The Pendulum Swings...
We've heard about it happening. It's that moment when a number of factors converge, and all of a sudden, reality radically shifts in another direction. Low inventory, low interest rates, pent-up demand and an improving economy are causing an outbreak of buyer irrationality and the emergence of the real estate tipping point.
Buyers Behaving Badly
Yes, folks, all the scary buying habits of 2005 are back with a vengeance as both first time buyers and sophisticated investors alike desperately want a piece of the action before it's too late. It's truly amazing how quickly the balance of power has altered for buyers, as sellers now control Manhattan's real estate marketplace. How bad is it?
Done with Due Diligence
There is a dangerous equation emerging: as the number of buyers for an apartment increases, the appetite for completing due diligence decreases. The fear of losing a deal now supersedes the possibility of making a bad buying decision. And bad buying decisions are being made every day. The recession, an aging housing stock and significantly increased carrying costs, have made the economic future of a number of co-ops and condos uncertain to say the least. Nevertheless, the intoxicating notion of the big "upside" causes the buyer to ignore the numbers and purchase on faith. We're back to the future.
The Canary in the Condo...
From the "I can't believe this is happening again" department, developers are once again able to sell apartments that have not yet been constructed. Buyers are forking over huge deposits (now 15 and 20 percent of the purchase price), to purchase apartments that do not yet exist and won't be out of the ground for months or perhaps years. Speaking of deposits, the New York Attorney General's Real Estate Division, recently opted out of reviewing deposit disputes, so even though the stakes have increased, when things go south on a new development deal, buyers have nowhere to turn but to the costly court system. Only those buyers with bottomless economic resources will have the ability to fight the real estate development machine.
Construction is a Complicated Process
In the "Specials Risks" section at the front of every Offering Plan, there is always a "construction risk" prominently presented. Basically, the sponsor discloses that construction is complicated and anything can and probably will go wrong. From delays to defects, the sponsor lets the buyer know, that "we will give it our best shot, but don't count on things necessarily working out as promised". In essence, the developer will build what's presented in the Offering Plan, but reserves the right to make changes. Without question, "buying from floor plans," as my friend Malcolm Carter calls it, is the riskiest purchase option available. Even when developers use best efforts and employ high quality and experienced contractors, there are any number of reasons why the construction will not be completed on time, without defects and in accordance with the promises of the Offering Plan. A model apartment is just that, a representation of what the apartment might look like one day. As we have learned over and over again, until a building has been completed and has an operating history of several years, there is no way to predict whether the new owners will be faced with construction problems that a developer may or may not be willing or financially able to remedy. No matter how reliable the developer's track record and reputation, buying a virtual apartment should be carefully considered and in many cases avoided.
Residential Reality: March Madness Redux...
There is nothing that warms the cockles of a sponsor's heart like the filing of a pricing amendment. And pricing amendments abound at the moment. To borrow from a Beatle, although we were all waiting for this moment to arise, common sense and economic analysis has to make a comeback before things get any further out of control...