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Amenities, Adjustments & Value Logic

How Not to Value A Co-op Apartment: Price per Share

May 12, 2016 | 11:59 am | Favorites |

Dakota_1890_wiki
Source: Wikipedia.

Co-op Boards Cannot Prevent Sales They Think Are Low Without Damaging Shareholder Values

I have spoken with buyers, sellers or real estate agents that were told by co-op board members their sale may not be approved by the board because the resulting “price per share” of the sale (purchase price/apartment shares) is less than a prior similar sale in the building. Here are some thoughts about co-op boards who try to “protect” shareholder values by preventing transactions.

  1. Co-op boards wield a lot of power over a sale within their building. In a research study I coauthored that was published by NYU Furman Center for Real Estate and Urban Policy with Michael H. Schill and Ioan Voicu called The Condominium v. Cooperative Puzzle: An Empirical Analysis of Housing in New York City found that there was an inherent cost of a co-op board’s power over their shareholders, unlike the relationship between a condo association and their respective unit owners. It is important to note that market forces are far more powerful than a co-op boards intention to “protect” the market within their building. Much of this gateway mentality stems from the legacy of no public record for co-op sales prior to 2003 (made public record in 2006, but retroactive to 2003). When a co-op overextends it reach and stops a sale because the price is considered too low – often because it falls short of a recent similar apartment’s sales price – the co-op board is doing a disservice to their shareholders, despite best intentions. Why? The decline of a transaction where the listing was properly exposed to the market creates a public perception that the board is disconnected from the market. Brokers are less likely to bring buyers to listings within such a building in the future. Less market exposure for listings in the building means fewer potential buyers and ultimately a lower achievable sales price.

  2. Housing markets do not always rise. This was made clear during the housing bubble and bust cycle a decade ago. The mindset of requiring a current sale to be higher than the last highest similar sale would prevent any sale from occurring when a market is flat or falling. This taints the building in the market and would make values fall much harder in a down cycle once the board capitulated. This would serve as a significant miscarriage of board power during such a cycle. I saw a lot of this circa 2009 after Lehman collapsed. A board would consistently nullify deals on a specific listing that was properly exposed to the market. By the time the third market vetted contract was signed at about the same price, the seller would give up and be possibly exposed to significant financial hardship. And since many co-ops are restrictive about a temporary rental scenario, the seller would be unable to rent the apartment after they moved out.

  3. One of a few valuation remnants of the past includes a co-op board valuing a current contract sale on a price per share basis. This is a “shotgun” approach to determining a reasonable market value and is at best case, a broad brushstroke approach that is not suitable for an individual apartment valuation. Valuing by share allocation does not reflect the fair market value. When the sales price per share is consistent with a building average or trend, it is simply coincidence within a wide bandwidth of price probabilities. Such a price per share valuation philosophy would appear to violate the board’s fiduciary responsibility to protect its shareholders by penalizing them for a share allocation perhaps done decades or even a century ago. There is no science to the original allocation of co-op shares and the patterns are often fraught with inconsistencies. For example, the perception of value for a certain exposure in the building may be different today than it was in 1927. A buyer doesn’t look at a per share valuation in a building as market value for guidance – they never have. They look at competing properties in the market surrounding the property. Incidentally all of those co-ops with competing listings likely had different rationale for their respective allocations when they were built or converted.

  4. Investor value can be mistaken for market value. In the case of the co-op board judging an adequate sales price based on the price per share within the building is known as investor value. It is the value to them, not the value to the market. This is why sellers can be so disconnected from the market when setting their asking price. A seller might think that a purple formica entertainment center in the living is worth another $50 thousand to a buyer when the buyer is thinking it is worth minus $2 thousand for the cost to remove it. Co-op boards are responsible to protect the interests of their shareholders but they can confuse that with market value.

A few definitions of Fair Market Value

IRS: “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”

Investopedia: “Fair market value is the price that a given property or asset would fetch in the marketplace, subject to the following conditions:
1. Prospective buyers and sellers are reasonably knowledgeable about the asset; they are behaving in their own best interests and are free of undue pressure to trade.
2. A reasonable time period is given for the transaction to be completed.
Given these conditions, an asset’s fair market value should represent an accurate valuation or assessment of its worth.”

Merriam-Webster: “a price at which buyers and sellers with a reasonable knowledge of pertinent facts and not acting under any compulsion are willing to do business”

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Bloomberg View Column: Want a New House? Good Luck

April 26, 2015 | 12:04 pm | | Charts |

BVlogo

Read my latest Bloomberg View column Want a New House? Good Luck.

inventory chart

Here’s an excerpt…

Much of the analysis of the housing market focuses on sales volume and price trends. These are important metrics, of course, but they really don’t tell you much about market fundamentals because they are, to a great extent, derivative…

[read more]


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Bloomberg View Column: House Rich, Land Poor

April 26, 2015 | 11:41 am | | Charts |

BVlogo

Read my latest Bloomberg View column House Rich, Land Poor.

walkingclosets

landisyourland

Here’s an excerpt…

The living space in newly built U.S. homes is on a tear: Since 1982, the size of a new single-family house has increased by almost 1,000 square feet — which was the size of the average U.S. house in 1950…

[read more]

The trend continued after a brief interruption during the early days of the financial crisis…


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[Three Cents Worth #272 NY] The Cost Of Your Doorman Keeps Rising

November 29, 2014 | 8:30 pm | | Columns |

It’s time to share my Three Cents Worth (3CW) on Curbed NY, at the intersection of neighborhood and real estate in the capital of the world…and I’m here to take measurements.

Check out my 3CW column on @CurbedNY:

Having that doorman just got more expensive. The difference between the average rental of a building with and without a doorman was at its widest point since we began to track this metric in 2007. The average rental price in a doorman building was $4,915, up 17.8 percent over the past 7 years and the highest recorded over this period. The average rental price in a non-doorman building was $3,461, up a more modest 5.8 percent over the same period. The difference between the two rental types resulted in an eight-year high of $1,645 per month…

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[click to expand chart]


My latest Three Cents Worth column on Curbed: The Cost Of Your Doorman Keeps Rising [Curbed]

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[Three Cents Worth #270 NY] What Is the Value of a Central Park View?

October 30, 2014 | 8:50 pm | | Columns |

It’s time to share my Three Cents Worth (3CW) on Curbed NY, at the intersection of neighborhood and real estate in the capital of the world…and I’m here to take measurements.

Check out my 3CW column on @CurbedNY:

While there is an obsession with views in the Manhattan market and it is one of the drivers of the tall tower phenomenon, there are a bunch of moving parts associated with it. We looked at the last two years of closed sales (to get enough data) on the four borders of Central Park, comparing the average price per square foot of co-op and condo apartments with direct views of the park—including both those above and below the treeline—and those with city views…

cpwviews
[click to expand chart]


My latest Three Cents Worth column on Curbed: What Is the Value of a Central Park View? [Curbed]

Three Cents Worth Archive Curbed NY
Three Cents Worth Archive Curbed DC
Three Cents Worth Archive Curbed Miami
Three Cents Worth Archive Curbed Hamptons

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A Fifth Avenue Co-op’s 87-Year Price Increase was 3.6X Rate of Inflation

August 1, 2014 | 6:30 am | |

960fifth$450krecord-1927

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A few months ago there was a record $70M sale of a penthouse co-op sale at 960 Fifth Avenue.  The purchaser paid $5M over list price.

While doing some research I ran across an article in the New York Times archive that described a record Manhattan sale of $450,000 in the same building in 1927.  The apartment was located on the 10th and most of the 11th floor in the same building (aka 3 East 77th Street).

Based on the unit description, I believe this to be Apartment 10/11B which last sold for $21,000,000 on July 24, 2013.   Using the BLS calculator for CPI, a $450,000 sales price in 1927 adjusted for inflation to 2014 dollars would be $6,164,043 or an increase of 1,270%.

However the apartment sold for $21,000,000. an increase of 4,567% or 3.6 times the rate of inflation.

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…and the Home Seller will give you a Free Tesla!

July 12, 2014 | 7:26 pm | |

SodFarmtractor

Back when I was in college, a good friend of mine owned a large Michigan sod farm with his father – acres and acres of putting green quality sod. They wanted to upgrade their big tractor so I joined him on his visit to the local tractor dealership – International Harvester (my parents tell me I am a distant – really distant – relative of John Deere).

1979IHscout

[Source: Hemmings]

The tractor they were looking at included air conditioning and a surround sound stereo system. It was impressive. The salesman said that if they bought the tractor that month the dealership would throw in an International Harvester truck.

My friend’s comment to me under his breath was something along the lines of “looks like we are actually buying the truck too.”

Jhoanna Robeledo’s New York Magazine piece on the guy who throws in a Tesla if you buy his condo talks about this marketing technique.  Using a Tesla is buzz worthy as a well thought of brand – after all marketing is about getting eyeballs on the listing – but is it effective?  Does this technique actual sell properties?

In my view throwing in such a large concession is a red flag signifying the property is over priced enough to cover the seller’s cost of the “gift.”

Econ 101:  There is no such thing as a free lunch.

We’ve seen this marketing gimmick attempted with other cars such as a Prius, a Porsche, a Cadillac and Ferrari.

The funny thing is, you never read a follow-up article that shows how this marketing technique/gimmick was successful.

JohnDeereLM

A buyer for the condo in Jhoanna’s article would have the financial wherewithal to buy their own Tesla and likely isn’t thinking about buying a car during their visit to the property.

We don’t see these extreme marketing gimmicks tried with low margin properties. “If I buy this $75,000 condo I get a free Tesla!” Of course not – the condo seller in this “Tesla” story is telegraphing to a potential buyer the listing is over priced.

Yes, in a typical suburban transaction, a seller may throw in a used lawnmower to close the sale, but this is not something that is usually promoted during the actual marketing of the property.

NEWSFLASH Buyers are a lot smarter than this Tesla-giving away seller is giving them given credit for.

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Cluttering Luxury Housing Markets with Listings Made for TV – Manhattan Edition

June 28, 2014 | 4:55 pm | |

wsjbpcphlistingterrace
[Source: WSJ]

A little over a week ago the WSJ’s Candace Taylor broke the story about 3 contiguous listings to be marketed together at the top of a 15-year old ground lease condo in Battery Park City for $118,500,000.  At 15,434 square feet, that works out to $7,678 per square foot.  CNBC’s Robert Frank provides more details in a video tour that was broadcast shortly after the story broke.

Normally I don’t bother to do the math on this sort of thing but after the Cityspire listing a while back, I thought I’d tweak my thinking a bit as the luxury market gets more than its fair share of confusing “milestones.”

Doing the Math
Here’s my listing price logic using content in the near viral news coverage of the record Battery Park City listing – I break down the 3 units:

$56,500,000 ($7,406/sqft) listing – 7,628 sqft 5-bed listed last year for 5 days and removed.

$11,700,000 ($3,330/sqft) purchase – 3,513 3-bed in April 2014.

$19,000,000 ($4,425/sqft) listing – 4,293 sqft 4-bed $23M January listing dropped to $19M, then removed.

$87,200,000 is the aggregate total for the 3 units that total 15,434 square feet ($5,640/sqft). The current list price of $118,500,000 represents a $31,300,000 premium for the combination of all 3 units before we might assume the millions in renovations to combine if you believe that the $87,200,000 total is what aggregate of the individual properties are worth.

Given the $3,330 ppsf recent sales price of the 3-bed and the unable to be sold for $4,293 ppsf after 6 months on market 4-bed and the not-market tested 5 day listing period 5-bed at $7,406, I can’t figure out how the listing agent gets to $7,678 ppsf as an asking price for all 3 together before the cost of renovation to combine? Perhaps the seller set the price.

The listing broker tells us that the pricing “is justified by the square footage“, as well as the views and building’s amenities.”

Got it.

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Zillow is Forecasting Future Property Values

May 14, 2014 | 10:42 am |

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“I may be cool, but you can’t change the future” –Beavis & Butthead.

Zillow has recently re-announced it is forecasting the value of each property out over the next year. It’s not a new tool for them, at least conceptually since the “What is a Zestimate Forecast?” page was last updated on October 3, 2012.

In a world with Big Data, it’s clearly inevitable to see an expansion of the capabilities of services from firms like Zillow and Trulia as their data set grows. Zillow’s Zestimate was a key web site feature at their launch (no listings!), but the company lit the real estate housing market industry on fire, establishing Zillow as a powerful brand that was here to stay, even if the Zestimate tool was problematic.

The challenges facing the Zillow Forecast tool

The Zestimates are still dependent on the quality of public record
Many markets (ie NYC), have quality-challenged public record. But as time passes, Zillow’s data set gets bigger and their logarithms get better and I have not doubt that the reliability will continue to improve.

If the Zestimate is wrong, the forecast will be wrong
Take a look at this chart on the highest price closed sale in Manhattan:

15cpwzestimatechart

This is perhaps Manhattan’s most famous “trophy” sale of the past several years, 15 Central Park West. The property sold for $88M but the Zestimate at the time of sale indicated the value was $72M. However today the value is $11.9M and the forecast estimated an 8.6% increase next year to $12.9M.

15cpwlandingpage

The Zestimate Forecast projects the current Zestimate out over the next year using a bunch of indicators

Zillow uses:
-mortgage interest rate (local, but not much different than national)
-property tax rate(local)
-construction costs(local)
-number of vacant homes(assumed local)
-percentage of loans that are subprime(assumed local)
-percentage of delinquent loans (assumed local)
-supply of homes for sale (local)
-change in household income (somewhat local, huge lag time)
-population growth (somewhat local, huge lag time)
-unemployment rate (somewhat local, lag time)

I feel that most of these indicators, when considered as a group, are important to consider won’t capture the nuance of next year’s view because they either lag or aren’t granular enough to be a key influence on value trends over a short period. I would think Zillow would add search patterns and other “Internety” things to leverage their proprietary data to help with accuracy. I’d also consider “new inventory”, not just total inventory (supply) to help catch the nuances of a tight time frame of forecasting.

The key national factor driving nearly all housing markets now – credit – is really hard to quantify.

Still, forecasts are the future (sorry) and kudos to Zillow for taking the first step, even though the results, like the early days of the Zestimate, are probably not very accurate.

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Combinations: Creating a Larger Manhattan Co-op or Condo

April 20, 2014 | 5:58 pm |

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[click to expand]

Over my career, I’ve have observed a higher frequency of combination apartments (ie co-ops or condos) when inventory is tight.  A combination apartment is simply the connecting of 2 or more adjacent apartments (to either side, above or below).  It may be easier and/or less expensive to buy the apartment next door to create a larger space (even if you have to overpay for it) than to brave the tough market searching for a larger place to live.

A few years ago I started to track this during the preparation of the Elliman Report: Manhattan Sales. I looked at the actual apartment numbers and counted those that suggested they were combined. I am clearly omitting apartment nomenclature that is not so clear ie 7AB is renamed 7A, so my results are conservative.  The above chart reflects the recent trend of more combinations being sold but doesn’t necessarily equate to more being created, so new combinations would only be considered a subset of this data.

I’ve dubbed the phenomenon “1 + 1 = 2.5” because there is a premium for larger contiguous space.

I’ve always thought co-op or condo building that allow combinations (nearly all do) as providing a potential way for shareholders to realize value upside, thereby enhancing the price structure of a building ie higher values rub off on other apartments in the same building.

Some top line ideas about combinations

  • No shares are lost and in fact, many combinations  result in the acquisition of dormant common hallway space providing additional revenue in perpetuity to the corporation and a cash infusion from the purchase price.
  • Larger units sell for more on a ppsf basis (ie my formula above) potentially influencing higher values for other units.
  • A few less apartments in the mix is a non-issue (ie risk) in a building this size, unlike, say a 4 unit brownstone.
  • I’ve always thought it wise to keep the stock certificates separate to give the buyers and co-op more flexibility, but I see this done both ways (and admittedly don’t understand any legal nuances on this point.)

Some other more granular thoughts

Some layouts don’t work
– Not all combo layouts make sense or provide value upside.
– Layouts tend to work better in pre-war and new developments than post-wars.
– 1980s condos often often the least combinable layouts – ie a side by side 1 bedrooms.
– Over the last decade, developers have kept this in mind during construction to give them more flexibility during the sales process.

Higher value per square foot
– Creating larger apartments creates value upside to existing space ie “1+1=2.5”
– Sometimes large combos can be oversized for the building and there is no ppsf premium for the larger space.
– When a an owner of a large unit buyers the adjacent unit, the mere fact that the same unit owner owns both usually results in a ppsf premium before renovations are made to connect.
– The upside in value for a smaller apartment, means that a buyer can overpay for the unit as an individual sale but the addition of the smaller unit to the large unit adds value to both units on a ppsf.
– The highest value is realized when the buyer can’t tell the layout was comprised of two different units.  Simply creating a door between two apartments would realize the least upside.

That second kitchen
– The biggest “tell” on a combo is the existence of a second kitchen.
– They are often converted to a laundry room or bathroom, taking advantage of the utility connections.
– Buildings might object to the removal of the second kitchen because it may impact the building Certificate of Occupancy – I defer to lawyers on this point.

What do lenders think?
– Some banks are scared of combinations and others are not.
– In my experience banks require financing on the whole apartment – if they have a loan using collateral of one of the apartments, they will require that it be replaced with a new mortgage to cover both apartments.
– Banks often get confused on the value of a combo asking the appraiser to provide a value for each of the separate apartments before they are combined. The problem with that position is that the combination is usually worth more as one apartment (even before considering improvements) – in other words, the sum of the parts is less than the whole and the bank will incorrectly assume the collateral is inadequate.

Maintenance fees
– Many agents tell me it is assumed that maintenance charges are skewed higher for combos. I can’t prove this, all other things being equal.  When it occurs, it’s probably for reasons other than simply combining the units.
– A combo in a small building, ie a 4-unit brownstone co-op, raises the risk to the remaining shareholders if the combo shareholder stops paying their maintenance charges. Risk exposure to a mid to large sized building should be nominal.

Common Area
– Quite often hallways are purchased and incorporated into a combo layout for a better result.
– The co-op wins by getting a cash infusion for the purchase and income in perpetuity for the additional share allocation from the common area purchase.

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Repost: Measuring Manhattan Values By Floor Level

March 25, 2014 | 1:36 pm | | Favorites |

In the spring of 2012 my floor level valuation methodology was illustrated in a great piece in New York Magazine by Jhoanna Robledo called “What Price Height and Light?. The graphic and accompanying descriptions provide incredible clarity to a fairly convoluted subject.

In the flurry of transitioning content to our new site over the past few months, I remember the actual moment when I deleted the original post for this topic by mistake and thought, “wow this is annoying but I can always go the Wayback Machine.” However, today someone asked me about the graphic and I couldn’t find my prior post on the Wayback Machine (but I found a bunch of cool stuff) so I am reposting this piece. I really LOVE the graphic that New York Magazine came up with.

The graphic is fairly self-explanatory.

nymag4-2012301w57

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[Three Cents Worth NY #232] The Manhattan GRM Is Too Damn High

May 29, 2013 | 10:19 am | | Charts |

It’s time to share my Three Cents Worth (3CW) on Curbed NY, at the intersection of neighborhood and real estate in the capital of the world…and I’m here to take measurements.

Check out this week’s 3CW column on @CurbedNY:

Not a very original title, but after realizing the long weekend was unfairly ending after only three days, I took a look at the relationship between sales prices and rental prices through the “gross rent multiplier” aka GRM. I presented the relationship between median sales price and annualized median rental price since 1991 as a ratio…

[click to expand chart]

 


Today’s Post: Three Cents Worth: The Manhattan GRM Is Too Damn High [Curbed]
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