No Heat Needed

Posted on December 27, 2011 by Jay Harper

I went to the house rather early yesterday morning – at about 7:45, just after the sun came up. I walked into the house and it was pretty warm inside despite the fact that it was 42 degrees and windy outside and we don’t have heat in our building yet. Given that the sun had just come up the warmth wasn’t due to solar heat gain either…

Besides a few light bulbs on, and a small heater down in the uninsulated part of the cellar (to keep the pipes from freezing) there wasn’t much the the way of heat sources, yet the house was still warm. It was a little on the chilly side, but we like that – that’s pretty much how we want to keep the house during the winter months. Cold enough to warrant wearing a light sweater or hoodie, but not so cold that our hands get cold.

It appears the heat was coming from the building next to ours – 166 West 123. Despite the fact that 166 is sandwiched between two cold, unheated shells it remarkably has no insulation in the party walls. I can’t imagine what their heating bills must look like – they’re radiating so much heat that it’s enough to keep multiple buildings warm. All the buildings next to them have to do is insulate well and trap 166′s heat.

I would feel guilty about having our neighbor heating our building for us but it’s costing them less than when our building was open to the elements and the party wall was freezing cold. The core principles of conservation are Reduce, Reuse, Recycle. To that end we’ve Reduced our neighbor’s energy usage, and Reused their radiated heat. It’s pretty much a win-win.

Even without a sweater I found the temperature yesterday to be pretty comfortable. What that means is that we probably won’t need to turn the heat on in our building until it gets down into the 30s and even then it doesn’t look like we’ll need much heat.

The moral of the story is closed cell foam is pretty incredible – and while it’s a bit more expensive upfront, it’ll save us far more money than it cost.

UPDATE:

It’s gotten colder since I wrote the post and I’ve figured out the house is comfortable down to roughly freezing. I was comfortable at 35 degrees outside with a 10 mph wind, but it was maybe 5 degrees too cold when it was 27 outside with a 14 mph wind. Even at 27 out the temperature wasn’t that bad. A hoodie or sweater would have made it comfortable enough except hands would have been a bit cold. And as a temperature for sleeping – it could even get colder inside with a proper down or wool blanket.

UPDATE #2

Today we finally got thermometers. The temperature outside was 32 degrees but inside it was 51 degrees on the parlor floor (the coldest part of our unit) and 52 degrees near the window in the cellar of the rental unit (the coldest part of the rental unit). That’s pretty sweet – we get 20 degrees of heat off light bulbs and from the warm wall with the neighbor. We also noticed at lower temperatures the heat gained is even more.

I think I’m going to be pretty comfortable with the house set to the high 50s during the day and the high 40s at night. That means we won’t need to turn on the heat until we’re in the high 30s (day) or below freezing (night). We’ll see what temperature we can get away with when we actually move in…

Cash Flow Issues With Rehab Loans

Posted on November 12, 2011 by Jay Harper

There’s an inherent problem with rehab loans which means the contractor is more likely than not to run into cash flow problems…

With a rehab loan there is no payment until the work is done. And even then 10% is held back until the end of the project. The holdback protects the bank and the home owner, but it creates a difficult scenario for the contractor. The 10% is supposed to be his profit and holding it is supposed to be leverage to make sure he stays around and completes the project. But if problems arise the holdback could mean that he doesn’t have the cash flow to keep the project progressing. Deadlines can be missed, and costs can start piling up.

With most contracting arrangements the contractor gets a deposit at the beginning of the project and that deposit is his cash reserve to help him get through the project since he’ll need to pay for certain things in advance. Thing is, with a rehab loan there is no deposit. This means you need to make sure going into contract that your contractor has a substantial amount of cash in his bank accounts and/or that he has good credit and access to substantial lines of credit. If you’re financing part of your renovation in cash you may be asked to give a deposit on the entire job – not just the portion you’re doing in cash.

One significant risk is if line items come in over budget. In that case the amount over budget will come directly out of your contractor’s available cash and could create cash flow problems.

Another potential problem is if your contractor needs money to cover losses on other jobs or if he didn’t pad the numbers enough to have money to cover G&A items like insurance. In both of those cases his available cash will get depleted and he will start having cash flow problems.

If you ask your contractor to bond the job (ensuring that sub-contractors are paid for their work and don’t put liens on your property) – the bond money will also eat away at available cash. But, contractors who have the cash to bond jobs probably have cash they need to keep the job on track.

When the contractor’s cash flow starts getting tighter you’ll start seeing progress on your job slow down. And the slower it goes the worse the problem becomes since fixed costs are still incurred even though work isn’t getting done. Gradually the contractor can dig himself into a pretty deep hole.

Finances and managing money are a big part of contracting – contracting is far more than just doing good work. The ideal contractor will have a “money guy” who will watch the budget and the cash flow like a hawk and make the contractor stay on budget. If you’re selecting a contractor make sure there’s a money guy that’s part of his team – that could be a construction manager (a “CM”) or it could be a project accountant. Stay away from any contractor who doesn’t have a money guy as a senior member of his team.

Rehabbing a place is difficult enough even when everything goes smoothly. But it can quickly turn into a nightmare if your contractor has financial problems.

How SROs With No C of NHs Get Rehab Loans

Posted on October 27, 2011 by Jay Harper

The other day we went through an SRO-restricted townhouse which did not have a certificate of no harassment. In talking to the broker afterwards the broker insisted financing SROs without certificates of no harassment wasn’t a problem – that they did it all the time. She even cited two that were closed this year including one that was uninhabitable. When I pressed the broker on details the answer was vague but insistent (and even a little condescending).

So I called someone I know who’s a bit of an expert on financing townhouses and SROs and we talked through what might be happening. His take on it is exactly what I expected…

An naïve buyer shows up at one of the broker’s open houses, they’re told the house a legal 1 to 4 family, and hence mortgageable. [The paperwork I was given when I went through the SRO said it was a legal single family, but the broker had conveniently "forgotten" to put their logo on the document so misinformation couldn't be traced back to them.] My mortgage expert and I suspect the following then happens… The buyer is gently guided through the process of buying the townhouse. The broker sends them to particular real estate lawyer, a particular architect, and a particular mortgage broker. The lawyer doesn’t tell the buyer the problems with the house or if he does he downplays them, the architect doesn’t mention potential problems with DOB, and the mortgage broker picks some unsuspecting bank in say the midwest who has no clue what an SRO is and what limitations that puts on the property. A 203(k) mortgage is then obtained, the sale is closed and everyone gets their commissions.

Unlike the loan we got, 203(k)s do not require approved plans at closing. After they’ve bought the place, the buyer goes to DOB to get their plans approved and is told they need a certificate of no harassment since their building is SRO restricted. The worst case scenario at that point is they have to wait 3 years to apply for the certificate, then construction takes another year. Meanwhile they have an uninhabitable building so they’re paying rent on top of say a $6,000 mortgage for a building they can’t use. They can’t afford the payments, so the bank forecloses and they lose the money they put into the building and their credit is ruined.

I’m not saying the worst case scenario is typical, but my mortgage expert friend has seen things like that happen. Banks who write a lot of rehab mortgages in the New York area insist on a certificate of no harassment to close the loan – they don’t want their loans going bad.

Unfortunately that’s typical of the dirty side of Harlem real estate and it doesn’t just hurt the buyers and the banks (and tax payers who’ve insured the loan). It hurts our neighborhoods since buildings don’t get fixed up – they sit there and deteriorate and reduce our quality of life and are a drag on our property values.

If you’re looking for a Harlem townhouse there are a few things you can do to protect yourself.

Work with a buyer’s broker who has experience in the Harlem market – like me
Deal directly with a local bank who has lots of experience doing rehab loans in Harlem. If you can’t get the loan past them, you may be exposing yourself to risk.
Get your own real estate lawyer and make sure they understand issues surrounding NYC SROs really well. Don’t do anything that your lawyer says you shouldn’t do.
Check the SRO status even if the building is 1 to 4 family. Check with both DOB and HPD.
Try to get approved plans before closing. At a minimum file the plans and see what DOB will require for approval.
If at all possible, buy the building in cash. At least then if you have to hold the building while you wait for a C of NH, you won’t be making mortgage payments (and you can get a loan that doesn’t require PMI).

For an all cash buyer it can still make sense to buy an SROs without certificates of no harassment IF they buyer understands what they’re getting into and they’re prepared to wait for the certificate. OR if they’re able to bring the building to an acceptable point under “repairs and maintenance” and they can do those repairs all cash. In fact all cash buyers are the only people who should be buying these buildings.

There’s a lot of gray area between the worse case scenario and the best case scenario. The building could be rentable and the rents could cover the mortgage while the owner waits for the certificate. Or the building could be habitable and the owner could pay a handsome mortgage to live humbly while they wait for the certificate. But sometimes the worst really does happen. Rehabbing a townhouse is hard enough – you don’t need to add to the stress by picking the wrong building.

Every now and then I encounter a buyer who is cavalierly working directly with every listing broker they can find. They don’t seem to understand that parts of Harlem real estate are a still a bit like the wild west and bad things can happen to good people (even people who think they know what they’re doing). Things are much better than they were back in the day, but when you’re looking to buy in Harlem it helps to have a team of people watching your back.

Loans Getting Even Harder For Townhouses

Posted on August 14, 2011 by Jay Harper

I was talking to our mortgage guy at Wells Fargo the other day, and on top of the rehab loan amounts going down over $100K on September 30, there are now restrictions on using rental income to qualify for a mortgage.

We qualified for our mortgage by taking our incomes and adding 75% of the expected rental income. Only with that rental income were we able to qualify for our mortgage. Now people getting loans have to prove that they can pay the mortgage payment out of their own pockets with no help from rental income. That’s a huge barrier.

Take us for an example… We’re not rich, we just invested well when we bought our coop back in ’98 and walked away with (barely) enough to buy a shell nearly “all cash” when we sold our coop in ’09. We were pushing the debt-to-income ratios as it is. Come October the $930K loan we got would drop to $800K, and then the $1,500/mo (75% of $2,000) that we calculated in as rental income wouldn’t count. That would drop the loan we would qualify for by almost another $300,000. We just couldn’t do any sort of renovation for $500K. It would have stopped us dead in our tracks.

There are exceptions to the rules. You can count the rental income if 1) you can show that you’ve managed rental property before, and 2) if you’re a first time home buyer. You can also ask for an exemption if there is an established rent roll for the building and the tenants are staying put. But of course, that’s never the case with shells undergoing major renovation.

All of this is because the banks are worried about the borrowers covering the first few months of mortgage payments. So I asked if an escrow could be set up to cover those months – the answer was ‘no’…

The thing is, even in a case like ours (which pushes the limits) the numbers really do work once a tenant is in place. We’ll be paying slightly more for 3,000 sq. ft. in a townhouse than we used to pay for our 1,350 sq. ft. coop – and rental income is a big part of the reason why the numbers work as well as they do.

What this means for Harlem townhouses is fewer of them will get renovated and the renovations that are done will be lower end “rental grade” renovations. It also means more investors doing renovations and fewer owner occupied townhouses. All of those factors have a direct negative impact on the community.

As always, if you’re affected by the new changes – talk to one or more mortgage experts to see if there are loopholes you can qualify for to get around the rules. There may be factors I’m not familiar with that will affect whether you qualify for the mortgage you need.

Good Overview Of Real Estate Market

Posted on May 21, 2011 by Jay Harper

I thought this interview with Richard LeFrak had a lot of truth in it…

The take-aways are:

There’s a glut of single-family homes across the nation. Values are still 10 to 15% higher than they should be and are likely to continue to decline.
Rental properties are doing very well right now since people are afraid of being trapped in a bad investment if they buy, so they’re renting.
A lot depends on the City. If the City has job growth its real estate market is fine (e.g. Washington D.C.)
Commercial real may be going back into a bubble. Low interest rates are what’s spurring the investment.
New York City is doing pretty well.