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…

Dan and I have been looking at a lot of townhouses now that we’re in contract and scheduled to close on our apartment (knock wood). Picking the townhouse is difficult in part because there are so many choices and you don’t want to make the wrong move in such an uncertain market.

We have two leading candidates. It started with one leading candidate that Dan sorta talked me into, but the more I considered it the more I liked it. I’m not going to give out addresses, but I’ll describe it generally… Simply put – it’s a wreck. You walk in the front door and your hit with the smell of piss and shit. Turns out a “caretaker” lived there and let the house fall down around him, and didn’t bother to walk his German Shepherd. As a result the place needs almost a complete gut. We love the plaster walls and ceilings – we’ll keep those and just skim coat them – but all the floors have to be ripped out to get rid of the smell. We’ll also need to replace the baseboards. The bathrooms need to be ripped out and completely redone. And it’s very close to some of the best blocks in Harlem, but the particular block it’s on is a bit sketchy/ghetto (though it’s improving). So lots of complications.

But when it’s done we’ll have a great little house with all the space we need (3450 sq. ft. plus a cellar) including a rental apartment on the ground floor to offset costs. And total net cost is about $250 more per month than we’re paying now. The pic to the left is some of the original detail we’d want to save/restore…

So we started bidding on that one, but just as a matter of due diligence we kept looking at other places and considering our options…

That’s when we found one we instantly fell in love with. It’s been owned by the same West Indian family for 60 years. The family wasn’t rich by any stretch of the imagination, but it was clear they loved the house and took care of it. All the original woodwork is there – much of it is painted over, but there’s hardly a scratch on it. Oh – and the house is MASSIVE. It’s a 5 story townhouse, which is a story taller than usual. And the ceiling heights are really tall – 12 1/2 foot ceilings on the parlor floor, 10 1/2 foot ceilings on the other floors. It’s a 20 footer – so it’s 4 foot wider than the wreck which also means more square footage – 5400 sq. ft. plus a cellar. The general neighborhood isn’t as good, but the immediate block is much better in general.

There are some problems with the house. The biggest is the next door neighbor. Someone bought the house, now has a $2M mortgage on it after fully renovating it, but then mysteriously never rented it out. It’s now vacant, completely looted and being used for drug deals. They’ve stolen the air conditioning units off the roof and when they went to steal the copper plumbing a couple weeks ago they managed to open a water main and flood that house and the three houses adjoining it (including the one we’re interested in)… We’re seriously worried that fire is coming next and don’t really want to have a burned out building next to the one we buy. But it’s such a great house otherwise we’re still seriously considering it…

Here’s my current list of pros and cons for each house…

The Wreck

Pros

• Will have a better renovation when we’re done
• Closer to a really good neighborhood
• Racially mixed neighborhood / less hostility
• Don’t need roommates to afford it – just the tenant for the ground floor apartment
• Good subway access (2 stops from 59th Street)

Cons

• By the time we’re done we’ll have invested $275/sq. ft. which is high compared to the other townhouse
• The block is sketchy
• We’ll need an interim apartment while renovations are underway

The Big Townhouse

Pros

• Square footage = value
• Higher profit potential (possibly much higher)
• It’s grand and impressive
• More intact original detail (just painted over)
• Great subways access (express trains for east and west sides of Manhattan)

Cons

• Really bad next door neighbor
• Either need to keep renovations very minimal (not as nice) or need roommates (in addition to a tenant for the ground floor apartment)
• Building is settling in some places (but otherwise quite solid)
• Some renovations are more difficult because we’re not tearing out as much (insulating, wiring, etc.)
• High heating and cooling costs
• Extremely high taxes until we get a new C of O for 1 or 2 units (currently a 14 unit building legally) – adds $20K/year in taxes
• Generally more of a financial risk (but also more financial reward in the end)

So there’s no perfect decision. The smaller wreck is generally a safer bet. We’ll invest less money so it’s not as much of a financial burden. But we really love the big one and feel like it’s worth all the risks.

On top of everything else the sellers of the wreck are desperate for us to buy (both sellers are estates) and have come down to our target price for the place. We sorta stopped bidding after we saw the big townhouse and they kept coming back with lower and lower numbers. If we bought it we’d be getting a genuinely good deal compared to the other comps out there, but ultimately the big townhouse is the better deal in the long run because square footage = money.

Decisions, decisions, decisions…

I just saw that one of the townhouses we’ve been through is having an open house – 42 Hamilton Terrace. After everything we’ve seen I can honestly say that owner (or broker) is absolutely crazy for the price they’re asking – $995K (it was up at $1.1M when we saw it earlier this year). Let me explain why that’s a crazy price…

To be fair the upside to the property is that it’s a decent width and on a great block – Hamilton Terrace. It also has some incredible original details in it – mostly the fireplaces and baseboards on the ground floor. But there’s so much wrong with the place it’s not even funny – at least when you consider they’re asking a million dollars for it.

The big issue is that it’s falling down. Literally. The extension in the rear where the kitchen used to be is just walls – the floor in the extension has fallen into the floor below. The rest of the building is falling down as well. When we went through it was raining inside the building because snow was melting on the roof. If you know anything about buildings you know the building goes downhill very quickly if the roof is no good. I was literally scared to walk through the building. They have plywood down in some areas ’cause they’re worried people will fall through those parts of the floor. Personally I don’t think it’s safe to go inside that building. If anyone gets hurt I’ll feel really guilty ’cause I was tempted to call 311 and report it as unsafe (but I didn’t).

It’s not the first Harlem townhouse that’s fallen down and it won’t be the last. But right now, in this market, you just don’t pay a million dollars for something that’s falling down.

• 48 Hamilton Terrace a few doors down needs some work, but it’s completely livable and mortgageable and it’s going for $1.25M.
• There’s a place on Stiver’s Row (236 W 139th) that apparently sold for around $425K a few months ago and now they’re trying to flip and asking $699K. Someone started a renovation and didn’t finish, but it’s completely solid and it’s on Striver’s Row.
• Then there’s 506 West 142nd Street, which is a fully renovated, income producing property in move-in condition and it’s asking the same price as 42 Hamilton – $995K. Mind you, the renovation is soulless, the back yard is dark and small, and the block isn’t nearly as good, but compared to one that’s about to fall down on a better block it’s price to sell and 42 Hamilton clearly isn’t.
• And 470 West 148th was just reduced to $999K – it’s perfectly nice 12′ wide townhouse that’s move-in ready, but will need renovation in the not-too-distant future.

Personally I think 42 Hamilton should have a price drop of about a third – to $699K. With a $500K renovation that would put the total cost around $1.2M and it would be in better condition than 48 Hamilton which would compensate the buyer for the hassle of the renovation.

UPDATE: 42 Hamilton Terrace sold on 10/09/2009 for $660K. Am I good or what? Saying they should be asking $699K was exactly on target.

The other townhouse where people seem like they’re stuck two years back in a time warp is 532 West 148th Street. The pictures are amazing, but when you go through the house you realize how little substantive renovation has been done. It’s “shabby chic” in the ’80s sense of the word (before the term referred to a store) when people didn’t have money for renovations so they just make things that were falling apart look pretty. The floors aren’t redone – they’re just whitewashed and varnished. The ceilings aren’t redone – they’re ripped out and there’s exposed beams. Same with the walls – ripped out. What you have left is a shabby chic 3 story loft that’s one big open space plus a work space in the basement – a total bachelor pad. There are almost no walls, no privacy – some of the bathrooms are literally in the middle of the floor with no walls around them. It would have been hot 20 years ago, but now people are looking for genuine renovations – skim coated walls, recessed lighting, floors that are in good condition. The other thing about that property is that it’s 1/2 block off Broadway – not on a prime block.

All of that would be fine if they weren’t asking nearly $2M for the place ($1.895M to be precise). I think the comp for it is 48 Hamilton Terrace @ $1.25M – so they need to drop the price by a third to be in line with their competition. Both 48 Hamilton and 532 W 148 are in similar condition in terms of infrastructure. 48 Hamilton is on a MUCH better block and is landmarked. 532 W 148 has better interior design, but you’re buying the building, not the furnishings. Plus 48 Hamilton has walls and rooms, which most townhouse buyers want, so it’s more desirable.

I did like going through the place though – it showed how much you can do to a townhouse at a reasonable price. If you really don’t want to do expensive structural changes, you can still have a place that’s stylish (though to me shabby chic is pretty dated).

UPDATE: As of 2/16/10, 532 West 148th has now been on the market for over a year and has not sold. They’ve only dropped the asking price to $1.75M. IMHO, the owner might as well take it off the market if he’s not serious about selling.

The Harlem real estate market has always been pretty speculative, but luckily much of the market is pretty realistic about how prices are dropping. There are some incredible bargains out there and a lot of people are quite flexible. We saw one property where the broker (whom we really liked) told us they were about to drop another 17% – and that’s after a price reduction not all that long ago.

But some people are afraid to be realistic. There are a few that are dropping the prices too far ’cause they’re desperate to sell in a bad market. But the problem is that when you drop really low people start thinking that’s what all the prices should be and then prices  really tumble. Hell, we’re sorta playing that game – hoping we can sell our place before that mentality takes hold in our neighborhood and after it takes hold in Harlem.

I’m not saying that most of the places that are livable and mortgageable should drop that much further, but the reality is construction loans are hard to get these days and people who buy places that need construction loans (like 42 Hamilton) should get rock bottom prices to compensate them for doing something that’s pretty risky in a falling market… At least we’re hoping a seller will see it that way when we go to buy a place. I’ve got my eye on a place and as far as I can tell it’s practically a shell. It also needs a one-third price reduction… Hopefully we’ll be able to sell our place and hopefully the seller will be flexible by then… We’ll see. First step is to sell our place… 😉

In defense of the people who’ve over-priced is the fact that the market is rapidly changing and there’s not a lot of data to make informed decisions on. Things were dropping before the stock market went down in September, then only 2 townhouses had deals in Q4 of 2008. That didn’t give people a good idea of what they should be doing. In Q1 they say 10 townhouses have closed, but even that data isn’t all in yet. But the issue is how far do you have to drop in order to be “priced to sell” when almost nothing is selling?