes than you get in additional rent with the 4th unit. However, because many buildings have low transitional assessed values, developers continue to configure them as 4 family. But when the transitional assessed value goes up and gets near the actual assessed value it’s smarter to reconfigure them as 3 family buildings.

I should mention that there are egress issues if you put in duplex or triplex units. The main staircase is usually the egress stairs so all units share it so they have access to the roof in the event of a fire. You can’t block that staircase and give it to the top unit and a second staircase would take up valuable space. The object is to give every unit two means of egress. The garden unit has front door and garden. The top unit has front door and roof. The problem are any units in the middle, so the solution is to put a staircase down from the parlor floor into the garden. Which means all floors above parlor need to be one unit. If you have a 4 story townhouse, that means a duplex. If you have a 5 story townhouse that means you’ll have a triplex. For developers that want to add a 6th floor to maximize their F.A.R. (maximum buildable space) there may be a problem since there may not be a big enough rental market for quadraplexes in Harlem, but by the point you get to 6 units the additional rent may very well easily cover the additional tax.

Significant Differences In Fire Code Between 1-2 Family and 3+ Family

We didn’t realize until recently how big of a difference there was between 2 family and 3 family. One of the big difference is the sprinkler system – generally, 3+ family buildings need them, 1-2 family buildings don’t. It may not sound like much, but among other things sprinkler systems have to be piped with cast iron piping (copper piping will melt in a fire) – they don’t come cheap. That means a sprinkler system will add at least $50K to your budget if you need one – possibly as much as $100K if you need to sprinkler the entire building. That’s a big chunk of change and will be a big part of any renovation budget.

Correction: We’ve found, by submitting plans and having them rejected, that most townhouses require full sprinkler systems – even 1 and 2 family homes.

The bigger issue is that 3+ family buildings are “Group R-2” where 1 and 2 family units are “Group R-3” (which are the same as the older “J-2” and “J-3” classifications). Things are just more lenient all around if you’re R-3 which means it’s less expensive to build a 2 family than it is to build a 3 family (not even taking into consideration the extra kitchen and bathrooms).

Of course, if you’re a landlord you may eventually recoup the cost of the sprinkler system with the extra rent from the 3rd unit. Plus your building may come with a usable sprinkler system. However, you just have to realize that you’ll be judged by a more demanding standard when you file for building permits and when you revise your C of O.

Smaller Differences In Building Code Between 1 and 2 Family

So far it seems the differences between 1 and 2 family aren’t all that big. In two family you need things like fire protection between the units, but that can be achieved by using two layers of drywall instead of one which is a pretty minor detail.

In my mind 2 family is a bit of a sweet spot – you get some extra income but don’t get slammed with major expenses upfront for construction or down the road in taxes…

I Feel Like Goldilocks Picking A Contractor In NYC

Posted on March 21, 2010 by BeatingUpwind

Finding the contractor who’s “just right” for our Harlem townhouse renovations makes me think of Goldilocks… There are so many different types of contractors and so many of them just aren’t right for our particular project.

Uptown vs. Downtown

One thing we’re noticing is that a lot of the good contractors usually work on projects downtown that have big budgets. One construction manager two days ago kept throwing out the number $2 million when he was discussing a budget. That’s nearly 4 times our budget and the fact that he kept using that number over and over and over again to us meant he just wasn’t right – he’d probably never understand our budgetary constraints.

Then there was another contractor who seemed to have rich clients that kept changing their minds. To him the design was fluid and he expected it would change substantially while it was being built. In contrast, we know we have to get it nailed down as much as possible before contractors give their final bids so there are as few change orders as possible. I’m sure he’s great with rich clients who really don’t have budgetary limits and want their every whim to be indulged, but we do have budgetary limits and we need the contractor who understands that.

One of contractors who’s made it onto our short list was a guy who came in with his partner who does structural work. One of the first things they asked was how much we paid for the building and how much we thought it would be worth when we were done. They then threw out a number that was close to our budget and understood that we needed to come in near that number.

Large Projects vs. Small Projects vs. Townhouse Guts

The other day we had a contractor in who we had wished we had gone with for our apartment renovations (he was too expensive). He does incredible work. He came into our townhouse and was clearly overwhelmed. He told us he could only bid on the project once we had floors in place so he could get a sense of the scope of work. The structural work completely freaked him out. We explained it was being funded with a rehab loan and it was an all-or-nothing package deal.

Then there are the guys who only work on huge projects. The mechanical engineer our architect had us sit down with just didn’t understand (initially) that you don’t need the same level of heating and cooling systems in a townhouse as you would a commercial space with the same square footage. It took him a while to think small. The same goes for some of the contractors who work on larger buildings and are used to huge HVAC (Heating, Ventilation and Air Conditioning) systems. They just think big and big comes with big price tags.

Another guy came in and he seemed like a good guy who would do a great job. But he was used to doing commercial work where everything is spec’d out in incredible detail by the time he gets called in. He said he wanted absolutely everything spec’d before he gave a proposal – the HVAC system, structural, the windows, the doors – everything. In contrast our goal in bringing the contractors in early was to understand the ways they would do things to stay on budget. We didn’t want to spec a system that could be done more cheaply. I felt a little sorry for him ’cause it was clear he was used to working on buildings that were much larger than ours but he said at the moment he’s just doing a few little jobs and that our project was substantial enough that would keep him going for a number of months. I mentioned that other contractors were giving us estimated budgets with allowances for materials that hadn’t yet been spec’d. A light bulb went off in his head and he said “Oh, I could do that”, but then he never did get back to us with a proposal.

NYC vs non-NYC, Harlem vs. Other Neighborhoods

Then we’ve had some contractors who’ve come in from places like Long Island who seemed freaked out by the City. One was shocked that he got a ticket one time when he left his car for 5 minutes while he was giving out pay checks. Experienced NYC contractors have guys watching or sitting in their cars while they’re at the job. The ones outside New York also don’t seem to know how to deal with NYC Department of Buildings. They complain about how long it takes to get approvals and inspections. The experienced NYC contractors talk about their expediters, and how they’ve done enough work in particular neighborhoods (Harlem) to get to know the inspectors and the types of things they look for.

Then there are others who just won’t work in Harlem because there tend to be theft problems in Harlem (e.g. tens of thousands of dollars worth of copper piping getting stolen). Compare that to a contractor who does a lot in Harlem who said “Yeah – I just put in a temporary alarm system – when there’s a break in, the police are called and my partner and I are called.” He knew how to deal with the neighborhood – it was no big deal to him.

Developer vs. Homeowner vs. Flippers

Yesterday we had a contractor come by. He and his partner were great guys who were extremely nice to deal with. They flat out asked our budget, we told them and they said “Wow – that’s exactly the number we were thinking when we did rough cost per square foot numbers yesterday”. HOWEVER, when I looked into the projects he’s worked on there were a lot of large apartment buildings (50+ units), and the townhouses were all chopped up into floor-through rentals. Property Shark had interior photos for some of the brownstones he’d worked on and they all showed low-end “builder’s grade” materials.

When we did the renovations of our bathrooms and kitchens in our old apartment we went with a guy who mostly worked for people who were flipping apartments. We learned that was a bad idea. People who flip come out with places that look great, but they don’t care about long term quality. The foreman he assigned blew up at me when I told him green board couldn’t be used in showers. I pulled the product spec sheet and showed him that it specifically said it couldn’t be used there and his response was “I’ve used it in million dollar homes” as if that mattered.

Simply put, homeowners want different things than people who are developing for renters or to flip. A developer/landlord wants something that’s cheap and functional. A flipper wants something that looks good and doesn’t care how long it holds up. A homeowner wants something that looks good and will stay looking good for a long time. Each of those types of customers need a different type of construction and hence a different type of contractor.

Contractors Who Finish vs. Those Who Don’t

Another criteria we’re starting to look at is whether the projects the contractor works on ever get their Certificates of Occupancy. A remarkable number of townhouse projects never actually get a new C of O. They may get a couple temporary ones, but then just never finish off the final details to get the final C of O. Since you need a C of O to legally rent an apartment it’s something we’re looking at pretty closely.

General Contractors (GCs) vs. Construction Managers (CMs)

Going into this we knew what a GC (General Contractor) was, but had never heard of a CM (Construction Manager). One CM came by to do a pitch and in the process they explained how they’re different than a GC. What it boils down to is that a GC hires all of the sub-contractors and is responsible for them. You pay a GC and he pays the subs. If you have a problem you have it with the GC. A construction manager is a consultant who takes a percentage as a fee. They’re not responsible for the sub-contractors instead they try to help the owner choose and manage the subs.

While I think a construction manager is a perfect solution for a busy executive who has more money than time, in our situation we want one person who’s responsible for the project. If the plumber is interfering with the work of the electrician we don’t really care – we want one and only one person who is ultimately responsible for making sure everything goes smoothly.

“Just Right”

So, after quite a few contractor interviews we’ve finally decided we want someone…

Who has worked on a lot of townhouses
Who has worked a number townhouses in Harlem
Who can deliver significantly better than “builder’s grade” finishes
Whose projects get C of Os when they’re done
Who is comfortable with structural work without overdoing it
Who knows how to do work on a tight budget

Luckily we do have a few options who seem to meet many of those criteria. We’re still vetting them – calling references, looking at previous projects, etc. The short list is taking shape and should be in place by the time we’ve got all the specs ready.