tangled webs woven by Manhattan Media wing of the Real Estate Industrial Complex
I’d like to think I’m more a skeptic than a cynic, as I habitually click through background data to better understand newspaper (or other) stories about real estate deals or ‘facts’ or personalities. But I am tempted to the dark side by a piece such as this one in last week’s NY Post real estate section.
From what Jennifer Gould Keil says (she is a prime member of the Manhattan Media wing of the Real Estate Industrial Complex [a term that I first heard from The Miller], leveraging tips about transactions and personalities into real estate “news”), the agent described as a “flip queen” did a heckuva job (Brownie!) in creating a vastly more valuable property through skill and insight.
The reality is rather more complex than Keil’s drooling suggests. First, the drooling:
- the agent is identified as a member of the team that features a high-kicking star of “Million Dollar Listing” (a hint as to why this piece got published?)
- the agent gets quoted as saying that she “design[s] and build[s] what the market forecasts”,
- the agent had her partner (and mother-in-law) pay “$1.35 million in May 2017”,
- the agent gets credited with doing research to find that outdoor space and views in Bushwick would be attractive features for buyers from Williamsburg or the East Village,
- the agent is then credited with including those features in a “ground up development” that sold for $1.7mm to (ta da!) buyers from the East Village (“as I expected from the start”)
You’d be forgiven for thinking that this agent just made $350,000 for her mother-in-law. I think there’s a non-trivial chance that the MiL, in fact, lost money and a likelihood that any profit was small (as outlined far below). I suspect this piece was written to repay the Million Dollar Listing guys for past (or future) tips. I suspect few people care, but if you’re one who is curious about how the Manhattan Media wing of the Real Estate Industrial Complex works, read on …
fact-checking is for journalists (and bloggers)
The Post links to the StreetEasy history of this Bushwick building, from which past sales data is a few clicks away, establishing that the May 2017 purchase price was $1.38mm, not $1.35mm, perhaps a small error if the flip was a success.
Without coming out and explicitly saying so, Keil implies that The Flip Queen made at least substantial changes (after her research, possibly to add views and/or outdoor space, as those discerning buyers from Williamsburg and the East Village want) to the home purchased in 2017; indeed, suggesting that TFQ did a “ground up development”.
But the home in May 2017 was already 3,967 sq ft, when it was sold by an LLC with a developer-like name. StreetEasy shows plainly that that LLC paid $200,000 for “vacant land” in August 2015 and sold a house in May 2017 (i.e., did some sort of “ground up development”).
I can’t find drawings of the to-be-built-after-2015 building in the Department of Buildings files (note to self: learn where these are found!), but it seems clear from the Property Shark links to Permits that no permits were filed after TFQ’s MiL bought the building in 2017; if you want to go into the DoB rabbit hole, the BIN is here.) The only filings that I see after May 2017 are by the architect to make the temporary Certificate of Occupancy permanent. That building, by the way, was a 3-story 2-family that featured a penthouse that was not an additional “story” (which would apparently have prompted application of different regulations), at least one balcony, and a 3-feature bathroom in the basement portion of the lower duplex.
what did The Flip Queen do?
There is nothing in the listing description that specifies what improvements were made to the house between selling in May 2017 for $1.38mm and being flipped in November 2018 for $1.7mm. It seems that nothing was done that required a building permit (or else a building permit would have been filed), yet TFQ did something that increased the value of the home, as implied in the NY Post.
The lack of permits implies that nothing was moved, no systems (like central air) were added, no structural elements dramatically opened up. That leaves open the possibility that there were major cosmetic changes that can add value (kitchen and bath, for example). The timing suggests that some major cosmetic work was done, as it took a long time for the to-be-flipped house to be flipped:
|May 18, 2017||purchased||$1.38mm|
|June 15, 2018||new to market||$1.995mm|
(*The StreetEasy listing page has November 15 for a “no longer available” date, but the deed record shows November 9 as the sale date.)
The plan was always to flip the house, so the 13 months before the house was put back on the market were almost certainly used in renovation or design work that did not require permits. Again, kitchen and baths can be redone without permits so long as nothing is moved. The Google eventually yielded the agent’s flipping business, which has this description of the project (emphasis added to highlight the claimed [or implied] improvements):
Nothing says Brooklyn like classic brick. This ground-up development was built to match it’s environment, but also to whet the palettes of East Village and Williamsburg dwellers looking to move into and invest in a place that would afford them space, luxury, and style. With all of that in mind, we added three roof decks and a glass penthouse on the roof, which gave unobstructed views of Manhattan and incredible sunsets. The floating staircase made the place look even more massive and gave an added hang out space/bedroom to the family who would live there. It was sold in just one year with a return on investment of 100%.
Since we know that the building had a penthouse when built, I guessed that brick walls were replaced by glass, substantially if not completely. (I would imagine “adding” roof decks would require an engineer and DoB approval, so maybe there’s a set of permits I haven’t yet found.) The three “added” roof decks all sit on existing structures:
It is rather maddening, even curious, that the listing does not include a single photo of the roof decks; at first, I thought the same about the penthouse, but then I realized this has to be it:
Does that look like a “glass penthouse” to you??
One could reasonably assume that the failure in the description of the flip above to identify any work on the kitchen or baths means that no significant work was done on the kitchens or baths. (The description above goes to the trouble of claiming credit for the “floating staircase”, which presumably replaced a non-floating stair.) And claiming credit for adding three roof decks eschews credit for the deck off the kitchen that has stairs down to the garden.
counting is hard, making a profit even more so
Puff-writer Keil only implies that this was a successful flip; the flipping website makes that claim explicitly, so strongly that you wonder why Keil didn’t parrot this line:
It was sold in just one year with a return on investment of 100%.
I have my doubts. Skip down to the next bold subheading to avoid some weeds, or journey with me ….
Between the shared listing system, StreetEasy and Property Shark we know that
- the house was bought for $1.38mm and sold for $1.7mm, so there is a maximum gain of $320,000
- the flippers took out a 30-year mortgage of $814,788 and a second mortgage that looks like a secured line of credit for $350,000
- the flippers had customary closing costs to buy in May 2017, including the “mansion tax” (1% = $13,800), mortgage recording tax (on both the mortgage and line of credit) (1.925% = $22,422), title insurance (assume 0.6%, or $8,280) … that’s $44,502 ‘off the top’ (or, added to their tax basis) on Day One, without considering attorney’s fees and other incidentals
- a prudent homeowner would insure the house, and every mortgage lender would require insurance
- the flippers carried the house from May 18,2017 to November 9, 2018, just shy of 18 months, paying interest and principal on (at least) $814,788, and paying real estate taxes ($6,093/yr in the current year)
- the flippers had customary closing costs to sell in November 2018, including NYS and NYC transfer taxes (1.825% = $31,025), plus incidentals such as another set of attorney’s fees
- the flippers were prepared to pay 5% sales commission ($85,000)
We do not know
- whether they used the $350,000 credit line (either for purchase or for renovation or redesign work), so we don’t know the size of the down payment
- the interest rate on either loan (this does not appear to be a principal residence, so the rate is likely to be higher than a conventional 30-year mortgage)
- the smaller down payment in the purchase (without use of the secured line of credit in the purchase)is $185,212, while the larger (with use of the secured line of credit in the purchase) is $535,212; in the first case, the cash investment is smaller so the potential return could be proportionately greater, but mortgage-related expenses would be higher over the 18 months
- The Big One: how much the flippers paid The Flip Queen (and/or she paid contractors, architect, and/or engineer) for whatever renovation or redesign work was done (taken at face value, the “added three roof decks”, the “floating staircase”, and somehow or other the “glass penthouse”); perhaps there were cosmetic changes in kitchen, baths, or lighting that would increase this expense line
A word about the sales fee … we also don’t know whether the November 2018 purchasers were represented by a broker or if the entire sales fee went to Douglas Elliman, or if the firm made some concession to this agent for ‘family’ business. I don’t believe my firm would make a concession in this instance, particularly as the agent was not a record owner of the property and the listing description does not say that a listing agent has an ownership interest in this property, as NYS regulations would require. But if there’s a concession at all it would be limited, as there is at least one other listing agent to be paid (and both are identified with the Million Dollar Listing guys so there’s probably a team fee) and there may well be another firm taking half the fee, in any event.
let’s go to the (metaphorical adding machine) tape
On Day One, the flippers paid or committed themselves to soon pay(without considering incidentals like attorney’s fees):
- $1.38mm, plus
- $13,800 (“mansion tax”), plus
- $22,422 (mortgage recording tax), plus
- $8,280 (estimated [customary] title insurance), for a total of …
On Day Five Thirty-Nine, the flippers received $1.7mm, but paid (again without considering incidentals like attorney’s fees):
- $31,025 (NYS and NYC transfer taxes), plus
- $85,000 (likely sales fee), so they took home …
Between those two Days, the flippers paid to carry the house, approximately:
- $9,139 (estimated 18 months of real estate taxes, though the first year would have been at a slightly lower rate)
- $70,020 (estimated 18 months of mortgage payments on the $814,788 mortgage of $3,890, assuming 4% interest, though the actual rate is likely to be higher because this should not have been a primary residence loan)
- $7,500 (estimated 18 months of homeowners insurance premiums; I pay much more, but maybe they found a policy for an uninhabited house at low rates), for a total (without considering incidentals like utilities) of …
If you’re in a business of flipping homes for a profit, you’d count all these things, right? (And probably more that haven’t occurred to me.) If you’ve scrolled up a bit as we were counting, you see how suspenseful this is, so let’s recap the bold numbers:
- $1,583,975 (the Day Five Thirty-Nine proceeds), from which deduct
- $86,659 (18 months of big-ticket expenses), and also deduct
- $1,424,502 (the Day One expenses), which leads to a preliminary net of …
There are two things we haven’t taken into account. This preliminary net would be further reduced by expenses if the flippers used any of the $350,000 secured line of credit (there is a reason they thought it prudent to line it up in advance). And it cost some amount to “add three roof decks” and the “floating staircase”, and to do something or other to turn the existing penthouse into a “glass penthouse”, even if, as seems unlikely, there were no other improvements to the house. Remember, it took 13 months for whatever improvements were made to be show-ready, and brought to market … something was spent, doing something.
We are operating on a very thin margin here.
Not having either been, or represented, a flipper, I can’t be certain how they measure their return. My numbers are logical to me, certainly as to category and direction, and I’ve tried to be conservative in estimating numbers I don’t know. The return is something less than $72,814, perhaps much less than $72,814, possibly even a red number. Remember, the work that was done between Day One and the day the house was brought to market took 13 months to plan and/or refine and/or complete (of course, they had however much time between purchase agreement and closing to plan). If they had cut that in-between time in half (and had the same success in marketing), they’d have avoided one-third of the $86,659 in big-ticket expenses, or almost $30,000, so you ‘d think that (a) they knew that, and (b) they couldn’t avoid it, or (c) felt that the investment of additional expenses was warranted by the scope of work.
If you measure a return against the cash downpayment, that baseline could have been as high as $535,212 (if the only loan taken was the $814,788), possibly as little as $185,212. The return was something less than $72,814, probably much less. To avoid red numbers, let’s assume the return (after renovation / redesign costs) was as little as $40,000 (a very conservative guesstimate). If the flippers put down only $185,212 when they purchased, that is a return of 22%; if they put down $535,212, that’s a return of 7.5%, in both cases over the 18 months between the initial payment and cashing out.
Not the result implied by puff-writer Keil’s account. And not the result described on the flipping website:
It was sold in just one year with a return on investment of 100%.
nothing personal (obviously?)
I hope this is obvious: I know nothing about this agent, her real estate agent practice, or her flipping / renovation business, other than what I’ve seen and described above. And I’m really not as much interested in her as I am in the fact that Keil wrote a puff piece implying this sequence of buy-improve-sell was a great success, without thinking it relevant to talk about the expense side of the deal (inevitable closing costs, inevitable costs to carry the house until it flipped, and the cost of actually making improvements), without even fact-checking the source hyperlinked in the article about the original purchase price.
As I said up top, I am skeptical by habit and will sometimes click on public sources to go behind the stated (or implied) ‘facts’. And once things start to look a bit askew … well, you see here we are, hundreds and hundreds of words later. All to document (and link, and metaphorically footnote) that this bit of agent-fluffing by the Manhattan Medias wing of the Real Estate Industrial Complex is simply an example of PR efforts by a brokerage firm on behalf of its star agent team, abetted by a newspaper writer who is more than happy to do PR and not especially interested in journalism.
Such a strange industry I am in, sad to say….