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…

The Least Expensive HVAC Solution For A NYC Townhouse

Posted on March 21, 2010 by BeatingUpwind

One of the major items in our budget it the HVAC (Heating Ventilation and Air Conditioning) system. Every contractor seems to want to talk about it. After talking to quite a few of them it seems there’s a general consensus as to what system is best on a tight budget.

The Expensive Options

There are a lot of options. One of the more popular ones is forced air. With a forced air system you get heating and central air conditioning pumped through duct work. It seems forced air systems start at about $60K and can get much more expensive as you add things like zoning, air exchange handlers, humidifiers, air filters, etc. Plus they tend to blow dust around the house and NYC air is dirty enough as it is…

Another option is to have smaller zoned forced air systems throughout the house, typically in a dedicated closet. This basically takes the forced air idea and puts several smaller units throughout the house that handle only a floor or two. We went into some houses that had them and they’re quite noisy, and also pretty expensive.

One person suggested PTAC units which are hotel style thru-wall, combined heating and cooling units. But those generally use electricity for heating which is absurdly expensive in NYC or they require plumbing gas lines into every room (also expensive). And they’re noisy and not as energy efficient as other solutions.

Then there are decentralized heating and cooling units which are supplied with heated or cooled water and blow water over fins attached to the pipes to heat and cool the room. But their cost is pretty high.

The Consensus Solution For People On A Tight Budget

However, what everyone seems to agree is pretty effective and inexpensive (and what we’re going with) is having a boiler that powers radiant heating and combining that with a “mini split system” for cooling.

Radiant Heating

On the heating side, it turns out that hot water is more efficient than old style steam – but the concept is pretty much the same… You pump something hot through a radiator and it warms up the room – just as they’ve been doing in New York for over a hundred years. These days the plumbing is done with high quality plastic (“PEX”) tubing and it’s quite popular to make the floor the radiator and have “radiant floor” heating, but that costs substantially more than simple radiators. If we had the budget, we would do radiant floor heating since it’s the most pleasant form of heating to live with. But our budget is tight, so we’ll stick to normal rads.

Mini Split System For Cooling

On the cooling side we’ll have 2 or 3 condenser units on the roof that will pump refrigerant to small units in each room. That means every room is a zone which is great for keeping cooling costs down since we’ll only be cooling a few rooms in the house at any given time. Also, much of the noise is relegated to condensers on the roof and the units in the room are pretty quiet. The units can also act as heat pumps. However, since we’ll be positioning them near the ceiling they probably won’t be as effective at heating as the hot water rads will be. Still, if we want to take the chill out of a room we can do it without turning on the whole boiler.

The mini spit systems have three types of units for in the room. The standard is a wall or ceiling mounted unit that’s just under 3 feet long. It’s not the most attractive thing, but it can be very efficient. The the other highly efficient option is a “ceiling cassette” however, they don’t fit between 16″ joists, so you have to plan ahead for them. In our case they’re 10″ deep and our joists are only 8″, so we’re not going to use them since we’d have to create some sort of bump down in the ceiling. The last option is a ducted version which can be put in a nearby closet and then you run a short duct to one or two rooms. However, you lose some efficiency in the duct work. The most efficient mini split systems combine one condenser with one room unit and they can get up around 25 SEER, which is excellent. You can also have one condenser power multiple room units – up to 4 at a time. Though the more room units you power the lower the efficiency and SEER ratings. There are condensers that power two room units that get as high as 18 SEER, but typical SEER values are more like 15 or 16 for the multi-room systems.

A/C Sleeves In The Rental

Of course there are air conditioning solutions that are less expensive than mini split systems… In the rental unit we’ll go even simpler and put air conditioning sleeves in the sidewall. Unlike most townhouses we do have a sidewall that’s all ours (not a “party wall”). The A/C sleeves are less expensive than a mini split system and more than adequate for a rental.

Our Townhouse Architectural Plans Taking Shape

Posted on March 16, 2010 by BeatingUpwind

There’s still a lot of work to be done on all the details, but we’ve pretty much got the layout of our townhouse determined. (Click on any image to see it bigger).

Our place is a 5 story townhouse that’s a narrow(ish) 15′ in width. It’s attached to sibling townhouse to the east (to the left as you look at the front of the building), but there’s an alleyway to the west between it and the apartment building next to it. The windows look off center because one sidewall is shared (and hence our portion of that wall is narrower which throws off the symmetry).

We’re still working on the window situation. What’s drawn is a casement window over a fixed pane transom. We need to do some measurements this weekend, but it may turn out that only double hung windows fit the current window openings since they’re wider than 3 feet. If we’re going to do casements in the front we have to make sure they’re in before the block is landmarked – apparently there are people who want to do it and there’s even a meeting about it tonight. Landmarking will help the value, but restrict what we can do in terms of development including what windows we can put on the front façade. Just for reference, the window next to the front door is huge – 4 1/2′ wide by 7 1/2′ tall! The window next to the door in the back (parlor floor) is 3 1/2′ wide by 8′ tall. We’ll may have to narrow the back windows to 3′ since that’s the maximum width for casement windows before you get into expensive custom “architectural” windows. We could also do double hung windows back there, but I’d really rather have casements.

The back side is south facing, so tons of light. The front faces north.

One thing that we loved as we were looking at townhouses was the quality of the light as you went up in the building and got light from the skylight. We’re not actually doing a skylight, instead we’re doing a bulkhead with south facing windows – just as you see in a lot of European factories. This should improve the quality of the light since it will reduce the light at noon in the summer when the sun is high in the sky, and increase the light in the winter when the sun is lower on the horizon. We’re devoting an bigger area than normal to the stairs and wrapping them around a “light well” which will bring the wonderful light down deeper into the building.

As you can see in the section view the house is basically a 6 bedroom owner’s unit over a 1 bedroom rental unit that has “accessory space” in the cellar. It may seem odd to have a 6 bedroom place in Manhattan, but if you think about a family with three kids – that’s three bedrooms for the kids + a master bedroom for the parents + a home office + a playroom/lounge for the kids. Even at 2 kids it makes sense – then they’d have a spare bedroom for guests.

Most townhouses are 4 floor buildings. We’re lucky to have a 5th floor. Dan’s a sculptor who’s never had enough space to do his work. One of our objectives in getting a townhouse was to give him space to do his art in a place where he could make as much noise as he wanted to (apartment buildings have lots of rules about noise). Initially he thought he’d take the cellar for art, but when this building had a 5th floor we decided to give it all to him for his art. In the back he’ll have a “dirty studio” which can get as messy as he wants. In the front will be his “clean studio”, and gallery space (if he can get people to walk up all those flights to look at the art). The dirty studio faces south so it will have tons of light and the gallery will get flooded with light from the bulkhead windows. However, FDNY may make us put a wall up between the stairs and the studio since it’s a bit of a fire hazard to have an open room at the top of a stairwell since fire spreads vertically. If that happens we’ll put a big window in the wall. In the middle will be a “utility room” that can easily be converted to another bathroom. It will have a slop sink, a small kitchenette, and some storage. The ceiling height on this floor will go gradually up and taper with the slope of the roof. In the back it will probably be about 8′, and in the front more like 9′.

One floor down will be my office. The fact that I’ve been self-employed for 9 years now (and for 3 years in the early 90s) is another reason why we needed more space. I need a proper office and that’s what will be in the front of the 3rd floor. Any street noise there might be won’t bother the office, unlike the guest bedroom which we’ve put in the back of the building. In the middle is a bathroom with an attached laundry room with a stacked washer/dryer. There will be exposed brick along the wall with the hallway. The other three walls will be insulated and sheetrocked since they’re exposed exterior walls. The ceilings are a nice 9′ high on this floor.

The next floor down is the floor just over the parlor and is traditionally called the “master/mistress floor” because the husband would have a bedroom in the front, and the wife a bedroom in rear and in the middle would be connecting dressing rooms. That let each spouse have a separate bedroom, but let them discretely go between the rooms as they desired.

We’ll have our master bedroom in the rear and a 2nd guest bedroom / den in the front. Since there wasn’t room for a second bathroom on the floor we’re putting in a pocket door so we can share our master bathroom if we have a lot of guests. The bathroom is smaller than some might want, but it’s plenty big for us. We opted to have a bigger master bedroom and a smaller master bath. I should mention that each of the bedrooms has about 10′ of closets – which we’ll really enjoy. There is a wood burning fireplace shown on the plans. It doesn’t use the existing chimney (which is on the opposite wall). It was just easier to put in a new fireplace and a new chimney. However, chances are the fireplaces will get cut due to a tight budget. But they’re something that can be done almost as easily at a later date. The ceilings are a whopping 10′ on this floor.

The parlor floor is always the most grand floor in a townhouse. Ours has 10 1/2′ ceilings, though we’re considering raising the floor 6″ (which would lower the ceiling height) to give more ceiling height in the apartment on the floor below. Historically the kitchens were a floor below and they had servants that would bring the food up. There would have been a sitting room in the front, a dining room in the middle and a living room in the rear. In most modern layouts the living room is in the front, the kitchen in the rear and the dining room in the middle. We’re changing that around and putting the kitchen in the front because we want the living room in the rear where it’s quieter, more private, and more connected to the living space in the back yard. Ultimately we’re going for an open concept loft-like space on this floor. When you come in the front door we want an unobstructed view to the back.

One of the objectives in buying a townhouse was to have a back yard, so there are stairs going down so we have use of the back yard. We could have put in another rental unit on the parlor floor pretty easily and made it into a 3 family, but then the only outside space we would have had would have been the roof deck. The back yard isn’t huge – just 15′ x 26′ (390 sq. ft.) but it’ll still be really nice to have it.

It was tricky fitting a bathroom on this floor. The thing is you don’t want people using a bathroom next to where you’re making food, and you don’t want to think about someone else using the bathroom when you’re in the living room, and you definitely don’t want it to be an issue when you’re eating. The best solution was to tuck it under the stairs and put a privacy screen between it and what will be the dining area. We’ll just have the rule that if you need to use the bathroom during dinner you need to go and use one of the bathrooms on the upper floors.

The rental unit will help carry the cost of the (rather large) mortgage we have to get on the place. So it’s important that we have a nice rental apartment so it will rent quickly and for a good price. We’re including 1/2 of the cellar in the rental as a “accessory space” (see floor plan below). You’re not legally allowed to have a bedroom that’s fully below grade, but renters can use it as a media room, artist studio or home office. There will be about 725 sq. ft. on the main ground floor and another 225 or so in the cellar – so it will be over 1,050 sq. ft. The tenant will have access to the back yard, but we want the back yard to primarily be ours. So how much they’re allowed to use it will depend on how we get along with the tenant and how much we find ourselves using it. Ceiling height will be at least 8′. We’re thinking about raising the floor above and taking 6″ from the parlor level and lowering the floor in the rental 6″ in the living/kitchen area. Those two things would give 9′ ceilings in much of the rental and over 8′ ceilings elsewhere.

The one odd part about the building is that there are two entrances under the stoop. There’s a 3′ wide staircase down into the cellar, and a 2′ entrance to the ground floor. The 2′ entrance is not up to code and we doubt we can get it grandfathered, so we’re thinking we’ll need to make what was once the window into the legal door. The tenant can use either, but we’ll put french doors on the legal door so it can read visually as either a door or a window.

We have a “C2-4” commercial overlay on the property which means we can use the ground floor (and even the parlor floor) for commercial purposes. In regular economic times a commercial tenant would be better since they’d probably pay as much or more in rent and only be there during the day. We’ve done the layout so if you take out the kitchen it’s a viable office space or small store, hair salon, etc. However, we won’t be trying to get a commercial use specified in the C of O. We’re amending plans for 2 family building the prior owner got approved. If we went the commercial route it would cost us a lot more money. Down the road we can think about changing that – but not now.

Here you see how the tenant gets half of the cellar. There’s a mechanical room in the center and storage for us in the front. The townhouse is unique in having a “vault” under the “front yard”. Usually the utilities are brought in under the stoop, but since there are stairs under the stoop they created a little stone walled room with a rustic arched brick ceiling (that’s having problems). It’ll make a wonderful little wine cellar or dungeon – depending on your proclivities 🙂

So there you have it – top to bottom… Hopefully in a year we’ll be living in it!

How To Find A Good Deal On A Harlem Townhouse

Posted on March 14, 2010 by BeatingUpwind

Since now is the time to buy if you want a Harlem townhouse I thought I’d go over what some of the things are that you need to know before you buy a place. Being an “educated consumer” is critically important. A LOT of people have been financially devastated by Harlem townhouses – you don’t want to be one of them.

#1 – Realize Harlem Townhouses Are A Speculative Purchase

Harlem townhouses were built by speculators in the late 1800s and early 1900s in conjunction with the subways being extended north into Harlem. But then there was a real estate crash starting in 1904 and that speculation came to an end and rents dropped. Harlem townhouses started as speculative investments and 100 years later the cycle of speculation and failure is still going on as is evidenced by the fact that you can buy one for 1/3rd of it’s price 2-3 years ago.

You need to go into it knowing it’s a speculative purchase. While I firmly believe Harlem townhouses will fair far better in the next major downturn (10-20 years from now) there is no guarantee. Harlem is not Brownstone Brooklyn. It’s not “there” yet. It’s only starting to get things that people look for in “good” neighborhoods like great supermarkets and good schools.

There are certain implications to a speculative purchase. Namely you need to watch for the next real estate crash and either get out before it, or be prepared to weather it. If you go into it knowing that time will come, you won’t be so disappointed when it happens.

#2 – Be Very Careful Buying SROs

SROs are “single room occupancy” buildings where people have a room without a proper kitchen. I’ve been reading Sherlock Holmes lately and he lived in an SRO. At one time it was fashionable for single men to live in them – the landlord would serve them meals, etc. Then they just became the least expensive form of housing and the City’s poor gravitated to them. Today SRO tenants often earn $10,000 to $15,000 per year and typically pay 50% of their income to rent these cheapest of cheap rooms. The issue is that when you kick out an SRO tenant they often can’t find other housing and they become homeless.

As a result the City put a moratorium on converting SROs back in 1985 because there was a wave of landlords kicking out their poor tenants, converting to proper apartments and making a bunch of money. A year later they put in place a process whereby you can convert an SRO, but you have to prove that the tenants haven’t been harassed at any point in the past 3 years. To get the signatures required you often have to pay the tenants $10,000 or more, and then the City will take 6-9 months investigating your claim – making sure you didn’t omit anyone who lived in the building, etc. If they approve you, then you get a “certificate of no harassment” which enables you to get a building permit to do the conversion.

The bottom line is that you need to know whether the building you’re considering is an SRO, and if it is you should see a certificate of no harassment before going into contract. Even top brokers lie and tell half truths when they’re selling SROs that don’t have certificates of no harassment. So you need to know how to determine SRO status yourself. There are two primary sources – NYC Department of Buildings (DOB), and NYC Department of Housing Preservation and Development (HPD). HPD has a web site that tells you details about buildings. If the number of “B Units” is greater than zero, then it’s an SRO. Keep track of the Block and Lot numbers that HPD has and then head over to DOB’s BisWeb site. There you enter the block and lot numbers and you can see the information they have on the building. One of the pieces of information is whether the building is SRO restricted. Remember that if any City agency thinks the building is SRO restricted, then it’s SRO restricted, though DOB and HPD are the primary sources of information for SRO restrictions.

DO NOT BUY an SRO without a certificate of no harassment unless you really know what you’re doing.

There are a few cases where buying an SRO without a certificate of no harassment is OK…

First, is if you want to be an SRO landlord. It’s not easy, but it can be profitable. Fully occupied SROs go for $600-$800K. If you have a typical 4 story building with two units per floor, each giving you $650, then you’ve got a rent roll of $5,200. If you can get a mortgage that should more than cover the mortgage payments and expenses. HOWEVER, do watch the taxes – they can be really high on SROs and wipe out any profits. I saw one in East Harlem that paid $25K/year in taxes.

Second, it’s OK to buy an empty SRO if you’re OK with your renovations not being done for 5 years (3 years of waiting + 1 year of review + 1 year of construction). If you can get the current owner to provide a sworn statement that it’s been vacant that can reduce that time frame. You can live in it during that time but you’re only allowed to do “repairs and maintenance”. If you do anything to convert the building you can get fined for it and that violation can make it impossible for you to EVER convert the building. It can even make it difficult or impossible for the next owner to convert the building. In that case you may need to bring the building up to current code as an SRO first, clear the violation, and then reapply for the certificate. That means you pay for renovations twice.

#3 – Look For Realistic Sellers

There are a lot of townhouses on the market right now that are completely unrealistic about their price. Even the ones that have realistic owners typically price their places $200,000 higher than they know they’ll sell for. In our case it was listed for $795K and we purchased it for $530K. Pretty much the only ones that are realistic are estate sales. We got ours from TPE Townhouses Harlem (a part of Tahl Propp Equities). They bought 11 townhouses and didn’t develop them quickly enough and then needed to liquidate them when the market went south. So there are people other than estates who are realistic…

The only way to know if the seller is realistic is to put in a bid. We saw 30 places and put in bids on 7. In one case it was a realistic seller, but we pulled the bid after having second thoughts. In another case it was a short sale and they wanted all cash. The place on Astor Row was looking for people who were bidding based on their gut, not the numbers. In another case there was already an accepted bid and they went with that offer (we later learned that our offer was about $10K less). Given all the bids you’ll be putting in and how much you need the sellers to come down, it’s critical that you have a real estate broker who’s great at bidding aggressively. They need to pull out every trick in the book to get you the price you should pay. If you need a broker with excellent bidding skills, we’d highly recommend Maria McCallister of Barak Realty.

One assumption I made during our search was that eager sellers would list their properties with brokers who would market them aggressively. Right at the end I realized that wasn’t true. Back when the market was hot there were brokers who would get listings and then not market them because they didn’t want to share the commission. (Not every broker in NYC is part of REBNY, which requires co-broking.) Back when Harlem townhouses were so hot you couldn’t help but sell them, it wasn’t a bad strategy. But I had a friend who listed his place in 2008, before the crash, with one of those brokers. She got him into contract for $1.4M, but it fell through. Then the crash happened. A lot of time passed and she got him into contract again, but that one fell through as well. He finally sold the place earlier this year for $775K. By the end he was sorta desperate to sell and was bleeding financially. So those brokers do have motivated sellers and for one reason or another they manage to keep the listing. That particular broker was flat out lying to my friend. She told him she was advertising in the NY Times (she wasn’t). She said she listed his place in the REBNY systems, but our broker confirmed she wasn’t.

That means there is value scouring the web for small real estate companies that have some townhouse listings. Typically they don’t tell you the address or the price and are pretty obscure about other details as well. When you see the properties you need to do things differently. Start by seeing the place on your own and do not mention that you have a broker. Then bring your broker in later after you’ve started initial negotiations. When we wanted to see my friend’s place his broker pulled every trick in the book trying to not get us in before the contract with her buyer was signed. It was only when she realized I was standing there texting everything she did to my friend that she sorta stopped playing tricks.

#4 – The Block & Immediate Neighborhood Can Make A Huge Difference

Real estate values in Harlem vary widely from block to block. We didn’t understand why one townhouse down on 112th was asking so much until very late in the process when we realized how nice it was over in South Harlem (SoHa). Anything close to that goes for a premium. Up in Hamilton Heights you cross Amsterdam Ave and you can go from one of the best blocks anywhere in Harlem to blocks that are pretty sketchy. If you don’t already know Harlem, it can take some time to be able to discern the good areas from the bad.

Before you go into contract on a place go there at night when it’s nice weather and people are out on the street. It’s best to do it a few times to really get a feel for the place. Ask yourself whether you feel safe. If there’s loud music ask yourself how you’ll feel about that when you’re having guests over for a barbecue. Look for possible drug dealing. New York doesn’t really have a gang problem, but look for “rough” groups of kids who might hassle you. But don’t be too critical on that last point. We were going by one property and saw a group of kids outside a building. About 5 minutes as more and more of them arrived and they subsequently left we realized it was Friday night and they were just meeting up to go out clubbing. If they’re standing around laughing an joking chances are they won’t be a problem.

#5 – Get A Property Shark Membership With Comps

One of the best things you can do is get a membership to PropertyShark.com. You can get an incredible amount of information about each of the buildings. You can see tax information, ownership history, pictures, building permits, violations, lis pendens (pre-forclosures), etc.

One of the great things they have is comps search. Not sure what something is worth? Do a 1/4 mile radius search around the building for the past 6 months and you can see what comparable properties are actually selling for (not just their list prices). One trick is to search for all building types but limit the search by square footage. 6,000 or 6,500 square feet max should find the townhouses you’re looking for.

#6 – Realize It’s Usually All About $$/sq. ft.

It’s uncanny how townhouse sales are consistent in terms of price per square foot. HOWEVER, it’s not as easy as you think to calculate the cost per square foot because the DOB has used two different methods to calculate square footage over the years.

First a little terminology… A townhouse “basement” is the floor that’s partly below street level. It’s the “garden apartment” in many cases. Below that level is the “cellar”. Floors that are completely below grade are not included in the square footage of the building (and cannot be used for sleeping). The confusion has come with the basement level which is partly below grade.

When the buildings were first built the basement was used for the kitchen and a bedroom for the cook/maid. Since it wasn’t where the family lived it wasn’t included in the square footage of the building. But we use townhouses differently now and the basement is considered living space, so it is now included. Problem is, the DOB never went back and recalculated the square footages of buildings calculated the old way. That throws off the calculations of cost per square foot.

The important thing is to be consistent and compare apples to apples. How the square footage is calculated can make a big difference. Let’s say a building has 1,000 sq. ft. per floor and 4 stories including the basement. That means it’s either 3,000 or 4,000 sq. ft. Now, if it sold for $1M then the cost per square foot was either $333 or $250 – a HUGE difference. So you have to be consistent one way or the other. On Property Shark you can see the building’s dimensions and whether it has an extension on the back. If there isn’t an extension then it’s easy to calculate. However sometimes the extension is included in the length of the building and sometimes it isn’t. So there are times when you just can’t tell. If you see a C of O in the past 10 years or so, then you can trust the official square footage of the building and know that it includes the basement.

One other thing to remember is that, unlike apartments, townhouse square footage includes the exterior walls. A considerable amount of the square footage can be walls. For example our place has an exterior dimension of 15′ x 58′ or 870 sq. ft. per floor. The brick walls are about 1′ thick. We share one wall with the townhouse next to us, so brick to brick our square footage is 13.5′ x 56′ or 756 sq. ft. If we did 4 inch studs on all exterior walls that would reduce things further to 12.8′ x 55.3′ or 708 sq. ft. That’s a huge difference from 870 sq. ft – nearly 20% of our square footage is exterior walls.

As you get to know the market you’ll understand the value of buildings and a quick calculation can give you an approximate price. “Why are you asking $400/sq. ft. for a building in poor condition?” can be a fun thing to ask the listing broker… 😉

And one side note – since it is all about price per square foot – if you’re tempted to put in double height ceilings when you do your renovations remember that you’ll be reducing your square footage and devaluing your property.

#7 – Know How Much Renovation Costs

Most of the townhouses in Harlem have 100 year old plumbing and nearly as old electrical systems. Very few of them are properly insulated. Most have rotten floor joists under the bathrooms. That means they all need major work. Never assume otherwise. And replacing things like plumbing, electrical and insulation in an old building requires skilled workers who are able to do their work surgically. Assume plumbing and electric will cost you $150K. If you buy a total shell like ours you’ll be spending at least $150K, probably $200K, just on new structural components. Windows can run you $1K/window for good windows (Harlem townhouses have some HUGE windows – we have one that’s 4 1/2′ x 7 1/2′ and others that are 3 1/2′ x 9′ – the place on Astor Row has a window that’s 5′ x 7′ and on a landmarked exterior where you’re required to use relatively expensive windows).

Then there’s the new building code… In 2008 the City implemented a new building code. The prior building code was from 1968. They didn’t change that much but what they did change can be expensive. For starters more buildings need sprinkler systems – that will run you at least $50K since sprinkler systems have to be done with cast iron pipes that won’t melt in a fire. You’ll also need at least one “handicap adaptable” bathroom per unit. If you’re thinking about an elevator, the minimum size just got a lot bigger. If you’re trying to change your C of O (e.g. converting an SRO) you have to bring it up to code – so all of that may be necessary…

In general, townhouses that look like they’re in pretty good shape will probably need at least $250K in renovation just for new electrical, plumbing, bathrooms and kitchens (though you may be able to defer that cost for a few years). For bigger projects you need to budget $150-200/sq. ft. for a pretty basic job. High end finishes will run you even more. That means a townhouse in poor condition with 4,000 sq. ft. can easily have a renovation that costs $800K. You can do it for less, but you really have to work hard to find a reputable contractor who can do things inexpensively and then you have to scrutinize every line item on the budget and spend countless hours learning about the options for every major system in the building.

And don’t forget all the little costs – the architect will want about 10% of the construction cost. Then you’ll need to budget money to carry the renovation loan during construction. Just those two can easily be $100,000 or more.

Before you bid on a place, conservatively estimate the future value after renovations and then deduct over-estimated renovation costs. The purchase price + renovations should be less than the future value. If it’s not, lower your bid.

Good luck!