wearing a $500k renovation on your sleeve / 158 W 23 is flipping

bragging, not showing
The 5^th floor at 158 West 23 Street was (apparently) sold by the developer in August for (probably) $1.699mm as a white box special. The August buyers are nothing if not quick … as the “1,865 sq ft” unit has been “gut renovated” and is now offered through Shelly Russell of Corcoran for $2.55mm $2.595mm [price change Nov 14; correcting typo??] (and $1,594/mo in taxes and common charges).

It is hard to say just how beautiful the space is without seeing it, of course, but they are not giving you much help. With only 3 pictures, I guess they figure that is enough of a hint (tease?) for the truly ‘selective’ buyer.

was this their plan all along?
I really wonder if they are flipping on purpose (if they bought in order to dress + flip), or whether something happened to make them change their minds about making this their home. But that’s just me being curious (nosy). Always looking for another of those eight million stories in the naked city….

does their math make you flutter?
Let’s do the crass numbers on a back-of-the-envelope basis, as it is impossible to know exactly what their actual expenses are, or how they structured these transactions and renovation (did they pay $500k for a “$500k gut renovation masterpiece” or did they pay wholesale for $500k in value?). But clearly, it is generally risky to renovate on spec – especially at the high end, where you shrink your buyer pool the more ‘special’ a renovation is. How risky? Time will tell, but the rough numbers below show that (in this hypothetical case), it is very risky.

If the August-buyers-now-sellers paid the asking price in August of $1.699mm (the 3^rd floor went above the ask of $1.559mm), they also incurred closing costs on the front end (usually higher from a developer sale), they brag about a $500k renovation (including $150k for the kitchen), and they will have closing costs again on the other leg of the round trip. Here are just the big ticket items.

front end:
$169,900 down payment (minimum)
$16,990 “mansion” tax
$31,431 NYC + NYS transfer taxes (assuming no sponsor concession)
$500,000 renovation (did they finance it?)

= $718,321 in front end costs (with renovation paid as cash)
= $218,321 in front end costs (if they financed the renovation 100%)

back end (if they get the $2.55mm asking price):

$47,175 NYC + NYS transfer taxes
$153,000 commission (they are offering 3% to co-brokers, so I assume that is a 50/50 split of 6%)

= $200,175 in big ticket back-end costs

Of course, they also had to pay common charges and taxes ($1,594/mo) and the (hypothetical) 90% mortgage. Assuming they got 7% on that $1,529,000 mortgage, their monthly principal and interest is $10,474, so their monthly big-ticket nut is $12,068.

mistake, unless they financed the renovation
No one would do this on purpose if they had to pay cash for the renovation, as their round trip big ticket expenses are at least $918k.

If they financed the $500k renovation at 9% on a balloon loan, their big ticket round trip costs drop to $418k, but their monthly expenses go from $12,068 to something like $15,768.

best case = close at the ask in January
$2,550,000 sale proceeds
($218,321) front-end big ticket costs
($200,175) back-end big ticket costs
($78,839) carrying apartment September – January at $15,768/mo
($1,529,000) (roughly) the mortgage principal repayment
($500,000) renovation loan repayment
= $23,665

That is a hypothetical return of $23,665 on nearly $500k cash investment in five months, but my guess is that meager amount is eaten up entirely by small ticket expenses on the two sides of the round trip (attorneys, title, etc, etc, etc). In any event, even that “gain” will be wiped out by a month and a half of additional carrying costs.

At this level, it does not matter much if they put down more money on the purchase or paid for all or part of the renovation in cash. Doing so would reduce their monthly nut (but not dramatically) but would also increase the cash investment against which to measure any “gain”.

Regardless, it seems like an awful lot of work (and risk) for that kind of “return”.

I don’t think they are doing this on purpose.

© Sandy Mattingly 2007