FINALLY, We Get To Start Construction

Posted on March 22, 2011 by BeatingUpwind

After over two and half months trying to get a stop work order lifted, it’s finally gone and we can start. The construction fence will go up tomorrow. Things are already in progress with ConEd, etc.

It’s all falling into place at the right time. All the paperwork is done for the rehab loan and it’s fully approved. We should close that Thursday or Friday (or maybe Monday).

If we can keep DOB happy and out of our hair things should go well. I’m sure the process will be a crazy one, but other than DOB, it should be good kind of crazy.

Mortgage Decisions – Points? Fixed/ARM?

Posted on March 17, 2011 by BeatingUpwind

It’s that time… We have to sign our life away and start a mortgage that’s bigger than I ever thought I’d have. It’s scary how much money the banks will give us – but at the end of the day once we’ve got our C of O and have rental income coming in, the numbers really do work (quite nicely, actually).

We were pretty set on a fixed rate mortgage, but weren’t sure whether whether we wanted to pay points to get a lower rate. Then after talking to our accountant I started wondering whether we should go with an adjustable rate mortgage.

Our options are:

5.5%, 30 year fixed, 1.25 points
5.25%, 30 year fixed, 2.5 points
4.5%, 7/1 ARM (5/2/5), 30 year term, 2.5 points

The trick with the 5.25% fixed and 4.5% ARM is that we have to come up with the money for the extra points at closing (1 point = 1% of your loan value). That will make our cash flow problem next year worse, but after about 7 years we’ll start saving money (compared to the 5.5% loan) because the lower mortgage payments would finally save more than the points would cost us.

Here’s how things work out (I’m using the mortgage calculator at HSH.com – it’s the best I found)…

March 2041 – regular pay off date for a 30 year mortgage

March 2036 – date we’d pay it off just by making biweekly rather than monthly mortgage payments (that’s a no brainer!)

February 2035 – date we’d pay it off if we went with the 5.25% fixed but paid the amount that would be due with the 5.5% loan and paid biweekly.

July 2032 – date we’d pay it off if we went with the 4.5% ARM but paid the amount that would be due with the 5.5% fixed, paid biweekly, and the rate never adjusted (unlikely).

I’m couching the discussion in terms of when we pay off the loan. Our goal is to pay the mortgage off as quickly as possible so we have the equity in our place to use to make another real estate purchase during the next real estate downturn (or the one after).

The biggest thing to notice is you can pay off your mortgage 5 years early just by dividing the payments in two and paying it every two weeks. I wish I had known that years ago. That’s a huge difference! That much we’ll definitely do, so the next question is how can we make it even shorter?

Paying extra points, but keeping the amount we pay the same shaves off just over a year. Given that it’s going to take 7 years to see the financial benefit and it makes our cash flow issues worse, I’m not so excited about that any more (it was the option we were planning on).

Going with an adjustable rate mortgage can have the biggest impact. But the problem is you never know how the rates will change. If they go up we could have big problems. The worst case is we couldn’t afford the house and had to sell during a slump. If the rates go down it could be great – we could pay the loan off even more quickly. We just don’t know what will happen and it’s an awfully big gamble. Dan and I have always been really conservative when it came to mortgages. We’re not gamblers. We’re the tortoise that gets there slowly but surely. Yes, it could almost shave another 5 years off the loan, but it just feels like too big of a gamble.

We’ll give the bank the final answer tomorrow morning. But I’m thinking we’re going with the 5.5% fixed rate with low points. It just makes the most sense for us.

One last note: If you’re renovating a townhouse and need a loan – contact Michael Stein at Wells Fargo (212/805-1055). Last I checked Wells is the only lender who are offering “conforming” (Fanny/Freddie) loans to rehab shells. Plus, Michael’s a great guy who’s literally worked with us for two years – telling us whether we could afford the mortgages for different types of properties, and then double and triple checking our numbers to make sure things went through smoothly.

Ready, Set… WAIT

Posted on March 16, 2011 by BeatingUpwind

I did a post a while back about how we got two violations, then they appeared as ‘resolved’ but the stop work order on which they were based was still in effect. Well, clearing that nightmare has been a VERY long, arduous, and inane process.

The short(ish) version was that the architect’s expediter was told by someone at the DOB that we could not renew/extend the previous owner’s approved plans to convert the building to 2 family – that that job had had completely expired and was dead. Well, that was wrong. During the 5 months plan review process no one at DOB told us that getting a second “Alt-1” would cause problems. Even when the plans were approved it didn’t set off any alarm bells. No, DOB waited until we pulled permits and wanted to start work to give a FULL stop work order. We can’t even put up a new construction fence when our current one is deemed a violation and ‘unsafe’.

Then the fun began. If you look on the DOB website the violations literally have no explanation. Here are screenshots of them…

How do you deal with a violation when they won’t tell you what’s wrong? The papers they put on our building simply said “failure to provide information on job ###”. What in in the ?@#$ does that mean? What information?

What the inspector should have put was that we failed to close the first job before starting the second job. The issue is that they need to do an inspection to know what was done under the first job so they know how to properly evaluate the second job. See? Put that way it all makes sense. The inspector could/should have put “failure to have final inspection of job ### before starting job ###.” THAT would have made a total sense. I still think it would have been nice for someone at the DOB to know that the we should work under the first job number or at least warn us to close it before starting the 2nd job number.

Anyway, it took a while to figure out what the problem was (because the inspector didn’t give us adequate information). We actually had to fire one expediter who couldn’t figure it out and hire another one. The new expediter met with the borough commissioner to try to get an exemption but was unsuccessful. However she did get an inspection a few days later (instead of a few weeks later) – that was supposed to speed up the process. The inspector came, and then we had to wait over a week for him to file his report. Then we were told it was up to the borough commissioner to review the report and take care of things. We waited and waited and finally got impatient. Just when we were about to go see the borough commissioner ourselves our expediter went in and as of Tuesday the old job is formally withdrawn.

But, you guessed right… That’s still not the end of it… Now the fact that the job is withdrawn has to be passed over to the construction unit who needs to dismiss the violations and lift the stop work order. That’s supposed to be done by the end of the week. We’ll see.

This is just ridiculous… Two and a half months to clear up something that never should have happened in the first place. Only the DOB is at fault here. They gave us the wrong information and then then never warned us of a problem despite seeing us several times over many months. You shouldn’t be able to apply for a second Alt-1 until you’ve closed the first one. It shouldn’t blow up right when you want to start construction – that’s the absolute worst time for it to happen.

Who knows what else they haven’t told us and how much time and money that will cost…

I gotta say I hate the DOB. If you look around Harlem and wonder why there are so many derelict buildings – they’re part of the reason. They should be helping people like us, not making it so incredibly difficult. We’re trying to do things by the book, but they keep changing the words on the page as we’re reading it.

Hopefully it will get resolved this week and we’ll be able to start construction first thing next week… Hopefully…

No Wonder People Get In Trouble With NYC DOB

Posted on March 14, 2011 by BeatingUpwind

There are a few minor changes that we need to get signed off by DOB. For example, when Peter Holtzman was kind enough to look over our plans he noticed the plan examiner hadn’t caught the fact that we were exhausting things like bathroom vents and dryer vents over the property line (not allowed). So we’re planning to vent everything through the roof or rear wall and need to get that approved. Also, as the plan examiner was stamping our plans he noticed we needed changes to the size of our bulkhead – the walkway next to it didn’t meet “side yard” zoning requirements. He was kind enough to tell us to just come back and fix it when we put in a PAA. And we had changed a bathtub to a shower (two changes – one to delete the tub, another to add the shower), etc. So all in all minor stuff, but it seems little details can trip you up with the DOB, so we wanted to get them approved to avoid problems.

Our architect’s expediter filed the PAA (Post Approval Amendment) on 18 February and we were scheduled for a meeting a little over two weeks later – on 7 march. But that meeting was canceled for some reason and rescheduled for 4 May – that’s right – almost 3 months after we initially filed the PAA.

I was watching Holmes Inspection last night on HGTV and at one point he saw a problem and said “oh, we’ll need to pull a permit for that”. The next day he had his permit and they were on their way. That’s how things should work, but 3 months to get some little changes approved? It’s craziness.

I can sorta understand why the initial plan approval takes a while, but 3 months for a post approval amendment? Please… If you see something during construction that warrants a PAA that means you could have a 3 month delay (or more). And what if we don’t get the PAA approved? That’s a horror I don’t want to think about.

It’s no wonder people get in trouble with the DOB. They have little issues they need approval for, but they can’t get the feedback in a timely manner so they have to choose between a major delay or going ahead and doing something that hasn’t been approved.

Apparently the current system is better than the old one. I think the current system is broken. I can’t imagine what it used to be like. This isn’t just theoretical. It hurts homeowners and makes it more difficult to fix up blighted buildings in our communities.

On top of everything else we can’t even try to get an earlier appointment without first canceling our current appointment. If one isn’t available, then we could be pushed back even further. The expediter risked a later appointment today by calling, canceling, and trying to get an earlier one. Luckily when they said ‘no’ to an earlier one he was able to rebook the original appointment. But it was possible another caller could have gotten his original slot while he was figuring out no earlier ones were available.

Here are a few things I can think of that would make the DOB process better. Admittedly some are easier said than done…

Hire more staff and get things processed more quickly.
During the approval process allocate sufficient time to completely review the plans the first time. After the full review, anything that was not brought up as an objection shouldn’t be able to result in a rejection unless there are other unresolved issues or it’s a serious safety issue. However, put them in as conditions that must be resolved in the first PAA. That will let work start and issues be dealt with later.
Have a check list for the construction process similar to the approval process. Anything that’s not on the list, and not an immediate safety issue, shouldn’t ever result in a stop work order.
Have a separate unit in the Manhattan DOB that only deals with buildings under 100,000 sq. ft. (or maybe 50,000 sq. ft.). Do a little more hand holding with these projects so these little projects don’t get mired in bureaucracy.
Give inspectors more latitude to be lenient with little things that are not safety issues. Things like changing a bathtub to a shower or adding a second dishwasher shouldn’t require approval by a plan examiner. The inspector should be able to overlook an unlimited number of items like that – or just note that additional fees need to be paid, if they affect filing fees.

But of course, all of that is a pipe dream. In the mean time, dealing with the DOB is the one thing that seriously worries me about our project. I’m scared something little and unintentional will turn out being incredibly costly for no good reason.

Renovations & Cash Flow Issues

Posted on March 12, 2011 by BeatingUpwind

Julia Angwin of the Wall Street Journal is wrapping up the renovation of her place two blocks from ours. It’s funny how what she writes is so pertinent to our situation. When she wrote about how disappointed she was that the nice deep tub she had spec’d wouldn’t fit and she had to use the shorter one which was much shallower, I realized we had made the same mistake by spec’ing the same exact short tub thinking it was as deep as the longer versions of the same tub.

Now things are wrapping up on their renovation and her latest blog post relates how delays are causing cash flow problems for them and they had to come up with $30,000 in two days to keep the contractor on the job and working. We’ve been thinking through the cash flow issues lately and have been realizing we’re going to need a large amount of cash right at the end of the project…

Problem #1: The Mortgage

We’re getting a rehab loan – 100% of it is going to rehab costs (architectural fees + construction costs). The bank doles out the money as things are completed. We don’t have access to all the money up-front. Even though the money isn’t ours until the work is done, we’re still paying interest on the entire loan amount from day one. I think they put the unused portion in an “interest bearing” account – but with interest rates near zero these days, that doesn’t mean much of anything.

Paying interest on the loan means the loan has started. That means we have to pay loan payments. They will roll up to 6 months of loan payments into the mortgage amount, but our project is going to take longer than 6 months. That means we have to start paying the mortgage in month 7 even though we can’t live there and can’t rent out the apartment to cover the cost of the mortgage. So that’s cash flow problem #1.

Problem #2: The C of O and Renting

Even though our building has multiple, active vacate orders (some of which date back to before I was born), we can live in the building as owners/caretakers. However, we can’t rent out the garden apartment until a new Certificate of Occupancy is issued. I haven’t heard anyone who’s had a good experience with the C of O inspection process. So cash flow problem #2 is our lack of rental income while we pay the mortgage and wait for the C of O.

Problem #3: The Bank’s 10% Hold

The bank does a 10% hold on all amounts paid in order to assure they’re getting what they paid for – a completed rehab. The final 10% is paid when they confirm that the C of O has changed – in our case from class C4 (old law tenement) to class B (2 family). The issue is that the C of O process can be long and unpredictable – and the length of the process is not necessarily the fault of the contractor. Our contractor has done work for us before (as well as work for friends and neighbors). We know him and trust him, and we know him well enough to know waiting for the 10% could be a hardship for his business. As a result we’ve offered to pay him a portion of the 10% holdback early provided our architect confirms that he’s finished and done a proper job. (This is essentially the situation Julia Angwin encountered with her contractor only it came unexpectedly).

The issue is that we’ll need to come up with that money at a time when we’re short on money because we’ve been paying a mortgage without getting rental income to help with the payments. Like Julia Angwin, we’ll probably have to raid our retirement accounts to make ends meet, but it will be temporary. Unlike the mortgage payments – at least we’ll get the money back from the bank.

So the moral of the story is – if you’re planning a renovation plan for how you’ll come up with a big chunk of cash at the end of the project – you’ll probably need it.

In other news, we finally signed the contract with our contractor this afternoon. However, he can’t start because of the stop work order. Dan and I are going to go down to try to see the DOB borough commissioner first thing Monday morning. In our opinion it’s a little crazy that it hasn’t been cleared yet. Hopefully we can get it cleared up quickly so our contractor can start.