Downtown Express
October 17, 2008

CREDIT CRUNCH BEGINS TO HIT B.P.C. CONDOS

By Julie Shapiro

Some Lower Manhattan condo owners who are hot to sell their property are turning to an unconventional strategy in the face of a faltering economy: The sellers are loaning the buyers the money to make the purchase.

Esther Muller, who consults for City Realty, said the credit crunch has made it much harder for buyers to get loans from banks, so sellers who don’t want to lose the deal are financing the loan themselves. She has heard of several such cases Downtown.

“It becomes a win-win situation for the buyer and the seller,”
Muller said.

The advantage to the buyer is clear: The buyer is able to purchase a condo and negotiate the interest rate and the price at the same time. The loans are structured like mortgages, with monthly payments over 20 or 30 years. That gives the seller the advantage of getting a monthly check over a long period of time, rather than having to worry about investing and paying taxes on a lump-sum payment, Muller said. Muller gave the example of sellers retiring and moving out of the city, where they would not need the money from the sale all at once.

Sellers can check the buyer’s credit history online to protect themselves, and the worst-case scenario would be for the buyer to default on the loan, which means the seller would get the property back — not such a bad thing in Lower Manhattan’s still-hot real estate market.

As unorthodox as the arrangement sounds, it’s actually not new, Muller said. She remembers interest rates soaring to 15 and 16 percent 25 years ago, and back then some sellers offered a comparatively modest 10 percent rate to their buyers.

The current difficulty of getting loans is just one effect of the economic downturn on the real estate market. Some Lower Manhattan residents are hoping to find that the plummeting stock market has a silver lining: more affordable condos. Several brokers told Downtown Express that while prices are slipping slightly, no one should expect drops of 30 or 40 percent anytime soon.

Rumors of lower condo prices recently sent Tom Goodkind, a resident of Gateway Plaza in Battery Park City, looking for a deal. At the Riverhouse, the Sheldrake Organization’s new condo building in northern B.P.C., Goodkind looked at a $1.3 million two-bedroom condo for his family several weeks ago. The salesperson hinted that bids were coming in substantially lower, and Goodkind thought he could have gotten the apartment for $800,000 to $1 million — but he and his family decided it was too small.

Sheldrake did not return a call for comment.

Even if Goodkind had liked the apartment, he agreed with Muller that the flip side of the poor economy is that it’s increasingly difficult to get a loan.

“Things are affordable, but only if you have any money left,” Goodkind said recently while discussing the question with other B.P.C. residents before a community board meeting.

Goodkind, a C.P.A., said Gateway residents are particularly hopeful about finding condo deals because Gateway’s rent-stabilization agreement is slated to expire next year, and many of the residents could find themselves priced out.

Muller said anyone who can afford it should look for a condo.
“If you can come up with 20 percent [for a down payment], I think there are fabulous, fabulous opportunities now,” Muller said. “It’s a good time to buy.”

Because of the economy, sellers Downtown and across Manhattan are more willing to negotiate now and may drop the selling price by up to 10 percent, Muller said. Making a 10 percent cut to the condo’s price isn’t a big deal to sellers who have owned the apartment for more than five years, because the value of real estate has risen so much so quickly, Muller said.

As the economy cools today, the biggest change Muller has noticed is that sellers who inflate the price of their property beyond its value are no longer getting offers. Before, Europeans were paying astronomical prices, but now everyone is being more circumspect, Muller said.

“All you have to do is get one [buyer],” Muller said. “In this market, it’s more difficult to get that one person.”

Tom Tam, a sales manager with Battery Park Realty, has not seen as much of a drop in Downtown prices as Muller has. He cited the Real Estate Board of New York’s September report, which showed Manhattan condo prices up 33 percent in the second quarter of 2008 compared to one year earlier. In the same period, Brooklyn condos saw a paltry price increase of 1 percent, and home values fell across the country, the report found.

Those numbers don’t take into account the most recent financial tumult, and Tam said some new buildings are more willing to negotiate prices now. Also, some of Battery Park Realty’s clients were laid off and moved away, but “Not very many people back out,” Tam said.

The foreclosure crisis didn’t hit Manhattan as hard as the rest of the country.

“People are still holding on,” Tam said of Manhattan as compared to Brooklyn and Queens, which he said had more foreclosures.

Muller thinks the reason for so few foreclosures in Manhattan is that people who can’t afford to buy apartments aren’t able to get them. Co-ops, for example, are strict about the financing prospective residents need before they can move in — a safeguard that much of the country lacks.

An Oct. 3 report by Brown Harris Stevens showed Manhattan apartment prices in the third quarter of 2008 up 12 percent from last year but down 6 percent from last quarter. (The 6 percent figure excludes 15 Central Park West and The Plaza, since those luxury sales skew averages and mask trends.)

“As we enter year two of the credit crisis, it is only now that we are beginning to see an effect on market indicators,” the Brown Harris Stevens report states. There are two reasons for the delay: the span of time between contract signing and closing, and Manhattan’s limited inventory of apartments with a low percentage owned by investors.

Looking forward, Hall F. Willkie, president of Brown Harris Stevens, remained optimistic, at least as of Oct. 3.

“Despite today’s turmoil in the financial services sector, our real estate market fundamentals are still solid,” Willkie said in a prepared statement.

Muller and Tam both think foreign demand for Lower Manhattan will stay strong and keep prices firm. Some of those foreign buyers are investors and want to rent out the spaces, but many just want to live Downtown.

“They see Downtown as we see Downtown,” Muller said. “It’s sexy to own a piece of property Downtown. If you’re European and you’re young and you’re hip, that’s the place to own.”