Uptown vs. Downtown

One thing we’re noticing is that a lot of the good contractors usually work on projects downtown that have big budgets. One construction manager two days ago kept throwing out the number $2 million when he was discussing a budget. That’s nearly 4 times our budget and the fact that he kept using that number over and over and over again to us meant he just wasn’t right - he’d probably never understand our budgetary constraints.

Then there was another contractor who seemed to have rich clients that kept changing their minds. To him the design was fluid and he expected it would change substantially while it was being built. In contrast, we know we have to get it nailed down as much as possible before contractors give their final bids so there are as few change orders as possible. I’m sure he’s great with rich clients who really don’t have budgetary limits and want their every whim to be indulged, but we do have budgetary limits and we need the contractor who understands that.

One of contractors who’s made it onto our short list was a guy who came in with his partner who does structural work. One of the first thing they asked was how much we paid for the building and how much we thought it would be worth when we were done. They then threw out a number that was close to our budget and understood that we needed to come in near that number.

Large Projects vs. Small Projects vs. Townhouse Guts

The other day we had a contractor in who we had wished we had gone with for our apartment renovations (he was too expensive). He does incredible work. He came into our townhouse and was clearly overwhelmed. He told us he could only bid on the project once we had floors in place so he could get a sense of the scope of work. The structural completely freaked him out. We explained it was being funded with a rehab loan and it was an all-or-nothing package deal.

Then there are the guys who only work on huge projects. The mechanical engineer our architect had us sit down with just didn’t understand (initially) that you don’t need the same level of heating and cooling systems in a townhouse as you would a commercial space with the same square footage. It took him a while to think small. The same goes for some of the contractors who work on larger buildings and are used to huge HVAC (Heating, Ventilation and Air Conditioning) systems. They just think big and big comes with big price tags.

Another guy came in and he seemed like a good guy who would do a great job. But he was used to doing commercial work where everything is spec’d out in incredible detail by the time he gets called in. He said he wanted absolutely everything spec’d before he gave a proposal - the HVAC system, structural, the windows, the doors - everything. In contrast our goal in bringing the contractors in early was to understand the ways they would do things to stay on budget. We didn’t want to spec a system that could be done more cheaply. I felt a little sorry for him ’cause it was clear he was used to working on buildings that were much larger than ours but he said at the moment he’s just doing a few little jobs and that our project was substantial enough that would keep him going for a number of months. I mentioned that other contractors were giving us estimated budgets with allowances for materials that hadn’t yet been spec’d. A light bulb went off in his head and he said “Oh, I could do that”, but then he never did get back to us with a proposal.

NYC vs non-NYC, Harlem vs. Other Neighborhoods

Then we’ve had some contractors who’ve come in from places like Long Island who seemed freaked out by the City. One was shocked that he got a ticket one time when he left his car for 5 minutes while he was giving out pay checks. Experienced NYC contractors have guys watching or sitting in their cars while they’re at the job. The ones outside New York also don’t seem to know how to deal with NYC Department of Buildings. They complain about how long it takes to get approvals and inspections. The experienced NYC contractors talk about their expediters, and how they’ve done enough work in particular neighborhoods (Harlem) to get to know the inspectors and the types of things they look for.

Then there are others who just won’t work in Harlem because there tend to be theft problems in Harlem (e.g. tens of thousands of dollars worth of copper piping getting stolen). Compare that to a contractor who does a lot in Harlem who said “Yeah - I just put in a temporary alarm system - when there’s a break in, the police are called and me and my partner are called.” He knew how to deal with the neighborhood - it was no big deal to him.

Developer vs. Homeowner vs. Flippers

Yesterday we had a contractor come by. He and his partner were great guys who were extremely nice to deal with. They flat out asked our budget, we told them and they said “Wow - that’s exactly the number we were thinking when we did rough cost per square foot numbers yesterday”. HOWEVER, when I looked into the projects he’s worked on there were a lot of large apartment buildings (50+ units), and the townhouses were all chopped up into floor-through rentals. Property Shark had interior photos for some of the brownstones he’d worked on and they all showed low-end “builder’s grade” materials.

When we did the renovations of our bathrooms and kitchens in our old apartment we went with a guy who mostly worked for people who were flipping apartments. We learned that was a bad idea. People who flip come out with places that look great, but they don’t care about long term quality. The foreman he assigned blew up at me when I told him green board couldn’t be used in showers. I pulled the product spec sheet and showed him that it specifically said it couldn’t be used there and his response was “I’ve used it in million dollar homes” as if that mattered.

Simply put, homeowners want different things than people who are developing for renters or to flip. A developer/landlord wants something that’s cheap and functional. A flipper wants something that looks good and doesn’t care how long it holds up. A homeowner wants something that looks good and will stay looking good for a long time. Each of those types of customers need a different type of construction and hence a different type of contractor.

Contractors Who Finish vs. Those Who Don’t

Another criteria we’re starting to look at is whether the projects the contractor works on ever get their Certificates of Occupancy. A remarkable number of townhouse projects never actually get a new C of O. They may get a couple temporary ones, but then just never finish off the final details to get the final C of O. Since you need a C of O to legally rent an apartment it’s something we’re looking at pretty closely.

General Contractors (GCs) vs. Construction Managers (CMs)

Going into this we knew what a GC (General Contractor) was, but had never heard of a CM (Construction Manager). One CM came by to do a pitch and in the process they explained how they’re different than a GC. What it boils down to is that a GC hires all of the sub-contractors and is responsible for them. You pay a GC and he pays the subs. If you have a problem you have it with the GC. A construction manager is a consultant who takes a percentage as a fee. They’re not responsible for the sub-contractors instead they try to help the owner choose and manage the subs.

While I think a construction manager is a perfect solution for a busy executive who has more money than time, in our situation we want one person who’s responsible for the project. If the plumber is interfering with the work of the electrician we don’t really care - we want one and only one person who is ultimately responsible for making sure everything goes smoothly.

“Just Right”

So, after quite a few contractor interviews we’ve finally decided we want someone…

• Who has worked on a lot of townhouses
• Who has worked a number townhouses in Harlem
• Who can deliver significantly better than “builder’s grade” finishes
• Whose projects get C of Os when they’re done
• Who is comfortable with structural work without overdoing it
• Who knows how to do work on a tight budget

Luckily we do have a few options who seem to meet many of those criteria. We’re still vetting them - calling references, looking at previous projects, etc. The short list is taking shape and should be in place by the time we’ve got all the specs ready.

#1 - Realize Harlem Townhouses Are A Speculative Purchase

Harlem townhouses were built by speculators in the late 1800s and early 1900s in conjunction with the subways being extended north into Harlem. But then there was a real estate crash starting in 1904 and that speculation came to an end and rents dropped. Harlem townhouses started as speculative investments and 100 years later the cycle of speculation and failure is still going on as is evidenced by the fact that you can buy one for 1/3rd of it’s price 2-3 years ago.

You need to go into it knowing it’s a speculative purchase. While I firmly believe Harlem townhouses will fair far better in the next major downturn (10-20 years from now) there is no guarantee. Harlem is not Brownstone Brooklyn. It’s not “there” yet. It’s only starting to get things that people look for in “good” neighborhoods like great supermarkets and good schools.

There are certain implications to a speculative purchase. Namely you need to watch for the next real estate crash and either get out before it, or be prepared to weather it. If you go into it knowing that time will come, you won’t be so disappointed when it happens.

#2 - Be Very Careful Buying SROs

SROs are “single room occupancy” buildings where people have a room without a proper kitchen. I’ve been reading Sherlock Holmes lately and he lived in an SRO. At one time it was fashionable for single men to live in them - the landlord would serve them meals, etc. Then they just became the least expensive form of housing and the City’s poor gravitated to them. Today SRO tenants often earn $10,000 to $15,000 per year and typically pay 50% of their income to rent these cheapest of cheap rooms. The issue is that when you kick out an SRO tenant they often can’t find other housing and they become homeless.

As a result the City put a moratorium on converting SROs back in 1985 because there was a wave of landlords kicking out their poor tenants, converting to proper apartments and making a bunch of money. A year later they put in place a process whereby you can convert an SRO, but you have to prove that the tenants haven’t been harassed at any point in the past 3 years. To get the signatures required you often have to pay the tenants $10,000 or more, and then the City will take 6-9 months investigating your claim - making sure you didn’t omit anyone who lived in the building, etc. If they approve you, then you get a “certificate of no harassment” which enables you to get a building permit to do the conversion.

The bottom line is that you need to know whether the building you’re considering is an SRO, and if it is you should see a certificate of no harassment before going into contract. Even top brokers lie and tell half truths when they’re selling SROs that don’t have certificates of no harassment. So you need to know how to determine SRO status yourself. There are two primary sources - NYC Department of Buildings (DOB), and NYC Department of Housing Preservation and Development (HPD). HPD has a web site that tells you details about buildings. If the number of “B Units” is greater than zero, then it’s an SRO. Keep track of the Block and Lot numbers that HPD has and then head over to DOB’s BisWeb site. There you enter the block and lot numbers and you can see the information they have on the building. One of the pieces of information is whether the building is SRO restricted. Remember that if any City agency thinks the building is SRO restricted, then it’s SRO restricted, though DOB and HPD are the primary sources of information for SRO restrictions.

DO NOT BUY an SRO without a certificate of no harassment unless you really know what you’re doing.

There are a few cases where buying an SRO without a certificate of no harassment is OK…

First, is if you want to be an SRO landlord. It’s not easy, but it can be profitable. Fully occupied SROs go for $600-$800K. If you have a typical 4 story building with two units per floor, each giving you $650, then you’ve got a rent roll of $5,200. If you can get a mortgage that should more than cover the mortgage payments and expenses. HOWEVER, do watch the taxes - they can be really high on SROs and wipe out any profits. I saw one in East Harlem that paid $25K/year in taxes.

Second, it’s OK to buy an empty SRO if you’re OK with your renovations not being done for 5 years (3 years of waiting + 1 year of review + 1 year of construction). If you can get the current owner to provide a sworn statement that it’s been vacant that can reduce that time frame. You can live in it during that time but you’re only allowed to do “repairs and maintenance”. If you do anything to convert the building you can get fined for it and that violation can make it impossible for you to EVER convert the building. It can even make it difficult or impossible for the next owner to convert the building. In that case you may need to bring the building up to current code as an SRO first, clear the violation, and then reapply for the certificate. That means you pay for renovations twice.

#3 - Look For Realistic Sellers

There are a lot of townhouses on the market right now that are completely unrealistic about their price. Even the ones that have realistic owners typically price their places $200,000 higher than they know they’ll sell for. In our case it was listed for $795K and we purchased it for $530K. Pretty much the only ones that are realistic are estate sales. We got ours from TPE Townhouses Harlem (a part of Tahl Propp Equities). They bought 11 townhouses and didn’t develop them quickly enough and then needed to liquidate them when the market went south. So there are people other than estates who are realistic…

The only way to know if the seller is realistic is to put in a bid. We saw 30 places and put in bids on 7. In one case it was a realistic seller, but we pulled the bid after having second thoughts. In another case it was a short sale and they wanted all cash. The place on Astor Row was looking for people who were bidding based on their gut, not the numbers. In another case there was already an accepted bid and they went with that offer (we later learned that our offer was about $10K less). Given all the bids you’ll be putting in and how much you need the sellers to come down, it’s critical that you have a real estate broker who’s great at bidding aggressively. They need to pull out every trick in the book to get you the price you should pay. If you need a broker with excellent bidding skills, we’d highly recommend Maria McCallister of Barak Realty.

One assumption I made during our search was that eager sellers would list their properties with brokers who would market them aggressively. Right at the end I realized that wasn’t true. Back when the market was hot there were brokers who would get listings and then not market them because they didn’t want to share the commission. (Not every broker in NYC is part of REBNY, which requires co-broking.) Back when Harlem townhouses were so hot you couldn’t help but sell them, it wasn’t a bad strategy. But I had a friend who listed his place in 2008, before the crash, with one of those brokers. She got him into contract for $1.4M, but it fell through. Then the crash happened. A lot of time passed and she got him into contract again, but that one fell through as well. He finally sold the place earlier this year for $775K. By the end he was sorta desperate to sell and was bleeding financially. So those brokers do have motivated sellers and for one reason or another they manage to keep the listing. That particular broker was flat out lying to my friend. She told him she was advertising in the NY Times (she wasn’t). She said she listed his place in the REBNY systems, but our broker confirmed she wasn’t.

That means there is value scouring the web for small real estate companies that have some townhouse listings. Typically they don’t tell you the address or the price and are pretty obscure about other details as well. When you see the properties you need to do things differently. Start by seeing the place on your own and do not mention that you have a broker. Then bring your broker in later after you’ve started initial negotiations. When we wanted to see my friend’s place his broker pulled every trick in the book trying to not get us in before the contract with her buyer was signed. It was only when she realized I was standing there texting everything she did to my friend that she sorta stopped playing tricks.

#4 - The Block & Immediate Neighborhood Can Make A Huge Difference

Real estate values in Harlem vary widely from block to block. We didn’t understand why one townhouse down on 112th was asking so much until very late in the process when we realized how nice it was over in South Harlem (SoHa). Anything close to that goes for a premium. Up in Hamilton Heights you cross Amsterdam Ave and you can go from one of the best blocks anywhere in Harlem to blocks that are pretty sketchy. If you don’t already know Harlem, it can take some time to be able to discern the good areas from the bad.

Before you go into contract on a place go there at night when it’s nice weather and people are out on the street. It’s best to do it a few times to really get a feel for the place. Ask yourself whether you feel safe. If there’s loud music ask yourself how you’ll feel about that when you’re having guests over for a barbecue. Look for possible drug dealing. New York doesn’t really have a gang problem, but look for “rough” groups of kids who might hassle you. But don’t be too critical on that last point. We were going by one property and saw a group of kids outside a building. About 5 minutes as more and more of them arrived and they subsequently left we realized it was Friday night and they were just meeting up to go out clubbing. If they’re standing around laughing an joking chances are they won’t be a problem.

#5 - Get A Property Shark Membership With Comps

One of the best things you can do is get a membership to PropertyShark.com. You can get an incredible amount of information about each of the buildings. You can see tax information, ownership history, pictures, building permits, violations, lis pendens (pre-forclosures), etc.

One of the great things they have is comps search. Not sure what something is worth? Do a 1/4 mile radius search around the building for the past 6 months and you can see what comparable properties are actually selling for (not just their list prices). One trick is to search for all building types but limit the search by square footage. 6,000 or 6,500 square feet max should find the townhouses you’re looking for.

#6 - Realize It’s Usually All About $$/sq. ft.

It’s uncanny how townhouse sales are consistent in terms of price per square foot. HOWEVER, it’s not as easy as you think to calculate the cost per square foot because the DOB has used two different methods to calculate square footage over the years.

First a little terminology… A townhouse “basement” is the floor that’s partly below street level. It’s the “garden apartment” in many cases. Below that level is the “cellar”. Floors that are completely below grade are not included in the square footage of the building (and cannot be used for sleeping). The confusion has come with the basement level which is partly below grade.

When the buildings were first built the basement was used for the kitchen and a bedroom for the cook/maid. Since it wasn’t where the family lived it wasn’t included in the square footage of the building. But we use townhouses differently now and the basement is considered living space, so it is now included. Problem is, the  DOB never went back and recalculated the square footages of buildings calculated the old way. That throws off the calculations of cost per square foot.

The important thing is to be consistent and compare apples to apples. How the square footage is calculated can make a big difference. Let’s say a building has 1,000 sq. ft. per floor and 4 stories including the basement. That means it’s either 3,000  or 4,000 sq. ft. Now, if it sold for $1M then the cost per square foot was either $333 or $250 - a HUGE difference. So you have to be consistent one way or the other. On Property Shark you can see the building’s dimensions and whether it has an extension on the back. If there isn’t an extension then it’s easy to calculate. However sometimes the extension is included in the length of the building and sometimes it isn’t. So there are times when you just can’t tell. If you see a C of O in the past 10 years or so, then you can trust the official square footage of the building and know that it includes the basement.

One other thing to remember is that, unlike apartments, townhouse square footage includes the exterior walls. A considerable amount of the square footage can be walls. For example our place has an exterior dimension of 15′ x 58′ or 870 sq. ft. per floor. The brick walls are about 1′ thick. We share one wall with the townhouse next to us, so brick to brick our square footage is 13.5′ x 56′ or 756 sq. ft. If we did 4 inch studs on all exterior walls that would reduce things further to 12.8′ x 55.3′ or 708 sq. ft. That’s a huge difference from 870 sq. ft - nearly 20% of our square footage is exterior walls.

As you get to know the market you’ll understand the value of buildings and a quick calculation can give you an approximate price. “Why are you asking $400/sq. ft. for a building in poor condition?” can be a fun thing to ask the listing broker…

And one side note - since it is all about price per square foot - if you’re tempted to put in double height ceilings when you do your renovations remember that you’ll be reducing your square footage and devaluing your property.

#7 - Know How Much Renovation Costs

Most of the townhouses in Harlem have 100 year old plumbing and nearly as old electrical systems. Very few of them are properly insulated. Most have rotten floor joists under the bathrooms. That means they all need major work. Never assume otherwise. And replacing things like plumbing, electrical and insulation in an old building requires skilled workers who are able to do their work surgically. Assume plumbing and electric will cost you $150K. If you buy a total shell like ours you’ll be spending at least $150K, probably $200K, just on new structural components. Windows can run you $1K/window for good windows (Harlem townhouses have some HUGE windows - we have one that’s 4 1/2′ x 7 1/2′ and others that are 3 1/2′ x 9′ - the place on Astor Row has a window that’s 5′ x 7′ and on a landmarked exterior where you’re required to use relatively expensive windows).

Then there’s the new building code… In 2008 the City implemented a new building code. The prior building code was from 1968. They didn’t change that much but what they did change can be expensive. For starters more buildings need sprinkler systems - that will run you at least $50K since sprinkler systems have to be done with cast iron pipes that won’t melt in a fire. You’ll also need at least one “handicap adaptable” bathroom per unit. If you’re thinking about an elevator, the minimum size just got a lot bigger. If you’re trying to change your C of O (e.g. converting an SRO) you have to bring it up to code - so all of that may be necessary…

In general, townhouses that look like they’re in pretty good shape will probably need at least $250K in renovation just for new electrical, plumbing, bathrooms and kitchens (though you may be able to defer that cost for a few years). For bigger projects you need to budget $150-200/sq. ft. for a pretty basic job. High end finishes will run you even more. That means a townhouse in poor condition with 4,000 sq. ft. can easily have a renovation that costs $800K. You can do it for less, but you really have to work hard to find a reputable contractor who can do things inexpensively and then you have to scrutinize every line item on the budget and spend countless hours learning about the options for every major system in the building.

And don’t forget all the little costs - the architect will want about 10% of the construction cost. Then you’ll need to budget money to carry the renovation loan during construction. Just those two can easily be $100,000 or more.

Before you bid on a place, conservatively estimate the future value after renovations and then deduct over-estimated renovation costs. The purchase price + renovations should be less than the future value. If it’s not, lower your bid.

Good luck!

Roof Insulation - The inspector kept telling him the roof insulation fine, they’d close up the ceiling, and then be told it wasn’t OK at which point they had to tear all the sheetrock off the ceiling and fix the problem. How “green” is it to waste that much sheetrock?

Plywood - “Green” plywood costs 3 times more than regular plywood. Isn’t all plywood made of recycled/waste material? I don’t get it…

Green Paint - …is just bad paint. It doesn’t adhere very well and the color doesn’t match properly so you can’t just touch up a problem - you have to repaint the entire wall. How is that “green”?

Dumpster Recycling - Putting the waste material through recycling instead of just sending it to a landfill costs about 40-50% more. That one I sorta understand, though I wouldn’t want to pay for it.

It just seems to me like a lot of LEED certification is just trying to make money on an already expensive product.

There are parts of green architecture that make sense to me - the ones that save you money. Good insulation, energy efficient heating and cooling… But charging 3 times as much for plywood is just crazy.

We’re going to stick to just being energy efficient and leave all the stuff with needlessly inflated prices to the people who seem to have way more money than we do…

Well, if you bought at those prices I think you bought at the bottom of the market. Things are much better now. The number of sales over $1M has doubled to 10 for the past 6 months and at least one of the properties is back over $500/sq. ft.

And here they are…

• 262 W 139 St (Strivers’ Row) - $1.85M, 3,660 sq. ft., $505/sq. ft., two family with an owner’s triplex over a ground floor rental - This place is ABSOLUTELY IMMACULATE. It was an over the top renovation planned back when you couldn’t help but make money flipping townhouses in Harlem. Things didn’t go very well for the developer/seller, but the new owner has a stunning place to live (with a garage!)
• 14 W 120 St (Mt. Morris) - $1.385M, $3,37 sq. ft., $456/sq. ft. - 18′ 4 story brick townhouse literally across the street from Marcus Garvey Park. SRO restricted. HPD says it has one class A apartment and 9 class B rooms. For some reason DOB has it classified as 4 family, but is aware it’s SRO restricted.
• 116 W 120 St - $1.485M, 3,636 sq. ft., $408/sq. ft. - 20′ 4 story painted limestone townhouse. Surprisingly this is an SRO restricted old law tenement. HPD says there is one class A apartment and 6 class be “rooms”. DOB still classifies it as an old law tenement, but doesn’t realize it’s SRO restricted.
• 7 W 119 St (just outside the Mt. Morris Historic District) - $1.098M, 2,794 sq. ft., $393/sq. ft. - This was a shell and was recently gut renovated with an uneven mix of high end and low end finishes. We went through it. The building is one of the smallest townhouses you’ll see - 14′ x 47′. The rooms in it are TINY and the “back yard” is just a small deck. Our couch wouldn’t come close to fitting in the living room. It’s a technically a 2 family since there’s a VERY small studio apartment in the front half of the ground floor. I have no clue how they’ll rent such a small space. It should have been made into a single family. In my opinion the buyer over paid, but that’s a good sign as far as the market goes.
• 106 W 118 St - $1.275M, 3,400 sq. ft., $375/sq. ft. - 17′ x 49′ 4 story brownstone. It’s a legal 3 family, that was converted about 10 years ago.
• 15 W 122 St (Mt. Morris) - $1.375, 4,180 sq. ft., $328/sq. ft. - 18′ x 53′ 4 story brownstone. This is technically an SRO. HPD shows it having one class A apartment and 8 class B rooms. However, DOB shows it has being an SRO-restricted 2 family.
• 590 W 152 St - $1.2M, 3,744 sq. ft., $320/sq. ft. - 16′ x 52′ 4 story limestone townhouse with a C1 commercial overlay on it’s zoning. Like the last one, HPD shows it having one class A apartment and 8 class B rooms. However, DOB shows it has being an SRO-restricted 2 family.
• 76 Edgecombe Ave - $1.436M, 4,611 sq. ft., $311/sq. ft. - This is a lovely 19′ brick townhouse on a corner lot. There would be incredible light in the building since the long wall faces south (too much for my tastes, but I know others like southern exposures). It’s a completely legal 4 family with no SRO restrictions.
• 226 Lenox Ave (Mt. Morris) - $1.25M, 4,932 sq. ft., $253/sq. ft. - A very grand 20′ brick townhouse that was a former funeral parlor. Curiously this is technically a rooming house with no apparent SRO restrictions - somehow with the funeral parlor in there they avoided SRO status. In addition to the funeral parlor there are 2 class A apartments.
• 146 W 136 St - $1.1M, 4,590 sq. ft., $239/sq. ft. - 17′ x 56′ 4 story townhouse. It shows as 3 family, but DOB is still showing it as SRO-restricted (probably an error). The new C of O was just issued a year ago, so this is newly renovated. This was an incredible deal. The weird part is I can’t find any record of it having been for sale, so there has to be more to this than you can see at first glance.

So there you have it - the top sales for the past 6 months for Harlem townhouses. Considering that just about every week a townhouse will sell in Brooklyn for over $2M, that’s sorta a sad lot by comparison, but at least things are better than they were a few months ago.

Where things are selling…

It’s also interesting to note that none of the sales were in Hamilton Heights / Sugar Hill. 6 of the 10 were south of 125th in and around the Mt. Morris Historic District. Given that our place is in the same area the good news is that we’ll have no problem with the future value appraisal for our rehab loan. It would seem our place will be worth about $400/sq. ft. when it’s completed.

Prices on shells will go up too…

That brings up another point… The sum total of all of these numbers is that when the top end of the market goes up, everyone goes up.  Let’s take our case. When we were bidding I was thinking our place would be worth maybe $325-350/sq. ft. when it was done. So if we put $150-200/sq. ft. into it I had to subtract that from the finished value for things to make sense. We bought at $122/sq. ft. so we’d be safe no matter how you looked at it (provided the market didn’t continue to go down). Now that the top number is $400/sq. ft. things are significantly better.

I still think the biggest risk are the ones in the middle that need more work than you might think. It’s still easy to over pay for those properties. The best bets are shells and ones that are recently renovated.

Buy now! Buy low!

Unless there’s more economic turbulence, I’m firmly convinced now is the time to buy a Harlem townhouse. The trick is finding one in a decent area, without SRO issues, where they’ll sell low.

Here’s one picture looking back to front in the cellar…

And we climbed up a ladder, through some rickety floor joists and into the back yard for the first time. It was pretty much what we could see from 122nd Street though we saw the bottom floor for the first time. I can’t believe some moron cut a huge hole in the brick wall to put an air conditioner in. There isn’t even a steel lintel to hold up the weight of the brick above. Needless to say that’s gotta be patched. And there’s about 1 foot of construction debris all over the back yard which will need to be removed. Unfortunately masonry debris tends to be basic and plants like acidic soil, so once that’s out and cleaned up we’ll need to bring in a lot of fresh topsoil and wood chips to get the soil back to being acidic. There was very nice light in the back yard - quite sunny…

The yard felt a little narrower than I was hoping for, but I’m still going to be very happy to have a back yard. Just need a good privacy fence… I haven’t been able to really garden in over 20 years… Should be fun!

One thing that doesn’t look so glamorous now but will be glamorous in the future is the size of the windows. Just on the ground floor (in the future basement rental unit) that window is nearly 7 feet tall. One floor up, on the parlor floor (in our future living room) those are 9 foot windows! (One will become a door). And one more level up on the master/mistress level, in what will be our master bedroom, there are 8 foot high windows. That’s the south wall, so we’re going to have a crazy amount of light… Possibly too much light.

When we were looking at it it was priced at $679K. Last month it finally sold for $425K. When we were bidding on it we went as high as $430K and they came down to $450K but then we withdrew our bid completely after spending an evening walking around the street. Even though it was just across Amsterdam Avenue from one of the best blocks in Harlem it was a remarkably rough block. The time we walked the block at night while we were bidding, it was summer, the windows were open and the salsa and merengue music was blaring from the windows. We realized that while the house itself had potential, the block didn’t have that much potential. It was never going to be a “good” block - at least not in the next 15 or 20 years. That would always limit the price of this townhouse, so we stopped budding on it. A few months later we second guessed our decision not to proceed on it so we walked the block again. This time as Dan was walking down one side of the street and I was walking down the other side, two “low income” women were yelling at each other and just about got into a fist fight as Dan passed them. He didn’t feel safe and that was absolutely the end of our thinking about 505 W 144.

On the plus side, the apartment building on the other side of the street and down a bit is where George Gershwin lived for a number of years, and there are 3 or 4 large apartment buildings on the block that have been designated part of an economic development zone and are getting 10-20 years of no real estate taxes in exchange for being redeveloped. One rooming house on the block has been gutted and turned into a condo and one building has been turned over to it’s tenants and is now a co-op. So the block is improving, but it’s still far from what we were looking for.

Here are the details…

Sale Price: $425,000
Sale Date: 5 February 2010
Square Feet: 3,468
Price Per Sq Ft: $122
Dimensions: 16.5 x 52 (no extensions)
DOB Classification: 2 family
HPD Classification: 1 class A apartment + 9 class B rooms
SRO Restricted: YES with certificate of no harassment
DOF Market Value: $1.13M
Annual taxes (2010): $3,039

It’s interesting that we paid the identical price per square foot for our place that the buyer paid for 505 W 144th - $122/sq. ft. but we feel like we made the right choice buying our place over this one.

The question then is if someone purchased this building what’s the best usage? Given the block I’d say it should be a 3 family rental with unremarkable finishes. You’d want three family instead of 4 to keep the taxes low. The ground floor would be a floor through 1 bedroom garden apartment. The parlor floor would be a large studio apartment. On the parlor floor the staircase is a switchback in the center of the building. That limits the layout options, hence a studio apartment on that floor. However, there are some interesting original details that could be preserved. Then the top two floors would be a nice, large 2(+) bedroom unit. There are original details on the master/mistress level, but not much of any on the top floor.

Given the block, I don’t see an owner living in this townhouse. IMHO, it’s value is purely as a rather average rental property.

Rough numbers… I’d conservatively say $1500 for the garden rental, $1,000 for the parlor studio and $2,000 for the top two floors. So $4,500/mo in income or $54K/yr. Assuming $1K/mo goes to running the building ($taxes, utilities, etc.), you could support a mortgage of about $600K off the rental income. At 80% financing that means the max value after renovations is about $750K and they have about $325K for renovations.

Renovations are a bit challenging because the house absolutely reeks of piss and shit. A “caretaker” had lived there for a number of years and during that time he didn’t walk his dog very much and the dog just did it’s business in the house. That means all the wood floors have to be torn out, the floor in the basement chopped up, removed and repoured, and Urine Off used liberally throughout the house. There’s also a fair amount of mold on the top floor - so all the “new” sheetrock walls on that floor need to be torn out and replaced. The plaster walls on the other levels are mold-proof, so they’d be OK. The building also needs all new electrical, plumbing as well as completely new kitchens and baths. It’s pushing it to get all of that done for $325K and bring it all up to code to get the new C of O, which means it’s not going to be very high quality.

There are some interesting original details. The triple mirror just inside the front door was incredible. It could be a great place, but I doubt it ever will be…

The one funny story from seeing this house was when the seller’s broker (Jean Adams of Prudential Douglas Elliman) was going down the dark, filthy staircase between the parlor and basement levels. She was a woman who carried herself with a fair amount of dignity but she was wearing flats walking down a staircase that was covered in rat droppings and god knows what else. She very calmly said “Wait a moment, I’ve got something in my shoe”. She didn’t have socks or stockings on, so that meant she had gotten what was probably rat feces in her shoe against her bare skin. Given what she had to endure to show that house, I had huge respect for her. Of course, she could have dressed differently… I for one always wore boots with steel soles and toes when I went through houses like that…

Pay 1/3rd of what you would have paid 2-3 years ago

Harlem townhouses that are wrecks and need major gut renovations have fallen about 65-70% in value since the peak in 2007. Even the ones in better condition have fallen substantially. Other real estate in Manhattan has fallen maybe 20%. I once had a friend tell me life is a lot like surfing - you need to watch waves and be prepared to get onto your next big wave and you need to do it before the wave gets too big. That analogy felt really apt as we sold our apartment at 15% off it’s peak value to purchase something that had fallen at least 65% from it’s peak value. It really felt like getting off one wave onto another that’s potentially much bigger.

Be prepared for volatility

But using the wave analogy a bit more… the Harlem townhouse market is still a market with drastic extremes. The fact that you can lose 2/3rds of the value in your home in 2 years will scare some people. There are a number of reasons for the volatility. The bottom line is that Harlem’s gentrification in the past 10+ years didn’t “stick”. Not enough got gone before the crash. The schools aren’t that great, the grocery stores are generally pretty bad, and there are still a fair number of empty lots and derelict buildings.

That’s why investing in Harlem today needs to be part of a long-term strategy. If you’re hoping to sell in a year or two - don’t do it. Harlem real estate could very well continue to go down in the next few years. Instead, look 10 or 15 years out at the next wave of investment/development and ask yourself which NY neighborhoods have the most upside potential. In Manhattan, Harlem is probably top of the list.

Signs of change - even now

If you’re not all that familiar with Harlem and it’s been years since you’ve been to Harlem try taking the ABCD trains to 125th Street and walking south on Frederick Douglass Boulevard (8th Avenue - the continuation of Central Park West). Years ago the place was pretty blighted, now the developers are calling it “SoHa” (South Harlem). Where once there was blight, now there are tons of brand spanking new buildings. Look closely at the buildings and you’ll see they’re quality building with decent design and above average construction. They’re a lot more like the new buildings you’d find on the Upper West Side than they are the drab new buildings you see in Washington Heights. At 124th you’ll see the new luxury Aloft Hotel being constructed. Around 120th go into Moca Lounge in the evening and see all the hip buppies. Around 119th go into Best Yet Market and see a grocery store that rivals downtown stores like Whole Foods and Gourmet Garage (it just opened a month ago and only had it’s official grand opening yesterday). There are great places to eat  all along that stretch - like Melba’s at 114th Street.  Yes, prices are down, but those new condos are still selling - even in this market. I genuinely think that type of development will spread to other parts of Harlem in the next upswing. If you’re patient enough to wait you can reap the benefits by buying now - at or near the bottom of the market (knock wood).

Pockets of long-time quality

There are certain parts of Harlem that have always had great townhouses and those neighborhoods are offering quality at a great price. Hamilton Heights / Sugar Hill (near the ABCD train at 145th) is one solid area. Strivers’ Row (138/139 between ACP and FDB) is another classic area that’s always been good. Mount Morris Historic District just south of 125 between 5th Avenue and ACP (6th Ave) is another solid neighborhood. And the blocks over by Morningside Park near Manhattan Avenue are great as well. Buying in an area with a reputation for stability is a pretty safe bet (long term). However, you really need to study Harlem to understand which blocks are solid and which aren’t since in some cases crossing an avenue can take you from one of the best blocks in Harlem to one of the worst.

Is the market going up or down?

Personally I think it’s leveled off. I don’t feel like it’s gone up or down much since about the middle of last year. Last July there were two sales in Sugar Hill that I saw as benchmark sales - 419 West 146th Street for $495K and 400 West 145th Street for $550K. When you looked at actual square footage both were at about $147/sq. ft. Both are in the historic district - with the one on 146 having the negative of a 12.5′ width, and the one on 145 having the negative of being on a busy street.

[The Department of Buildings has used two different ways to measure square footage over the years. As a result basement / garden levels are sometimes included and sometimes not. You need to determine the real square footage to determine the real cost per square foot.]

Doing the a 1/2 mile radius around those sales for the past 3 months we see prices haven’t changed all that much. The least expensive was 505 W 144 which sold for $122/sq ft. That’s one we bid on at one point and it’s outside the historic district on a “less than desirable” block. 400 W 145 sold for a 2nd time later in the year - this time for $650K - $100K more than it sold at auction for in July. 48 Hamilton PLACE sold for $450K ($143/sq. ft.) but it doesn’t have great location and I think it’s a fully occupied SRO. So, if anything I’d say prices have gone up slightly.

The higher end of the market is seeing similar stability. For almost a year now $300/sq. ft. will get you a habitable townhouse on a prime block needing significant renovation. In  the $400s/sq. ft. you’ll get a very nice fully renovated townhouse. And the exceptional townhouses will go for around the $500/sq. ft. mark.

Starting with a shell/wreck in a “decent” location (like ours), add about $20/sq. ft. for a prime block in a historic district or even a bit more the area in SoHa around Morningside Park & Manhattan Avenue. Or subtract about $20/sq. ft. for the worst locations. So the range for shells is just over $100/sq. ft. to about $150/sq. ft. on a prime block. It’s been that way for at least the better part of a year.

[If the townhouse is close to the FDB corridor and has the new R8 zoning with a commercial overlay, then it's worth significantly more given the development potential. 243 West 120 is a building that falls in that category.]

That said, in our experience very few owners price their townhouses anywhere close to where they’ll sell. Chances are you’ll get around $200K off the asking price. We got $270K off what the asking was at the time we started bidding (they lowered it $100K while we were bidding to attract other offers). Any owner who scoffs at an offer $250-300K below their asking probably won’t be selling their place any time soon.

How much do the renovations cost?

When looking at places don’t underestimate how much work has to be done. Even places that look half way decent can require $200-250K in renovations. In addition to the little stuff, most of the townhouses have original(ish) plumbing and electrical ($150K or so to replace). Most of them will have rotted floor joists near the bathrooms. Most of them will need all new kitchens and bathrooms ($200K to replace). Then there are things like repointing brick, replacing old, inefficient boilers, etc.

For an “average” wreck you’re probably looking at $500K in renovations. Our place is a complete shell with nothing left inside. We’ve budgeted $700K ($550K for construction + 10% overage contingency + $50K for architectural + $50K to cover the mortgage during construction) and that’s a very tight budget - $800K would be better, but we just can’t go that high. And god forbid you have problems with your contractor - then things can get VERY expensive.

Make sure the numbers work in the short term

Even though you may be buying as a long-term investment, be conservative and make sure the numbers work in the short term. Over-estimate on your renovation budget and timeline and under estimate your rental income. Get to know the rental market, figure out what your rental unit(s) will rent for, and then only assume that you’ll receive 70-75% of that since the market may go down or you’ll have vacancy between tenants.

If you’re in the market for a shell make sure that if push came to shove you can sell it when you get done if you have to without losing too much money. So if you buy at $125/sq. ft. and put $200 sq. ft. into it then you need to be able to sell it for $325/sq. ft. It’s really easy for a architect and contractor to give you a price of $800K to renovate your place, but you may find that the market only warrants spending $500-600K. Do all the numbers before you buy - some places just don’t make sense to buy. But if you really like the place put in a lower bid based on those numbers. Never be afraid of a low ball bid that makes sense when you crunch the numbers.

Pay attention to the certificate of no harassment

In the 1980s landlords started evicting tenants who were in rooms in townhouses so they could flip the building or have  units that were more profitable. Those rooming houses are called “SROs” in NY which stands for Single Room Occupancy. Since around 1985 it is illegal to convert an SRO unless everyone who’s lived there for the past three years signs a document saying that they were not harassed to leave. This protects NY’s poor who often can’t afford the rent of a full apartment. It’s not uncommon for landlords to pay $10,000-$15,000 to get someone to sign.

If you purchase a building that is considered an SRO - even an empty one or one that doesn’t seem to be an SRO, you may need to wait 3 years before you can apply for a certificate of no harassment. Then you’ll need to wait about 9 months to actually get the certificate, and then you’ll have a year of renovation. If you absolutely love the place and don’t mind waiting 5 years to live there, go right ahead, but otherwise always insist on seeing the certificate of harassment before you even start bidding on the property.

It’s amazing the things brokers will say when they don’t have a certificate of non-harassment. Sotheby’s claimed an SRO on Strivers’ Row was a 2 family. I’ve also heard “it will be delivered vacant” as a response (as if that changes anything), or “we’re in the process of getting it”. As much as you like the place, if they don’t have the certificate - move on…

Loans are available

Financing is a critical component of buying a townhouse and Wells Fargo seems to be the bank most eager to issue rehab mortgages on Harlem shells (they’re possibly the only bank doing those loans). Your interest rate will be a bit higher, you’ll have some extra expenses to cover their management of your construction, and there will be a lot of hoops to jump through - but it is possible to get a loan. We recommend speaking with Michael Stein (Michael.B.Stein@wellsfargo.com) if you’re in the market for a townhouse.

Just imagine - lots of space in Manhattan…

When it’s all said and done, if you can get the numbers to work for you, you’ll have a wonderful home with tons of space in Manhattan. Space is a pretty rare thing to have in NY. So all of the hassle really is worth it…

And on top of it all, in 30 years when you’ve paid off your mortgage you’ll still have rental income that will more than cover your housing costs. So you’ll live rent-free in Manhattan. Not a bad deal - but at this point it’s all about the long-term investment.

I genuinely believe that in 5 or 10 years Harlem will start going up again very quickly and dramatically and next time the gentrification will stick. If you’re well positioned on the wave you’ll have a great place to live, at an affordable price, with solid rental income, and tons of equity in your home. All in all, a very good deal…

We’ve been looking at townhouses in Harlem for about a year now and saw at least 30 different places (not including drive-bys). At first I was only interested in Hamilton Heights and Sugar Hill (aka “West Harlem”) which would have had us near the A, B, C, and D trains at 145th Street. Being two stops from 59th Street (on the A and D) seemed like it would be great. The nice part about Hamilton Heights / Sugar Hill is how stable the area encompassed by the historic district is. It really is lovely, but once you get outside of the historic district it’s hit-or-miss. The bottom line was that there was  nothing available in our price range on a block we wanted to live on. I’ll be doing blog posts in the near future on the various places we looked at and the reasons why they didn’t work out…

I really didn’t know that much about Central Harlem, but as Hamilton Heights & Sugar Hill started drying up we started looking at places further south and east. Strivers’ Row is stunning, but it wasn’t quite in our price range and the subway access was a bit bleak. Strivers’ Row townhouses do have garages, but that doesn’t help the people we want to visit us and work for us. The other issue in Central Harlem were the rather large and ugly housing projects that were built in the 1950s. I just refused to live in a place where I’d have to walk past something like that all the time. Other places were on the 2/3 train and while that was OK, it wasn’t as good as being on the A, B, C, D.

In early October our (wonderful) broker, Maria McCallister of Barak Realty, suggested we look at 168 West 123rd Street. Up to that point I had found most of the places we looked at. I’m not quite sure why I kept skipping over that particular listing, but (obviously) I’m quite happy she suggested it. As I went over the details of the property I realized the location was pretty incredible. It wasn’t near any big housing projects and it was within easy walking distance of the 2, 3, A, B, C and D trains. And since this was Central Harlem it was just 1 stop from 59th Street on the A & D trains. And the 2/3 gives us great access to the Upper West Side.

The building had the critical “certificate of no harassment” that you need to convert the building to 2 family. There is public housing close to our place, but it’s the type of building that you don’t know is public housing unless someone tells you or you’re particularly well-versed in the tell-tale signs. I knew the townhouse was one of a group of townhouses that were all being sold by the same owner - TPE Townhouses Harlem. At the time I didn’t know much about TPE or the story behind those particular townhouses. In the coming months I’d learn a lot more about them than I ever wanted to…

When we looked at the building we realized it was a total shell. There were no floors, no windows, not much of anything - just 4 walls, a leaky roof, and some rotting floor joists. It was sorta cool - you walked down into the cellar and looked up 60 feet to the roof. It was somehow very peaceful and had a strange beauty about it. Here’s a picture of the interior - it’s the view looking up. The timber you see are old floor joists (they happen to be some of the better, less rotted ones)…

As you can see, there are no “original details” to preserve. In other places there may be plaster walls, or original tile work, or old fireplaces. While we would have been game to take on a project with original details, they do create a bit of a problem since you have to do the construction somewhat surgically in order to preserve them, which will increase cost somewhat. None of that is necessary here. It also gives us a completely blank slate to construct whatever we want (and can afford).

The good part is that people with total shells are more realistic about the value of their place than other people are. Finding realistic sellers was one of the many problems we encountered in our search. Most owners just didn’t (want to) realize how far the values of their places had fallen since the height two years before. The reason we bought was because values were down about 65% from their high in 2007. That’s a hard pill to swallow for owners. Estates were some of the only people who were being realistic.

Another seller that was being pretty realistic was TPE Townhouses Harlem. They had purchased 11 townhouse shells in 2004 - 2005. They were all townhouses that had been involved in mortgage fraud starting in the early ’90s. Unbelievably the mortgage fraud was perpetuated by churches who typically would buy townhouses at inflated prices from accomplices and then take out the maximum federally-insured mortgages which they would promptly never pay. The church involved in the TPE Townhouses was Beulah Church Of God In Christ Jesus. I do not know the particular details of the Beulah case - just how it turned out. Based on how it turned out there’s a very good chance Beulah didn’t actually commit the fraud, but again - I don’t know. In some of the cases people would forge documents pretending to be the churches so the churches were involved but not guilty of any wrong doing. I do know there was a court decision in 2002 that determined that Beulah was the actual owner of the properties. TPE bought our particular townhouse from Beulah in 2004 for $1.13M.

TPE then seems to have wasted the next three years of opportunity. They could have developed and sold the properties at the height of the market in 2007 for a huge profit. In 2005 they took out a blanket mortgage on 11 townhouses for a total of $14.3M. They’ve developed the two most valuable buildings that are over on Frederick Douglass Blvd (8th Avenue) in the heart of “SoHa” (South Harlem - the new and upcoming area in Harlem that’s been recently gentrified), but they only did that development recently. The other 9 townhouses they decided to sell just before the market crashed.

TPE put our place on the market in July of 2008 for $1.1M. In November they lowered it to $995K. In March of 2009 they lowered it to $895K and a week later reduced it again to $795K where it stayed for quite a while. We saw the place for the first time on 10/15 and put in an admittedly low-ball offer of $450K the next day. It was rejected and we were told our offer “needed to start with a 5″. Almost 3 weeks later, on 11/5, we came back with an offer of $500K. We then continued to take our time negotiating the price because some other properties came up that we were interested in. On 11/13 they reduced the price $100K to $695K most likely trying to see if anyone else would come in with a higher bid. At this point we gave our broker a ceiling price that we couldn’t go over and told her to see what she could do. By this point in our relationship with Maria we knew she was very good at negotiating price and we trusted her. After a few rounds of negotiation, the day after Thanksgiving (11/27) we got the call that the seller accepted a price of $530K. (That’s less than half what they paid for it in 2004 and what they listed it for a year an a half before).

We were thinking that since it was technically an all cash deal we might close before the end of the year. Boy, were we wrong! First things were slowed down by TPE telling their lawyers to put as little time into the closing as possible to reduce costs. I should mention that TPE is Tahl Propp Equities which is a big Harlem landlord that seems to own over 100 buildings in Harlem alone as well as some fairly large office buildings in Midtown. Tahl comes from a well-established NY real estate family. Propp was one of Donald Trump’s lawyers at one point. This sale was pretty insignificant to their overall operations.

Then we hit a wall with title issues. Given the sordid legal history of the building our lawyer insisted in using his own title agent and insurance company - not the one TPE was insisting we use. In fact, they wouldn’t even go into contract unless we either settled the title insurance issue or used their title company. So we waited. In a hotter market not being in contract would have been dangerous. But in this particular case we were pretty safe. It wasn’t in the best interest of the seller or the seller’s broker to get another offer on the place. They still have about a half dozen similar properties to sell. It’s much better that they make two sales than one at a slightly higher price.

It wasn’t until early February that the title issues got settled. The seller’s title company was actually a pretty good company so now we have two big, solid title companies that think the building is OK, which will help when we go to sell. We signed the contract during the (first) big snowstorm on 2/10 and the seller’s signed a week later on 2/18 and we closed yesterday, 3/3.

The closing was actually a bit up in the air there for a little while. Apparently the seller’s bank was giving them difficulty about it. Remember, they initially had a $14.3M mortgage covering 11 buildings. They’ve developed two of the buildings, and sold maybe half the others ones. It makes me wonder how well that loan is collateralized these days… I know our final payment went 100% to the bank (The Community Preservation Corp). I’m guessing a fair amount of the deposit went to the bank as well.

So now we’re working on plans with our architect. More on that soon…

Just some basic info on the building - It’s 15 feet wide, 5 stories tall (most are 4 stories). The usable interior space will be about 13 feet in width. It’s longer than most townhouses - 58 feet. That means we can have decent sized bedrooms of 200+ sq. ft. The ground floor and part of the cellar will be a rental unit (residential or commercial) which will help offset the cost of the mortgage.

Here are some pictures of the front and back of the building. The big window on the parlor level is nearly 8 feet tall and 4 feet wide! The front of the building faces north. You can see in the picture how there’s an alleyway between us and the apartment building to the right. This will be helpful since we can punch holes in the wall and have windows in the bathrooms, and vents for the kitchen range hoods.

The back of the building will be incredibly sunny since it faces south. Some of the windows you see are about 7 feet high and 3 feet wide - so the rooms on the back of the building will be incredibly sunny. Obviously the entire back wall has to be resurfaced and the brick repointed.

It’s a huge project, but it’ll be fun and the end result will be pretty spectacular. And no, we’re not doing the work ourselves. Everyone seems to ask that but it’s an absurd question… Just monitoring the work and choosing finishing materials will require an incredible amount of time.

Children have wonderfully creative minds and I can just see me envisioning a stair case / slide combo like that as a kid and thinking it would be great fun. One vivid memory from when I was young was wanting a place that was a big empty loft that was so big I could roller skate around in it.

Times change, needs change, and practicalities rear their ugly heads. But part of me thinks that a combo spiral staircase and slide would make a great fire escape on the back of a townhouse :)  But then I worry about what it would cost and the budget…

[The chevron pattern you see in the wood floor in that picture is another detail we've been thinking about incorporating. So there's more in that photo than you might think.]

So what do you think? Weird or Wonderful?

To me the question is which one would I most want to live in? I think my favorite would be the Urban Cactus high rise apartments in Amsterdam (see pic to the left). It’s wonderful - huge terraces, great foliage… Who wouldn’t want to live there?

Too much of architecture is just dull and boring. I’m fine with preserving the character of some neighborhoods by doing “predictable” buildings, but too often those buildings aren’t all that well done and they just fail to make the neighborhood a better place. The apartment buildings on the 20 weirdest list are pretty much all ones that capture the imagination and give back to the community. That should be applauded, not laughed at…

If you know anything about townhouses in New York that statement looks very suspicious… A two-family “currently configured as a rooming house”? Rooming houses are never “zoned” two family. And zoning has nothing to do with the number of families anyway - zoning has to do with the height, bulk and general use of the building.

So what exactly is 259 West 139th?

Let’s start with what the NYC Department of Buildings says… The DOB’s property profile for the building says it is “SRO Restricted”. If you follow the link on that page to see the certificate of occupancy for the building you see there is a C of O for the garage that was issued in January 1950, but no C of O for the main building (which is typical of older townhouses). There is one other C of O linked to that property, but it’s an error - a temporary C of O for a completely different building.

Next, let’s look at what the Department of Housing, Preservation and Development (HPD) says…

The key thing to notice there is 0 “A Units”, 14 “B Units”. “A Units” are normal apartments, “B Units” are rooming house rooms. So 259 West 139th Street has no legal apartments and instead has 14 rooming house units. That means Sothebys is suggesting a illegal use of the space - you can’t rent an apartment that isn’t registered in some way with the City and DOB and HPD are the two ways to make an apartment legal.

So both DOB and HPD say the place is an SRO, ergo it’s an SRO.

When you head over to the Department of Finance you see a different story. There you see it’s building class C3 which stands for a 5-6 family home.

Now, it’s typical for Department of Finance to get it wrong and in this particular situation it doesn’t make much of a difference since 5-6 family homes and SROs pay the same amount in taxes. But the point is if it were a 2 family home the owner would have it classified correctly with DOF since 4+ family homes pay 7 times the property tax as 1-3 family homes. That’s not an error you’d let slide for very long.

I am SO tired of real estate agents giving false and inaccurate information on their listings. It’s really not that hard to find out the truth. But it’s common for real estate agents to answer the question “Is there a certificate of no harassment in place?” with “the building can be delivered vacant”.

If you’re outside New York you’ll be excused for not knowing the absurdity of that answer but in the 1980s New York City went through a real estate boom and low income people were being evicted from their apartments and becoming homeless. Rooming houses are where the poorest people in New York live. If you lose your place at a rooming house there just aren’t any cheaper options and you wind up homeless. So in 1985 a moratorium was placed on conversions of rooming houses (SROs). A year or two later that was reworked so landlords who wanted to do an SRO conversion were required to get a “certificate of no harassment” where the City verified that the landlord didn’t force out or intimidate any tenants in the prior 3 years. You could also be turned down if there was an open violation for an illegal conversion.

Certificates of no harassment are vital for anyone buying an SRO and wanting to use it for something other than an SRO. It really doesn’t matter if it’s vacant and any licensed broker selling a townhouse should know that. And lying and saying it has a C of O that it clearly doesn’t have is completely inexcusable.

Thank god Property Shark and the City of New York put all the info online and make it easy to tell brokers they’re lying. It’s amazing how quickly their story changes when you say you’ve looked up the property up on Property Shark. Still, it’s a huge hassle that is completely avoidable. I feel sorry for the poor buyers who don’t understand how to find the information and learn the truth. If you don’t do your due diligence and you have a crappy lawyer who doesn’t do it either, it can devastate you financially.

The longer we search the more we see see what really makes places valuable…

• Being in a large, established, historic district like Hamilton Heights / Sugar Hill
• Having a certificate of no harassment, or not needing one at all.

If you click on the blue dots you get a quick synopsis of what we thought about each place.

View Townhouses We’ve Seen in a larger map

the prospect of buying in harlem was a much more harrowing process…many of the places were being sold by sketchy brokers, had sketchy situations, or were in sketchy neighborhoods….harlem is still very much house by house, block by block…even the much coveted mount morris park area still has many burned out buildings [...] many more of the places there have sro issues, or are in general worse shape.

“Harrowing” might be a little melodramatic, but honestly there are times when it feels like that. We’ve been looking for a place now for over 9 months (in earnest for 3+ months) and there are times when it’s just exhausting and depressing. Just when you think you’ve found a place you notice drug activity at the abandoned house next door, or it turns out to be an SRO without a certificate of no harassment, or the taxes are crazy high, or it’s close to projects, or you walk the block at night and seriously worry about your safety, or they’re asking 3 times what the place is worth, or it’s a short sale and they want all cash. We’ve literally seen all of those things and the list goes on and on…

All I want is a nice shell or wreck at a reasonable price, on a decent block, that’s not too far from express trains. That’s not as easy as it sounds. We’ve expanded our search area and are willing to deal with up to 10 minute walks to an express train. I don’t even mind a place where it rains indoors or there are soft floors or there’s a staircase that feels like it’s about to give way… I can deal with those things. But everything seems to have major complications. It really does feel like I’m beating upwind…

No wonder so few places are selling…

The townhouse we were bidding on was 54 West 130th Street which is one of 28 townhouses known as Astor Row in Central Harlem. There’s a good Wikipedia article on Astor Row, and the New York Times did an article on it recently as well. Astor Row townhouses are definitely not typical Harlem townhouses. They are brick with wooden porches and are generally narrower than their lots so they appear to be in pairs.

We had a really hard time coming up with a bid. At first glance, and on an emotional level, the place looks like it’s worth $800-850K, but the more thought we gave it, the lower our bid went…

Let’s start with what’s right with the place…

• It has wonderful karma
• Even though there are locks on all the bedroom doors (hinting it’s been used as a rooming house at some point), it appears otherwise to be an intact single family home, which is quite rare.
• There are lots of original details and they’re in pretty good shape for a 126 year old house.
• It appears to be in great shape overall.
• It has a unique layout with three large bedrooms per floor - so you get the space of a 5 story townhouse without the extra flight of stairs.

It’s rare to see things in that condition these days. You see shells, and you see things where the details have been ripped out, but that particular combination isn’t something you see very often so it’s hard to put a price on it.

But there are problems as well. I’ll go over them one at a time to prove my point…

Problem #1 - The next door neighbor

The house next door (#56) is quite dilapidated. When the Astor Foundation was giving away new porches and free façade restorations the owner at the time apparently said “no thanks”. It’s possibly the worst house on the block. Here are a couple pics…

When you look at the front you think it’s just a run down eyesore. It’s not boarded up and we think we remember seeing someone go in the first time we were around there. But when we saw the back of the building we realized it’s essentially a shell that’s getting rain into it’s interior through all the broken windows. Given the condition that’s evident in the rear, it needs to be boarded up. Either the person in it is living in squalor or it’s being used for drug activity. In either case it would be too easy for it to catch fire and spread to the buildings next door, so living next to it is a scary prospect.

And it’s not just the next door neighbor….

• The two at the end of the block are run down and owned by a Pentecostal church which is taking their sweet time renovating them.
• In the other direction 2 doors down there’s another that’s a shell
• Further down the block there are a few others that are run down SROs and/or shells.
• Directly across the street there are a couple that are shell-like. One seems to have been gutted and then had all work stop.
• There are a couple other run down SROs on the other side of the block.
• The back yard is small (since so much room is given to the front yard) and there are rather rough rental buildings directly behind the townhouse. This is not like Hamilton Terrace where you have people on Convent Avenue looking at you. Go take a look at who’s hanging out in front of those buildings and you may not be so comfortable with them seeing everything you do in your back yard.

All in all you can’t use prime locations as comps for this townhouse. No matter who says it (including the NY Times), there are definitely more than “a couple” problem buildings on the block.

Problem #2 - Plumbing and Electrical

While pretty much everything appears to be in working order, when you look closely you see a different story and realize that it needs all of the plumbing and electrical replaced. There are maybe two outlets per room. Most rooms don’t even have light switches. And looking at the electrical panel I’d guess it has maybe 100 amps of power going into the house. I think we have 200 amps in our apartment.

As far as the plumbing - it’s not up to code - it’s been done with PVC which is illegal in NYC. Given that plumbers can probably lose their license for using PVC I doubt the a licensed plumber did the work.

Now think about what it will take to replace all the plumbing and all the electrical in a house where you want to preserve the original details. The work is best described as “surgical”. If it were a gut renovation it would be so much easier, but this has to be done by highly skilled workmen and will wind up being quite expensive.

Problem #3 - Other Major Expenses

Given that all the plumbing has to be redone and the bathrooms are out of date (at best) that means all new bathrooms. Likewise the kitchens (there are two - the main one in the basement and a kitchenette on the top floor) both need complete overhauls. So you’re looking at 3 new bathrooms and two new kitchens - none of which come cheap.

Add to that all new windows if not immediately, then pretty soon. The windows on the front can’t be done cheaply - they have to be approved by the Landmarks Commission. The one in the living room is nearly 5 feet wide and 7 feet tall - there’s no cheap way do a window like that and get it past Landmarks.

And if you’re going to spend that much on the place, then you’ll probably want to put in things like central air conditioning, etc… So the costs will keep adding up…

By the time you’ve finished work on that house you will have spent about the same as a low-end gut renovation. You’ll have a great place (except for the neighbor), but you’ve got to factor all those costs into your bid.

So how do you bid on a place like the Astor Row townhouse?

Take what I’m about to say with a grain of salt - our bid was not successful…

First, let’s look at the comps… There aren’t any perfect comps for this townhouse. There aren’t that many sales and none of what is selling is in a similar condition, in a similar location. So all you can look at is a range and then figure out where it falls in that range.

At the low end you have shells (or ones that are essentially shells). 6 West 128th Street (two blocks down) sold for $144/sq. ft. on 7/22/09 which is 25% below what it sold for 5 months earlier. Also close by is 46 East 126th Street which sold for $98/sq. ft. on May 14th, but that one is affected by the rezoning on 125th Street. There are a few other comps but the ones in the low end average around $120/sq. ft. and never really get much above $145/sq. ft.

At the high end you have renovated ones that literally need no work and are in mint condition. The best comps there are 63 West 127th Street which sold for $214/sq. ft. on August 17th, and 133 West 131st Street which sold for $284/sq. ft. on June 8th. I would say mint condition townhouses in that area average around $250/sq. ft. If after renovations you’ve spent much more than those, then you’ve over invested.

54 West 130th has 3,525 square feet (officially, not including the English basement - there is no cellar, so much of the basement is mechanical). So, if it were a shell it would sell for around $425K. If it were in mint condition it would sell for between $875K and $1M.

It’s hardly in mint condition and needs at least $350K in renovations - probably more like $400K. If you start with the high end of the mint comps and subtract the minimum you’d spend on renovations you come to $650,000. That’s actually what we bid, but it got rejected because “there was a substantially higher offer”. But looking at it that way is a recipe for overspending since renovations will probably cost more and the market might fall. But we loved the place and were willing to spend more than the comps warranted to get it. Honestly, I think the person who put in the “much higher offer” is insane. We’d never go “much higher” on that place - not with those neighbors and in that condition.

$650K is also exactly half way between $425K and $875K (the low and the high), and the house is somewhere between those two conceptually as well - definitely not a shell, and definitely not mint.

On a price per square foot basis we bid $184/sq. ft. and it needs about $100/sq. ft. in renovations. So our final investment would have been in the range of $285/sq. ft. - actually higher since $650K was just our initial offer and we were prepared to go up. There’s just not much selling around $300/sq. ft. so it would have been an iffy investment especially if real estate values continue to go down and even if they stay flat.

I think it’s instructive to look at the top end of the market, since after renovations that’s where you’d end up… Here are all of the Harlem townhouses that sold for more then $1M in the past 6 months…

• 235 W 132 - 7/8, $1.05M, $291/sq. ft, 3 family
  I don’t understand this one - too close to projects, not close enough to subways
• 310 W 133 - 7/10, $1.06M, $212/sq. ft., 4 family
  Odd little 2 story building sandwiched between two apartment buildings
• 236 W 138 - 7/20, $1.693M, $277/sq. ft., 2 family
  Striver’s Row
  [edit: On closer examination the square footage of this house seems misstated. It's officially 6,060 sq. ft., but it's twins on either side are in the neighborhood of 4,500 to 4,700 sq. ft. At that square footage it sold for more like $360/sq. ft. - but it's a prime Striver's Row townhouse with recent renovations so that actually isn't all that surprising.]
• 48 Hamilton Terr - 7/27, $1.1M, $292/sq. ft., 2 family
  The one we know well. Needs work, but very much livable.
• 883 St. Nicholas Ave - 7/29, $1.04, $235/sq. ft., 3 family
  Recently renovated. Appears to be in great shape.

For being the high end of the market, that’s not all that impressive. Most of those are just over $1M and they averaged $261/sq. ft. Subtract $100/sq. ft. for the renovations needed to this townhouse and you have $160/sq. ft. or $564,000.

My other rule of thumb is that townhouses should be going for 40% of their 2007 comps - that’s just how much the market has come down. In 2007 a renovated Astor Row townhouse went for $1.875M and 40% of that number is $750K, but that was a renovated townhouse which only shows that one should use the lower end of the mint comps.

We put in what we thought was a very competitive offer and it was rejected. It will be interesting to see how their other offer progresses and what it eventually sells for. There is an emotional factor to buying real estate and this property definitely elicits that. I just hope the new owner doesn’t regret what they paid for it after it’s all said and done.

Postscript: As I was writing this our broker told us the selling broker told her that another offer had come in over the offer that was “much higher” than ours. So now there’s a bidding war. I just don’t get it…

UPDATE: It’s now early March and the top of the market is clearly going up. I’d now guess this place will be worth $375/sq. ft. after about a $100/sq. ft. renovation making it’s current value around $275/sq. ft. That means the value has gone up substantially - $950K is not unreasonable for this property now. You won’t be making money on it, but won’t lose your shirt either. Thing was, back when I initially wrote this the comps didn’t come close to supporting a number of $950K. After having our offer on this place rejected, we did finally buy a place and paid $122/sq. ft. for a total shell. After renovations we’ll have about $300/sq. ft. invested in our place and the current comps say it’ll be worth about $400/sq. ft. While I love the karma of the place on Astor Row, ultimately we were shopping for a deal and Astor Row wasn’t a deal… However, someone will be very happy living there and it looks like they won’t need to worry about having lost money on the deal, which means they’ll have no regrets.

There’s a bit of a fire sale on Harlem townhouses/brownstones - their down 60% or more from their 2007 peak. Actual sale prices are often $200K or more below asking. Very few people are buying and some sellers are getting desperate. But even at drastically reduced prices Harlem townhouses may not make sense to buy unless you’ve got a pretty long-term perspective on the market.

Let’s take an example… Someone e-mailed me having seen a post here on the blog. A relative of his just bought a townhouse I had noticed a few months ago and really liked. His relative paid $146/sq. ft. for the place which seems like a great deal, but is it? The architects are telling them that renovations will cost $200/sq. ft. which means the total investment will be around $350/sq. ft. Thing is, nothing is really selling in that price range. The highest price per square foot in the past 6 months was $333/sq. ft. Their location is much better than that comp so maybe they can get $350/sq. ft., but what if the market slides more? But that’s just a short term perspective. Harlem townhouses will rebound. The property in question isn’t quite prime, but it’s got a lot going for it including incredible location, which counts for a lot.

We recently pulled out of negotiations on a wreck of a townhouse in part because when I calculated how much we’d have invested in the property after renovations it came out to $303/sq. ft. and we didn’t feel that block was worth that amount of investment (it was a sketchy block). They were willing to come down quite a bit, but we just weren’t willing to invest that much in that location.

Then we saw a huge ark of a house in East Harlem North - an enormous 5 floor townhouse with 10 1/2 foot ceilings on most floors and 12 1/2 foot ceilings on the parlor floor. When we worked the numbers on the house it was depressing. They’re asking a bit under $1M, but the house needs a gut renovation. There are some original details and parts of the house are in decent shape. But it has some structural problems and original details have been stripped out of many of the rooms. On average it would probably be worth $650-700K, but I doubt the owner understand that it’s worth that little.

On top of that it’s got some unique problems - first is the tax bill - $25,000+/year, when most townhouses pay $3,000 to $5,000/year. That can’t be changed until the there’s a new C of O specifying 3 families or less. To get that you have to first get a certificate of non-harassment (a certificate that you haven’t harassed tenants to clear the building) and they don’t have all the signatures from past tenants yet. So it’s possible that it could take 3 years to get the signatures for a certificate of non-harassment (since you have to get all tenants in the past 3 years to sign). Then you have wait nearly a year for the City to process the certificate - and you can’t even start renovations until you’ve got your certificate of non-harassment. Then you’re looking at months of renovations and if you don’t get your readjustment request in by January 5th you may have to wait another year to bring down the taxes. The extra $21K in taxes you’d be paying in the meantime could buy you $300-350K in mortgage, so that reduces the value of the property to about $300K.

But there’s more since there’s a drug house next door. The short story is that an investor put over $2M into the building (he has a mortgage of $1.999M) but then he didn’t do anything with the building. Drug dealers and addicts noticed the vacant building, got in, and now use it for drug deals and more… On top of that they’re looting the house. The air conditioners on the roof are gone. They ripped out the plumbing to the point of causing a huge flood that flooded 3 other townhouses. And last time we went by there we noticed they’ve started stealing the windows and shitting in the back yard (since there’s no working toilets now that the water is off).

You can’t help but wonder what the owner of the vacant drug building is thinking. The only scenario that makes sense to us is that the owner is hoping the building will burn and he can get out of his mortgage through an insurance settlement. But what insurance company will pay out on a $2M fire claim when there are violations on the building for being a vacant unsecured building?

So back to the big ark of a townhouse… With the tax situation it’s down to $300K. With a drug house next door that could very well burn, we think that makes the building literally worthless. Now think about the fact that they’re asking nearly $1M… We feel so sorry for the owner. We’re guessing the taxes are a major burden for him. He doesn’t even have the money to pay former tenants to sign the certificate of non-harassment. It’s just a horrible situation for him. He inherited the property, but it’s looking like his inheritance is more of a problem than a benefit.

If the market goes down much more there will be quite a few Harlem townhouses that will literally lose all value in that they’ll be worth less after renovations than the cost of the renovations. That’s what happened in the 80’s - landlords didn’t see recovery in site so they walked away from the buildings and the City became the city’s biggest landlord.

Even now the issue is that townhouses aren’t worth what you put into them after you renovate them. And they ALL need renovations. Most of them have 100 year old plumbing and wiring that has to be ripped out and replaced. Most of the ones that have been renovated have soulless renovations that are just horrid and cheaply done. That means even the renovated ones will need renovation sooner than you think. We saw one the other day that looked great but when you looked closely lots of plumbing was done with PVC which is illegal in NYC. Any plumber who gets caught using PVC would probably lose their license, so that means this great looking townhouse didn’t use a licensed plumber. So even the great ones aren’t all that great. There are a few with great renovations but they just aren’t selling ’cause their priced too high for the market. People with that much money are buying the bargains downtown.

All of that will change in time, but for now even though there are great prices on Harlem townhouses, they’re really not so great after you calculate in the cost of renovations. As a buyer the challenge is to get the sellers to understand how little value their homes have. Many still think they’re worth what they were 2 or 3 years ago.

That said, we’re putting in a bid on another townhouse. We’re in a bit of a quandary on what price to bid. Our wonderful agent (Maria McCallister of Barak) just spent all afternoon doing a driving tour of 23 properties to understand how to bid on the one we’re interested in, but more on that later…