Warburg Blog

This week one of my agents was involved in a competitive bidding situation for an apartment in Brooklyn. Her buyer won the bidding TWICE, and was told each time that the property was his. Then a higher offer came along and it started over! Finally the third time he just gave up and lowered his offer rather than raising it. As real estate markets all across the country heat up with decreased inventory, many properties will generate enthusiasm from multiple buyers. It is what happens THEN which tests the professionalism and integrity of both the seller and the agent.

Here in New York, where commerce has always been king, it seems there is a lamentable sense that somehow money trumps all. While of course you keep your word when $5000 is at stake, the equation is not quite so clear when it is $50,000, and if we are talking about $100,000, then anything goes. Integrity all too often has a price. The idea which so many of us grew up with that your word is your bond seems to have been replaced by the notion that greed is good. Personally, I am not convinced that greed is good, especially when it results in outcomes like the one described above. I think most people are comfortable with a process in which they know the rules, and feel some confidence that those rules will be adhered to. This requires that both sellers and agents adopt certain basic behavioral guidelines:

* As agents it is our job to suggest an appropriate process for managing multiple offers to our sellers. There are many ways this can be done, and it is not my goal in this blog to enumerate them. The point I want to make here is that we select a process and we STICK TO IT! It happens too often that a process is advertised as best and final but turns out to be neither. So…

* Once a process is advertised as best and final, that is what it has to be. The agent and the seller MUST agree in advance that once the offers are collected and a winner is chosen that no other bids will be taken. Imagine the chaos in the auction industry if additional bids were listened to once the hammer had fallen. But that is what happens ALL THE TIME in our business. And truly, it lacks not only integrity but also common sense. All experienced agents know that a buyer who jumps the queue to upset a deal already in place is FAR more likely to drop out. Since the buyer who has been knocked out of first place is usually furious at this point, the seller may well be left with nothing.

* In real estate as in all things, a reputation for integrity is worth its weight in gold. While we as agents cannot control the choices our principals make, we do (or should) have influence. An agent who says “Yes we told you that you have the deal but you know there is really no deal until contracts are signed” is legally accurate but not likely to make a lot of friends among his or her colleagues. And while buyers and sellers come and go, we deal with each other all the time- month after month, year after year. You never know when the person who felt unfairly treated in your competitive bidding situation may have the listing or piece of information you need. Relationships are everything in our business, and once relationship bridges are burned they are not easy to rebuild.

We all respect people who say their word is their bond and then actually mean it. The sale or rental of real estate is no different in this respect from any other business transaction. Don’t call something a best and final if, in your mind, it is neither. Under those circumstances it is far better simply to solicit offers and then choose among them. Doing that also has its dangers but at least one of them is not reneging on an agreement. Reputations are hard to build and easy to tarnish. And for all of us, agent, seller, and buyer alike, our reputations are the most valuable assets we possess.

“It’s just business.” For all the times I have heard those words uttered, I still do not really understand what they mean. Does that mean that our ordinary reactions should not arise because it’s a professional situation? Does it mean that the behavioral standards we expect of ourselves and others are suspended because it is “just” business? A volatile and active real estate market, like the one in which we currently find ourselves, gives both principals and agents plenty of opportunities to contemplate this conundrum. This past week a number of difficult situations arose at Warburg which inspire me here to lay out a few guidelines for what does and doesn’t seem like fair and appropriate behavior between customer and agent:

- Don’t change horses in midstream unless there is a TRULY compelling reason. This week one of my agents, after introducing a customer to a property, making an opening offer, and negotiating for weeks to try to bring the parties together, discovered that the buyer had decided to ask another agent to continue the negotiation. We all understand that buyers get frustrated when they cannot get the property they want for the price they want to pay for it, but, as the messenger of that information, we are often unfairly blamed. If you as a buyer truly believe your agent is not negotiating skillfully on your behalf, talk to him. Try to arrive together at a strategy which you agree has the best chance of being effective. Because nine times out of ten, firing someone in mid-negotiation is to no one’s advantage.

- Co-ordinate with your spouse or significant other. If you are using multiple agents in your search (something for which there is truly NO necessity in these days when every listing appears on multiple websites available to everyone), please make sure that you are seeing and/or discussing a particular property with only one of them. It is acutely frustrating for agents to do research on a buyer or renter’s behalf, discuss the property, arrange for a viewing, and then discover after the fact that the buyer/renter is negotiating for the property with another agent. It can be easy to forget, since agents get paid by the transaction rather than by the hour, that we ARE professionals and that our time is valuable. The buyer/broker relationship is a partnership, and the greatest likelihood of success always exists when the partners are working together.

- On that note, another experience one of my agents has had in the last few weeks: the buyer who wants to see everything, whether or not they have any likelihood of buying it, or even the resources to do so. Ours is a service business, but we are not tour guides. Many buyers may be curious about what properties at twice their budget look like, but it is not fair to ask an agent to spend a day showing them unless a real possibility of purchasing or renting them exists . As agents, we never want to say no, but we do hope to put our time to effective use.

As a buyer or seller, you have the right to expect a knowledgeable, professional agent who gives you clear well-documented advice on how to achieve your real estate goals. If you feel you are not being adequately represented, please talk to your agent about it. Sometimes the fit is not right. It may be a tough conversation, but it respects our professionalism and dignity to be treated as peers. We hope to receive the same consideration for our time and expertise which our clients and customers look for in THEIR professional lives. It’s not “just” business; it’s a critical life transaction – highly important for both the buyer AND the agent. Nothing is more important than that.

Privacy is much harder to come by than it used to be. With all the major newspapers and websites featuring significant sales on a daily or weekly basis, almost every transaction of substantial proportions runs the risk of being featured in the media. For publicity shy buyers and sellers this exposure can be both unexpected and unpleasant. Frequently, the first angry phone call when such an article appears comes to the real estate agent. How could you have divulged this information, we are asked? The answer is, we didn’t!

Six or seven years ago co-op sales, which had previously been treated as stock transfers rather than real estate transactions, became matters of public record. Since then it has been an easy job for reporters to scout the transfers every day for transactions which they deem press-worthy. And since co-ops rarely permit purchases in a trust or corporate name, the reporter can see not only the price but the names of the principals as well. From there, it is a quick task to Google the names and obtain full biographical information about both the buyer and the seller. In the old days, reporters would call us about deals, when they heard about them through the grapevine. Most agents, knowing that their clients would prefer to retain anonymity, declined to speak.

Our concern, then as now, is the privacy and well being of the people we represent. But today we are cut out of the loop; the reporters no longer need us for the basic information. While most of us still prefer not to discuss our clients or our transactions, our choice to talk or not is usually more about damage control. If we know the story will be written in any case, we hope to spin it in the way which will be LEAST difficult for our client to swallow.

As agents we are still frequently asked to sign non-disclosure agreements. While these are sometimes a necessary evil, they have no impact on whether the final transaction gets press coverage or not. At Warburg, I always make sure these agreements clearly limit our responsibility once the transaction becomes a matter of public record. And I try to warn our clients and customers that, if they buy a co-op, we have no control over whether or not the press will cover their transaction.

The situation is different with condominium sales, but here too caution and care are necessary. Since condominiums DO permit purchase of the unit in a corporate name, most wealthy individuals buying condos tend to create single purpose corporations in which to hold this asset. While this provides some protection, persistent reporters (and remember, this is their job!) can obtain the details of the corporation. So it is critical for the buyer both to appoint someone else as the corporation’s manager or executive, and house the corporation at a different address. Too often, a buyer will name himself as the executive or give his office address as the corporate address. This makes it easy for anyone with a little determination to pierce the corporate veil and determine the actual owner. What we recommend to our buyers is that they appoint a fiduciary, usually their attorney, whose name and address can be used to front the corporation. That way it is very difficult for any outsider to determine who the owner actually is.

Throughout the county newspapers publish the details of real estate transactions. As real estate has become more of a national pastime, these features have grown more popular and numerous. New York, as an international epicenter with high priced, high profile transactions, makes particularly good copy. So the old rule of caveat emptor (let the buyer beware) applies here! Real estate agents cannot control either what the press writes about or what the public discovers. The names of the purchasing and selling individuals or entities, the closing date, the price, the financing – all are available on a number of public websites within days or weeks after the transaction closes. It is, in our increasingly public era, just a cost of doing business.

Does the direction of January predict the course for the year? Wall Street where the adage originated thinks so. The first month of 2013 scored impressive gains with the S&P up 5.05% and the Dow gaining 5.77%—signaling the best January since 1987 and rising above 14000 for the first time in over five years. In Manhattan’s residential marketplace, a similar scenario is occurring on the Main Streets of our city with 859 contracts signed in the first month of 2013, up 30% compared to January 2012 and the highest January according to Noah Rosenblatt since his online UrbanDigs began compiling real time analytics in 2009. Following a gangbuster December when players raced to close before January 1 tax changes, and contrary to expectations for a beginning of the year slowdown, properties in January were snapped up by buyers who competed aggressively and speedily for a limited supply of homes.

Will competitive bidding become as commonplace in 2013 as it once was in 2007 when the market was at its peak? Today as then as high buyer demand and low quality inventory converge, when a well priced offering comes to market, crowds of buyers and their agents rush to view. Within days, brokers are collecting multiple bids, and the property goes to contract within weeks. For sure there are similarities to 2007, but there are also notable differences.

In 2007 at the height of the market after successive years of escalating prices, buyers could hardly imagine a downturn in Manhattan real estate. A combination of windfall Wall Street bonuses, easy lending practices and exotic mortgage products fueled the run up in prices from 2003-2007. Rates hovered at 6%, interest only and no income verification loans were prevalent, nearly anyone with a pulse could secure a mortgage and lenders readily approved nearly all buildings. Buyers leveraged highly with little concern for risk, and apartments flew off the shelves, often trading 10-15% above asking prices.

Current interest rates, while inching up slowly remain at historic lows—as of this writing 3.5% fixed for 30 years. But the lending industry is over regulated today. Both borrower and building are scrutinized exactingly and repeatedly, and clearing to close is fraught with delays. Citibank’s Jeff Appel observes, “In the last year, lenders have become better at interpreting the new blitz of regulations. But as the CFPB (Consumer Finance Protection Bureau) prepares to roll-out the long awaited QRM (Qualified Residential Mortgage) guidelines, we will have to see if there is any net positive traction for consumers who have struggled while seeking a new mortgage.” At the same time, there’s considerably less cash bonus money around to fill shopping purses. With few exceptions, financial professionals are being paid with stock options and little or no cash, and many firms are capping bonuses or deferring them based on long term performance. 

Today’s buyers are more risk averse than their predecessors. Instead of frothy excess, they are seeking value, and when it surfaces, they are acting quickly and assertively to purchase. The current climate is indisposed to low ball offers and favors cash buyers first, and second those purchasers who can waive a financing contingency.

While there is increased velocity in all sectors of the market and all price ranges, not all properties are uniformly rushing to contract. Indeed, properties in mint condition are achieving astonishing results. Two from last week are noteworthy examples: a stunning high floor prewar 6 with a terrace and views on Park Avenue in the 70’s is purportedly going to contract 20% above the asking—a cool $1M over the $4.595 ask; in Tribeca, a Hudson Street loft designed by its architect owner received the first of several full price $3.395 offers during the first hour of the first open house. Meanwhile other homes that are either overpriced or have obvious shortcomings like a lack of sunlight, poor condition, or an out of the way location are being ignored.

In the current climate where the pace of activity is quick, the market poses challenges for everyone. Often it takes losing a property for a buyer to understand the elements that go into an offer, and that there are no second chances with Best and Final negotiations. Sellers need to appreciate that an inflated asking price not only diverts bidder attention but fails to capture the possibilities presented in the first weeks of marketing. Both principals need to acknowledge that a rising market creates problems with appraisals which are coming up short with more frequency.  Appraisals that fall below the contract price not only affect the karma of a transaction, but also negatively impact the loan to value ratio, significantly reducing the amount a lender will lend; most vulnerable are jumbo loan borrowers and buyers of co-ops which limit financing to a specified percentage of the appraised value. 

A spreading optimism is feeding the current market. As the economy improves, consumers who feel more secure are more likely to make a move. Maybe even inventory of resales will grow. While global uncertainties and a 7.9% U.S unemployment rate will keep overconfidence in check, January is a likely barometer for how the year will progress: 2013 figures to be very good. 

The co-op Board experience, largely unique to the New York area and, to a smaller degree, to Chicago, presents more challenges to broker, buyer, and seller alike than any other aspect of our real estate business. There is no negotiation. While each building has a list of requirements, one can never really be certain what each particular building is looking for. Buildings do tend to have personalities, but they can change as different individuals rotate on and off the Board. Sometimes Boards seem to evince an almost total lack of awareness of housing discrimination prohibitions. So when, as often happens, a buyer asks one of our Warburg agents what the building is looking for, we can never honestly say we are 100% sure. Boards accept people who surprise us and they turn down people who surprise us. It is always a little bit of a crap shoot.

As agents, our role is to facilitate. Too often in the past the agent has been a more fastidious, and sometimes inappropriate, gatekeeper than the Board. Agents will say “He could never get into that building” when, in fact, perhaps he could. It is a point of pride for me that at Warburg we consider it a sort of moral obligation to try to eliminate perceived prejudices in the way applicants are handled. Because, as I said above, you just never know.

So here are a few words of advice. First, for buyers: no one can promise you a particular outcome. A skilled agent with a real understanding of how Boards work can substantially improve your chances, but there is no way to eliminate some element of uncertainty. That is simply the nature of the process. What you CAN do is make sure you present a perfect package. That means working closely with your agent to make sure your financials are absolutely clear (and every number is fully explained and accounted for) and that your letters come from people who really know you and are able to write articulately and in some detail about different aspects of your life. The best letters come from co-op residents (or even better, Board members) in the neighborhood. However if you don’t know people in the neighborhood, don’t worry. Just make sure the letters are detailed and descriptive. And PLEASE, don’t write them all yourself. Board members are not stupid; they can see an identical style moving from one letter to the next. And they DO, increasingly, contact the references to verify the content of the letters.

Different buildings do have different personalities. Some are more focused on money, some on neighborliness. So there is no way to say how much you need to show in assets or income to be acceptable to a Board. Every building is different, and every applicant is different. What would be an acceptable financial profile in one applicant with a particular set of social and business connections might be unacceptable in another. But there is no situation in which a logical, attractive, clear and polished package does not exert significant influence. Buyers, please remember that before you explode to your agent that you will not provide ONE MORE THING! It’s an onerous process, but every co-op owner has gone through it before you.

As a seller the most important thing you can do is choose a likely candidate. Especially today, many sellers have options. Price certainly counts, but we always urge our sellers to remember that a bit less money, if it comes with a better overall profile, may be the smarter choice.

In the end, the buyer, the seller, and the agents are all working towards a common goal: closing the sale. Co-op Boards are powerful, and they can at times seem arbitrary. Over the years, thanks largely to the professionalism and expertise of agents, co-ops have developed a far broader constituency: married and single, kids and no kids, straight and gay, white and non-white. We at Warburg are proud of the work our industry does to make the Board process as clear and manageable as possible, even if we cannot control the outcome. Co-ops contain many of the stateliest and most beautiful residences in New York. They will always be in demand, so the Board process will always be a part of our business. Assembling a package is like putting a 500 piece puzzle together: frustrating, time consuming, and ultimately satisfying; I still love that “Aha” moment when it all falls into place! The outcome may be out of our hands, but if all the parties work together to shape the process we hugely improve our chances of success.