A Better Tomorrow? New Buyers raise their due diligence game but will it be enough?

The New York Times demonstrates their journalistic prowess with their article about this new generation of buyers who are taking it to the streets with their new fangled excel spread sheets and background checks of developers in order to find an apartment. In other words they are acting as their own brokers. Here’s my analysis of the story.

February 4, 2007
Young Buyers, Prepared and Fearless
By CHRISTINE HAUGHNEY
DANIEL AND LUCIANA HYMAN are quick to admit that they are insufferably sentimental about how they fell in love. Seated on the half-finished floor of their Midtown co-op, they relate every detail about how they met at a nightclub in Rio de Janiero, how he asked her to move to Manhattan in the sculpture garden at the Metropolitan Museum of Art and how he proposed on a trip to Paris at the Eiffel Tower — well before Tom Cruise and Katie Holmes became engaged at the same spot.
But Mr. Hyman, a 27-year-old trader at Credit Suisse First Boston, and Mrs. Hyman, a 24-year-old elementary science teacher at the Grace Church School, lose all of their sentimentality when they talk about real estate.
After online research into the financial state of more than 100 apartment buildings, tours of 30 condos and co-ops and analysis of minutiae like projected future maintenance payments, they recently closed on an $875,000 two-bedroom co-op in Midtown. As owners in a building with relatively lenient policies, like 10 percent down payments and flexible sublets, the Hymans talk about their apartment as a strategic investment that they someday plan to turn into cash.
“We’re more comfortable with taking on debt and paying tomorrow,” Mr. Hyman said. “If the cards topple, you can rent your place out and go somewhere cheaper.”

Mr. Hyman is correct that if the house of cards falls, he has the option to rent their apartment out. Currently rental vacancies are almost non-existent. The one barrier to entry is the rent. Will the rent Mr. Hyman is charging cover the mortgage payment? Depending on the market it may or may. If doesn’t, Mr. Hyman will have to dig into his kid’s college fund to cover the mortgage. And what if the only place cheaper to live is out of state. Do they really want to commute from the Poconos?

There is little talk about the apartment as a romantic nest for newlyweds, and in that they are not unusual. Brokers say that younger buyers, especially those under 30, often approach their first home with cold calculation and an appetite for risk more often associated with real estate moguls.
While this approach to buying may be typical of Wall Street analysts and bankers who are used to approaching deals with extensive research, younger buyers with jobs far from financial fields — wedding photographers and advertising executives, for example — are not relying only on the advice of their brokers. In addition, they are coolly investigating the backgrounds of their developers and their buildings’ histories. They treat these purchases first as portfolio diversifiers and only second as homes. With that in mind, they are keeping their money in the bank and borrowing as much as possible

“You have a new kind of buyer today,” said Dottie Herman, the chief executive of Prudential Douglas Elliman Real Estate. “Twenty years ago, it was ‘Pay everything off in cash and have no debt.’ Ten years ago, it was ‘Have some debt.’ If they want something now, they figure out a creative way to finance it.”

I know what these “new buyers “ are trying to do. And they are no different from any of the other buyers who keep refinancing

What these new buyers want to do is play the OPM game, where they place the burden of financing onto the lender. Meanwhile, the cash that isn’t locked up in their homes is readily available to invest elsewhere. It is a great idea in theory but when you are dealing with the uncertainty of our economy, you are looking at a complete clusterf**k.

The mind-set of younger buyers may dominate the patterns of buying in New York City for years to come. Their liberated attitude toward borrowing is helping to keep prices stable. While buyers of the past may have coveted co-ops, younger buyers find condominiums more appealing because they allow for flexible financing and their sales don’t require board approval.
At the same time, younger buyers are exposing themselves to more risk because they are taking on so much debt that if prices fell, they could be caught with no equity in their homes.
“The whole attitude is different today,” said Barbara Fox, the president of the Fox Residential Group in Manhattan, who started her real estate career before these under-30 buyers were born. “These buyers have never lived through bad times.”
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These “New Buyers” are scarfing up debt like Rosie O’Donnell at an all you can eat Chinese Buffet, so there will be significant number of them living through the bad times once things start to get rough.

Younger buyers have such different approaches to real estate that they are prompting developers to change the way they sell apartments. Some are hyping condominiums with the promise that buyers can eventually rent them out. Others are making sure that their prices are as close as possible to similar projects because they know younger buyers have researched every comparable condominium in the neighborhood before they walk through the door.
Real estate developers and brokers are also using this information to shape how they negotiate deals and approach future projects.
Louise Phillips Forbes, a Halstead broker who represents the converters of 296 East Second Street, sent the developer the feedback she got from a potential buyer about the building’s penthouse, which was lingering on the market. The bidder, a Goldman Sachs investment banker and first-time home buyer, put together a one-and-a-half-page analysis justifying her bid, which was 11 percent lower than the asking price.

Yeah. That developer put that analysis to good use. As toilet paper!

She based her case on data from PropertyShark.com, an online real estate company, and interviews with brokers about how long it had taken to sell apartments in five nearby buildings. The bidder argued that she should pay less because it would be harder to resell a luxury apartment on the Lower East Side. The argument was valid enough that Ms. Forbes thought the developer might want to negotiate.

When the developer got the analysis, he or she probably wanted to wring the broker’s neck for wasting their time. I know I would. Negotiation is really not an option for this developer because an arm and a leg was presented in exchange for this property and that developer is going to demand top dollar for the units.

Since then, Ms. Forbes has received three higher offers, and last week, the developer accepted one for the full asking price.

I wouldn’t be surprise if the developer was pissed off that the offer was submitted by an INVESTMENT BANKER FROM GOLDMAN SACHS. Don’t you think developer’s read the newspapers? If I were the developer I would have the Ms. Forbes call that buyer and give her a big f**k you by letting her know about those offers.

Ms. Forbes said the experience had made her take younger buyers — and their Wall Street bonuses — far more seriously and had made the developer realize how closely younger buyers were examining prices. “He might just need to negotiate on the product,” she said. “It’s a very valid argument.”

Valid Argument nothing. The LowerEeastside has been gentrifying at a rapid pace. Those restaurant supply stores on the Bowery are taking the hint and taking a hike whether they want to or not. The developer knows what this property is worth and knows what he or she can get for it.

Nora Ariffin, the Halstead broker who helped Ms. LaHaie find her apartment, said younger buyers were often more willing to search for listings, instead of relying on her to do that. Still, she often encouraged Ms. LaHaie to let her follow up to weed out apartments with problems. Ms. Ariffin said she had not run into this situation with older buyers.
“The younger buyers like Naomi will do their own research,” Ms. Ariffin said. “They’re more adventurous. Older buyers haven’t e-mailed me listings outside of what their parameters are. In general, they don’t do their research as much as Naomi was.” ‘

Yeah. Those old people have no idea what the f**k a computer is. If you ask if they have a mouse to their computer, they will scream of an exterminator. They used chalk and slate, instead of excel and they chose an apartment by throwing darts at a wall full of photos. This is such a gross generalization. In my experience I have a dealt with people who are older and they are well aware of the concept of email and looking for listings online. The only difference is that that the older generation is hell of a lot wiser and unwilling to do anything stupid.

While many buyers under 30 are getting financial help from their families, they are also turning to aggressive financing. Data collected by the National Association of Realtors show that nearly 65 percent of first-time home buyers finance more than 95 percent of the cost. A first-time buyer is also far more likely to have a mortgage that begins with an attractive interest rate and adjusts periodically.
Oh, this going to end so badly.
Because co-ops in New York often require deposits of 20 percent, younger buyers tend to look at condominiums that require only about 10 percent and allow for creative types of mortgages.
In the most extreme cases, Joseph Gallagher, a Corcoran Group broker in Brooklyn, has had clients with high credit scores finance everything, even their closing costs. He finds that some developers are willing to take down payments as low as 5 percent to fill their apartments.
In the wake of the recent record Wall Street bonus season, brokers say that buyers who have made enough money to put down 20 percent are choosing to keep their money in their pockets.
“Younger buyers want to retain their cash,” Mr. Gallagher said. “They don’t want to empty their bank accounts for a deposit. They want to finance 100 percent if possible.”

This is a new generation where having credit cards and amassing enormous amounts of debt is cool as long as you can pay for it tomorrow. What these younger buyers are doing is throwing this cash into the stock market where they can get higher returns. The risk of course is if the stock market takes a massive hit ala dot com meltdown or interest rates kick up and the monthly payments begin to spiral out of control. And whatever they earn from their jobs and investments can barely cover those payments.

But no one really cares. As the article indicates, developers are bending over backgrounds allowing for aggressive financing and bowing down to the demands of the buyer to have the option of renting out their units. And brokers could care less what their buyers do as long as the check clears.

One of his clients, Charlotte Lewis, a Brooklyn-based photographer, was more conservative than most about financing her condo. She spent six months looking at nearly two dozen apartments in Brooklyn. With her savings and help from her parents, she put down 20 percent for a $340,000 one-bedroom on the outer edges of Williamsburg that she thought was distinctive enough to retain its value, even in an area with many new buildings.
She sought help from a mortgage broker in her rental building to negotiate the best interest rate, and now pays about $1,630 a month. But even with all this thoughtful research, she rattled her family when she told them about the kind of mortgage she had chosen for what she considers a five-year investment.
“My parents freaked out when I said I was doing a seven-year, interest-only ARM,” she said. “They’ve always bought properties that they’ve owned for life.”
In the end, they agreed with her that it was smarter to own than to rent — they even paid for the crown moldings. Since she moved in December, Ms. Lewis has painted her walls a creamy Edgecomb gray and has framed watercolors she painted as a child. She’s feeling more comfortable with her decision every day.
“I really think that real estate will not go down,” she said. “At the very least, it will stay the same. In the meantime, I need a place to live. So the worst-case scenario still isn’t that bad.”

We don’t know what tomorrow will bring. Right now we are dealing with an out of control war, a dying dollar, oil prices, terrorism and a slowing economy. Even if those people are just buying a primary home they are playing a juggling act by taking aggressive and creative forms of financing. Sooner or later they will have too many balls to in the air to control.

I know there are a lot of you would wish I would shut the hell up and I would be more than happy to table this discussion, however it appears that a lot of people out there are not listening. So I am going to keep doing my Paul Revere act.