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Tuesday, January 27, 2015

Why It's Nearly Impossible to "Flip" in New York City


This week a listing for a  900 sq ft 2 BR in the Towers for $515k caught my eye. Back in September  the same unit on the first floor sold for $230k. Why the almost $300k price differential? The latter was a wreck, indeed, as these side-by-side photos show.

The recent listing caused a flurry of speculation in the Jackson Heights Life forum. Did someone "flip" that wreck? And brought up a good question: can you "flip" a co-op apartment in Jackson Heights? Not in the conventional sense, especially in a co-op.

In the conventional sense a "flip" is bought and sold quickly and sometimes, not even renovated. In the heady days of the housing bubble of 2008 in Northern California where the combination of high tech salaries and low housing inventory were inflating the market - still are, in fact - a savvy flipper who got in first with an all cash offer could turn around and put the home back on the market for more money a few days later without even touching it with a paint brush. And that is where the term flip came into recent "home show" vernacular (though the concept has been around for as long as property has been bought and sold).

In New York City, several realities make flipping near impossible. 1. Most residential real estate in NYC takes the form of a co-op, in which you are buying shares in the building which is a corporation that is governed by a board.  2. The paper work and approval process that it takes to buy a co-op apartment takes at least 3 months from contract to close, sometimes longer. 3. Generally the buyer has to make promises (both to the board and the lender) that he/she intends to live in the apartment as their primary residence. There are a few exceptions and some boards allow pied-a-terres which are "second homes in the city" that often the adult children of the buyers may live in. But for the most part, you see, a quick turnaround is not feasible. 4. To top that off, most co-ops impose a "flip tax" on the seller that takes a portion of the profit on their sale, sometimes up to 50% in Jackson Heights. So not only is it not feasible, it's often not profitable.

The Towers 2BR that sold for $230k last year would more accurately be called a "fixer upper" or a "handyman" special or in more refined circles a home in "estate condition" (think Gray Gardens). And as a renovator, those are all terms that catch my eye. Because I know that few perspective buyers are willing to take on a renovation of that magnitude, so competition for that property will not be high. And this puts me in position to make a below market value offer and have it accepted. But I don't look for just any fixer upper. I look for one that is a good value.

How do I know a good value? Often by looking at other apartments in the exact same "line" that sold for market price.

That wreck in the Towers was just the kind of property I look for, and looking at the side by side with one in the same building and with the same floorplan that sold for so much more will show you why.

Living Room:

NY Times | RedFin

Dining Room:

NY Times | RedFin


NY Times | RedFin

Bathroom 1:

RedFin NY Times

Bathroom 2:

RedFin NY Times


NY Times | RedFin

Though the "wreck" looked like a money pit, the renovation probably wasn't all that costly, considering that The Towers is a very well-kept building in good financial standing with a strong co-op board. The building will have a solid foundation, a well maintained roof, and mechanicals in good working order. There were not likely serious structural issues hiding behind those decrepit walls. The hardwood floors would look great after a cursory refinish. There remained some incredible period fixtures in the bathrooms that might be salvaged. You were probably looking at some framing and wallboard to close up weird openings, plaster and skim coating, electrical upgrades, regrouting and reglazing two bathrooms, and a full-scale kitchen build. Renovating this place would run you about $100k - and given the price differential of $300k between this wreck and the pristine home at market value, you'd have $200k instant equity. And that's a tidy profit.

The Towers is one of the loveliest prewar co-ops in Jackson Heights. Most of the graceful floorplans are what are called "classic seven" - that is, living room, formal dining room, a master suite with bathroom, two additional generously proportioned bedrooms plus a "maid's room" - a tiny bedroom with it's own small bath. Four bedrooms, three baths all told. The 2BRs we are looking at are unusual. They were created back during The Depression, when even buildings like the Towers fell on hard times and had to split up some large apartments into smaller apartments. Once sold cheaply 80 years ago, these two-bedrooms are a great investment now.

You can't flip this home, but you can buy it, live in it a while, and quickly build up equity.

What's the convential wisdom? Better to own the smallest house on the most beautiful block? In Jackson Heights that might translate into better to own the smallest apartment in the most sought-after building. Especially given the grand scale of the rooms and some of the architectural detail.