Author Topic: Our rental building is going condo. Should we buy out our apartment?  (Read 4424 times)

randomstring

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Don't know if this is the best place to discuss this; point me to correct place if it is not.

We currently rent a 1 br apartment in Manhattan. Land leased building. Our current landlord ( a shady large firm known for its shadiness ) is trying to convert the building to condos. They sent us a red herring plan that almost makes it seem reasonable ( e.g. maintenance is not outrageous and price per square foot is not outrageous ).

However. The building is 80/20 building and 20 percent of apartments are not being converted. Who is responsible for those is unclear. They did a structural inspection of the building but conveniently did not inspect the roof or the mechanicals ( which I know are old ). The plan does not mention the current land lease terms or when they end ( which would affect the monthly maintenance and taxes significantly )

Writing this all out makes it sound terrible. However -- we want to stay in the area ( because of kid's school ). NYT buyvs rent calculator tells us that with on paper price of the apartment and proposed monthly fees we should buy. Our apartment is old and unrenovated so if we are attempting to buy at all we will be offering 100k less ( current ask is 850k) but in cash. But before we even get to the buying part we need to figure out the true building financials and I am having hard time figuring this out.

As a postscript, we are not actually very rich. Buying this apartment for cash will pretty much drain all our non retirement savings ( minus a cushion ). The reason I am thinking of a cash offer is because I want to buy cheaper. However the risk is that for a long period of time the apartment will be unsellable unless to another cash buyer ( recent conversions with less than a certain percent of bought out apartments are hard to mortgage ).  We intend to stay in the area for the next 20 years 

alexpkeaton

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #1 on: August 20, 2017, 11:32:57 AM »
Seems like you'd really need to know the terms of the land lease to make any informed decision. I've heard some condos down in Battery Park City go for well under market rate because the land lease isn't perpetual, so eventually all the buyers there will have to deal with that. I imagine a real estate attorney could tell you what to expect.

I'm also curious what will happen with the 20% units. Will the current landlord keep them? Or would the new condo association own them?

What about tenants who don't exercise their option to buy? Is there a non-eviction agreement? Would the current landlord just hold onto those units or would they be sold to outside investors?

randomstring

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #2 on: August 20, 2017, 01:20:06 PM »
Seems like you'd really need to know the terms of the land lease to make any informed decision. I've heard some condos down in Battery Park City go for well under market rate because the land lease isn't perpetual, so eventually all the buyers there will have to deal with that. I imagine a real estate attorney could tell you what to expect.

I'm also curious what will happen with the 20% units. Will the current landlord keep them? Or would the new condo association own them?

What about tenants who don't exercise their option to buy? Is there a non-eviction agreement? Would the current landlord just hold onto those units or would they be sold to outside investors?

We will definitely need a real estate lawyer; I was hoping to bring one in later in the game. Sounds like it will have to happen sooner. Any lawyer recommendations?

The offering plan is non eviction. The units will be sold with tenants in place if tenants decide not to buy. Our unit is technically rent stabilized, but at a pretty high price ( higher than our rent ). Another option is to stay put and see if they will want to buy us out, but at very high stabilized rent this option is not very attractive. ( we currently pay 3200/month, which is slightly under market.  Stabilized rent is at 3800/month which is over market rent for unrenovated 1 br. )
« Last Edit: August 20, 2017, 01:22:30 PM by randomstring »

humbleMouse

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #3 on: August 21, 2017, 10:34:04 AM »
Whatever you do, for the love of all things holy and sacred do NOT buy it with cash!!! Take advantage of low interest rates. 

Think about it - if you can lock in a 4% or lower interest rate (totally do-able) - and inflation is between 2-3% depending on who you believe - then you are effectively paying 1-2% interest on a mortgage. 

4% - inflation(@2-3%) = 1-2% effective interest. 

You can save the rest of your cash so you can have a flexible lifestyle and possibly buy more real estate in the future.  Don't use all your cash to buy it!!

randomstring

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #4 on: August 21, 2017, 06:03:12 PM »
I am curious about cash offer not being helpful. From things I have read on the internets and heard in conversations cash is the king in NYC. Allegedly, in condo conversions, cash deals are favored, since mortgage options are limited in a building that is not 80% sold.

But this is all hearsay. If someone has actually dealt with this, I would love to know more.

We did more research on the possible land lease increase. The land holder has issued a bond, which, while not specifying the amounts for each building ( several dozen buildings ), does specify projected earnings.  Double by 2040 or so. Our building should be up for renewal either this year or next, assuming uniform lease duration ( the bond specified 15 years ), and that the lease start date coincides with building construction date. This is not very encouraging at all ( and makes me wonder why on earth apartments around here are not even cheaper. )

randomstring

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #5 on: August 21, 2017, 06:08:55 PM »
Ps: just to be clear, if we don't buy this apartment, we will probably not end up doing anything interesting with the money. Maybe buy some mutual funds or something along those lines. Our employers make it very very difficult to trade ( need two compliance departments to approve trade on the same day and execute it. A real pain -- we leave stuff sitting in cash way longer than reasonable because of this ).

Another Reader

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #6 on: August 21, 2017, 06:29:26 PM »
I would be very surprised if something on a land lease can be financed.  You certainly aren't going to get a conventional mortgage.

You already know you are dealing with "shady" people.  I would talk to other tenants and see if this offer can be refused by the majority of tenants and business can continue as usual.  In the meantime, you do need to see a real estate attorney familiar with leasehold interests in Manhattan.

With This Herring

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #7 on: August 21, 2017, 08:33:58 PM »
PTF

alexpkeaton

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #8 on: August 22, 2017, 09:28:09 AM »
The cash offer will not buy you much (if anything) in terms of negotiating power.  The seller gets all their money on the day of closing regardless of if you pay cash or not. 

Cash offers are preferred due to the lower risk of failing to close. We were actually the highest bid on an apartment, but the seller chose a lower cash offer because of this. In his case I'm sure he was particularly sensitive to this, as a previous sale fell through when the buyer's financing fell through due to a job loss.

alexpkeaton

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #9 on: August 22, 2017, 09:31:06 AM »
Our employers make it very very difficult to trade ( need two compliance departments to approve trade on the same day and execute it. A real pain -- we leave stuff sitting in cash way longer than reasonable because of this ).

Sounds like you both work in investment banking. I use Wealthfront because as a fully-managed service it avoids the compliance headache. I can give you a referral code if you like. My company also has list of ETFs that are exempt from compliance requirements.

alexpkeaton

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #10 on: August 22, 2017, 09:33:45 AM »
We will definitely need a real estate lawyer; I was hoping to bring one in later in the game. Sounds like it will have to happen sooner. Any lawyer recommendations?

I'll PM you the info for the lawyer we used.

Lucky Recardito

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #11 on: August 22, 2017, 09:42:19 AM »
I'm not familiar with the land-lease or the rent control bits, but here's the consideration I'd throw into the pot: in my city, apts-converting-to-condos are a risky buy because of the lag in having a condo association take control. The developer (in this case, I'd guess it's the current property management company) maintains control over building maintenance and HOA/assessment $$ until a certain (high) percentage of units are sold. Depending on the market, I've seen this take years... during which time the developer defers maintenance because they don't want to spend money, and the current homeowners can't do anything about it. And then when the HOA finally wrests away control, they find they have a bunch of deferred maintenance to take care of AND that the assessments were set artificially low by the developer to make the purchases look attractive, but they're not high enough to properly maintain the building. I've seen assessments double or triple after the developer's out of the picture.

All that said, I know NY real estate is a special kind of crazy and the goods may outweigh the worries. Good luck!

alexpkeaton

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #12 on: August 22, 2017, 09:53:48 AM »
I'm also curious how you're rent stabilized. I thought units came out of stabilization once the rent passed $2,700/month. Is there any reason a landlord would leave an apartment in the program once they're no longer legally obligated to?

I'm also curious if you have a sense for whether the offered price is a good deal? Would it be worth it to buy an apartment of one of your neighbors who declines to purchase as an investment? I suppose whether it's a good deal depends a lot on maintenance projections and the lease terms.

Please do let us know what you find out. I'm very curious. Do you mind sharing what building this is?

nippycrisp

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #13 on: August 22, 2017, 12:46:14 PM »
Let me see if I get this right - you are considering putting a tremendous amount of your liquid, otherwise-investable resources into a real estate play. You (I am assuming based on you asking this question here) are not a savvy real estate investor. Having said this, you are considering making a deal with people you describe as sketchy. These people are professionals at evaluating property, and know much more about the building than you do. Knowing all of these things, this for-profit organization has offered you a price that you find attractive (at least enough to form a starting point for negotiations). That's it, yes?

If this doesn't give you pause, let me ask you another question that might help you resolve your dilemma: which would hurt you more - passing on a good buying opportunity and continuing to rent elsewhere while watching your old place increase in value or buying the place and then finding out there are tremendous costs in deferred maintenance (requiring expensive special assessments), legal issues that are now the new HOAs problem, etc.?

 

randomstring

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #14 on: August 22, 2017, 07:51:54 PM »
Thank you everyone for replies! Very helpful.

To address some questions:

Yes, the owners are absolutely shady.  PM me if you want to know who they are (hint: they are large enough to their own wikipedia entry). Quite frankly, however, I have yet to hear of a non-shady developer in the city.

We have no interest in becoming a landlord. We are interested in living in the area for the next 20 years and want to reduce our monthly burn rate from rent. Our rent has gotten to the point where NYT rent vs buy calculator has moved towards buy. We are not necessarily interested in actively managing the apartment money either (in fact our jobs explicitly prohibit this). And no, unfortunately even passive management like Betterment and Wealthfront is not an option. We can buy some ETFs (if approved, does not always happen). We can buy some mutual funds. Not particularly attractive. We cannot buy options, or short, or participate in IPO or a laundry list of other exclusions. We are only allowed a handful of transactions a year.

Re rent stabilization -- my grasp of the law is tentative, but the building receives active tax abatement (it is an 80/20 building). I believe while the abatement is in place, the stabilization, which applies even to expensive units, remains in place. At this point it is mostly academic, tbh. The legal rent is definitely not attractive ($3800/month for un-renovated 1br). Our current rent is slightly under market at $3200/month.

Someone has brought up a good point -- what am I hoping to find out by posting here. Here are more concrete questions:

1. How do you value an apartment inside a building if pieces of information are missing (e.g. the state of the furnace, for example). In a private house I'd have hired an inspector. I had hoped other tenants would have organized and hired someone by now (its been 1.5 months since red herring has arrived), but no dice.

2. This is pretty specific -- if someone has looked into land leased building purchases (esp. in NYC), how does one find out the terms of a specific land lease. This information is not in the offering plan.

3. Stories/anecdotes of living through non-eviction conversion. Almost all buildings in the area evicted tenants before conversions; in place conversions are rare.

In general, we are pretty tame in our investments; however we do need a place to live (and want to stay in school zone, which is small). Sounds like the devil is entirely in the details and we might need to pay a lawyer just to understand the offering plan.

randomstring

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #15 on: August 22, 2017, 07:59:01 PM »
PS: Where *should* I be asking this? The NYC specific places (e.g. curbed) are a bit trolly.

Another Reader

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #16 on: August 22, 2017, 08:31:54 PM »
What does not seem to be clear here is that you are not buying a property.  You are buying a leasehold interest in a property.  When the ground lease expires, the landowner gets the building back.  You get nothing.  The lease may extend a few decades into the future, but as you draw closer to the end of the ground lease, the value of your interest drops, eventually to zero.  It's unsaleable in the last few years.  About all you will be able to do is lease it out to someone else to the end.

You can view this as prepaying rent over the life of the ground lease.  Run that calculation (once your attorney has analyzed the ground lease to see what the actual term of possession is) and see if you want to pay that rent for that period of time.

ETA:  You are dealing with "shady" people by your own statement.  Expect litigation over the ground lease and its' interpretation.  The ground owner wants to recover possession of the building sooner rather than later so the property can be sold or leased again.  Can you afford expensive litigation?  As you get closer to the end of the lease term, no one will want to pay to maintain the building.  Why should they?  They don't own anything, and it becomes apparent to them at that point they are just renters.
« Last Edit: August 22, 2017, 08:37:38 PM by Another Reader »

alexpkeaton

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #17 on: August 22, 2017, 10:20:44 PM »
2. This is pretty specific -- if someone has looked into land leased building purchases (esp. in NYC), how does one find out the terms of a specific land lease. This information is not in the offering plan.

It's material information. Without it there's no deal, simple as that. If you retain a lawyer I'm sure he'll just ask for it, so you might as just ask for it yourself before you spend money on a lawyer. And I can't think of any (good) reason they'd refuse. The condo association is going to need it once it assumes the lease from the current landlord.

Mr Mark

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Re: Our rental building is going condo. Should we buy out our apartment?
« Reply #18 on: August 22, 2017, 11:08:11 PM »
This sounds like a really terrible deal.

You have children but want to lock all your liquid assets into owning a one bedroom apartment? In a building that's not freehold?

Mind blown.