Welcome back to Part 3 of Purchasing An Apartment In New York City. The goal of this series is to help NYC home buyers formulate a sound game plan in an effort to maximize the possibility of “winning” an apartment. A critical component of any successful game plan is creativity and “out of the box” thinking. In this article, I will address the competition with other buyers you are likely to encounter at showings and open houses.
As you can see from my previous articles, I am fond of sports analogies when explaining the process of purchasing a home in New York City. And, what more timely analogy is there than March Madness – the Big Dance – the NCAA Basketball Tournament – the Road to the Final Four!? If I were to construct the brackets for the Road to the Real Estate Final Four, the Championship game would be You vs. The Seller (the initial negotiation through the closing), while the early rounds, Sweet 16, Elite 8 and Final Four are You vs. the Other Buyers. In order to compete for the Championship you must first beat the early round opponents, and upsets DO happen (sorry Villanova). Whether you feel you are a 16-seed or a 1-seed, these early rounds deserve their own, well-crafted game plan – and must include a level of “creative” or “out of the box” thinking in order to score points and win the game.
Know Your Strengths and Weaknesses
Every buyer has strengths and weaknesses when it comes to down payment, closing timeline, DTI, post-closing reserves, pets, mortgage contingency, sales contingency, neighborhood and building preferences, inventory (which seems to be a universal weakness in the current market), etc. It is important that you know your specific strengths and weaknesses well, so you can create you game plan around them. But, aside from your strengths, what can you do to score points and beat your opponent? As any great coach will tell you, winning is often the result of out-thinking your opponent rather than out-playing them…
Think Differently From The Other Buyers And Their Brokers
I find brokers and their clients get sidetracked or slowed down by seeing the World of Apartments through the lens of their preferences too rigidly – missing potential winning options along the way. I refer to this as, The Rental Mentality. More on that later…
When conducting your search, there are 4 major variables to consider: Price/Cost (factoring in both list price and carrying costs), Size, Location, and the Amenities the building offers. When it comes to purchasing, there is a lot more gray area within the 4 variables than buyers sometimes think. The Location and Size variables tend to give the most room to think “out of the box”, but let’s address each of them so you can give yourself the best chance to advance to the next round, and ultimately the Championship!
Price: The most common – and often necessary – strategy is to manipulate the price variable (upward) until you find an apartment which fits the other three variables. This is a simple – but often expensive – plan. Thankfully, current interest rates allow buyers to borrow more without significantly increasing their monthly mortgage payment (borrowing an extra $25K on a 30-year fixed rate mortgage increases your monthly mortgage payment by about $100). However, for many buyers, liquidity prevents this option. Further, I believe focusing solely on increasing the budget ignores the possible creative alternatives, and a potential competitive edge over the other (similar) buyers. Remember, the goal is to think differently than your opponent – to outsmart them.
One strategy regarding price is to position yourself for a potential best and highest scenario by “baking” the additional possible/probable “overage” into your initial budget. It is no surprise that the last 18 months or so has seen many listings with quick sales, multiple bidders, best and highest scenarios, and “over ask” purchase prices. It is still common now, and seems to be trending that way for the foreseeable future. Believe it or not, best and highest winners typically find themselves 5-10% above the asking price depending on their down payment. That’s a significant amount of money for most buyers, and not something they likely considered when determining their budget. But, if a $1M buyer were to lower their budget to $900K (keep in mind this may mean an adjustment in one or more of the other 3 variables), they will be ready and able to win a best and highest if the $900K property has multiple bids, since they are comfortable with 10%+ above the asking price. If not, and you are the only bidder, you will likely save a little money! That is a far better position to be in than trying to find an extra $100K to win a $1M apartment.
Amenities: “Amenities” in NYC apartment buildings include anything from an elevator to a pet spa. The way to get creative regarding amenities is generally to compromise on them or take the “a la carte” approach. Is there a laundry room in the building rather than in the apartment? Is there a gym down the street? Are you willing to purchase in a building with a video intercom or virtual doorman, rather than an actual doorman? Again, the goal is to think more creatively than the other buyers, so the more you know about the area around the building (as well as how your compromise might save you money when it comes to monthly maintenance or common charges), the more potential options you will have in your World of Apartments.
Location: I am a huge advocate of casting a “wide net” when it comes to location. This is a difficult compromise for many buyers to make, but often one which opens many doors. The transient nature of NYC living – as well as the understandable “rental mentality” of many first time buyers – sometimes causes buyers to forget the investment aspect of buying a home. Of course, the motivation or rationale for buying ranges significantly from buyer to buyer, but I urge my buyers to keep an open mind when it comes to neighborhood. If there is one thing we know about NYC, it is that neighborhoods can and do change over time. From an investment standpoint, you may want to think 3-5 years down the road if you plan to hold the apartment for 10+ years. This will allow you to purchase “more” relative to your ideal choice of neighborhood, increase the return on investment, and help position you to win a best and highest if necessary. Big Fish, meet Small Pond.
Size: This may be the most underestimated variable when it comes to creativity and out-thinking other buyers. Earlier I mentioned the idea of Rental Mentality. This mentality can influence the size variable in a big way. The Rental Mentality is the notion that New Yorkers are so used to being renters, that their vision of what an apartment “could be” is clouded by what it “is”. It is seeing a particular apartment ass an alcove studio, rather than an 600 square foot Space. Remember, you are buying it not renting it! And, although there are certainly limitations to what you can do, it is very common to alter the apartment to fit your specialized needs. Thankfully, I learned this lesson early in my career representing two architects purchasing their first home. They were expecting a child and ideally wanted a two bedroom apartment. Their ability to see the raw space and potential in the “out of the box” ideas, resulted in the purchase of an over-sized one bedroom which allowed for a nursery within the bedroom. Seeing apartments as spaces will definitely separate you from many of the other buyers who will likely not be so creative.
One quick word on “stale” listings. I strongly recommend to our buyers that they do their best to ignore the length of time any particular apartment has been on the market (until we are in the Championship Game negotiating with the seller of course). There are many variables which can cause an apartment to linger on the market including board turn downs, lazy brokers, difficult tenants, stalled contracts, etc. A “stale” listing is not necessarily a “red flag” and actually could be an opportunity for a creative buyer to out-think buyers who choose not to see it because there “must be something wrong.” See it first and then determine if there is a valid issue.
Remember, buying an apartment in NYC – whether for an investment, pied-a-terre, or primary residence – should be fun! My advice is that you strategize with your real estate professional and enjoy coming up with a game plan. A creative game plan not only prepares you for the Championship, but helps you out-think the other buyers in the market. Additionally, become a resilient buyer! Most successful buyers (unless you are a cash buyer with an unlimited budget) understand that there is not a right apartment, but several right apartments. You may not get the first one (or the second or third), but your willingness to bounce back and stick with the process will ultimately lead to “cutting down the nets” and a shiny new home in New York City.
My name is Eirik Davey-Gislason and I work in real estate in New York City. This blog is an opportunity for me to educate everyone who has a horror story or is on the verge of one. By sharing, preparing and advising my audience on what to expect, what is normal, what is right, and what is wrong, I hope to do my part to expose the wrong-doers and shape the future of this dysfunctional thing we call NYC Real Estate.