not chump change, but the actual gain is neither “close to $4mm” nor “$3.5M profit”
Hat tip to The Real Deal blog yesterday for linking to Thursday’s New York Daily News report about the first unit to flip at the media magnet One57 mondo condo project. The info is so fresh it is not only not yet a public record, it is not in our listing system as sold (it was a Corcoran listing; shown as still “in contract” as of Wednesday). Somebody on the inside spilled the beans to Katherine Clarke of The News.
The outline is as simple as the numbers are staggering: some Rich Folks hiding behind a LLC paid $30,551,000 to buy the “4,483 sq ft” unit #58A on May 1, put it up for sale almost immediately and re-sold to Other Rich Folks (a hedge fund guy; go figure) for $34mm (“sources told the Daily News”). It’s not a loft (obviously) and is at a price point I hardly pay attention to (my Master List of Manhattan loft closings tops at a measly $5mm), but the news coverage gets my dander into rant mode. It’s not just the fuzzy math, but the netting that gets to me.
The Daily News headline was:
Investor flips first unit at exclusive 57th St. tower to make $3.5M profit in five months
Clarke’s scoop is the purchase price ($34mm) and identity of the buyers (the hedge guy and wife), but she pooped the math:
The former owner, Sso Enterprises, paid just $30.55 million for the unit in May, meaning it netted a more than $3 million profit in just five months. (my italics)
Her math (“more than $3 million”) is better than the headline writer’s (“$3.5M profit”), but I wouldn’t be irritated enough to write about this if she hadn’t “netted”.
The Real Deal needs a better calculator than the one that generated this headline:
One57 condo flip nets close to $4M profit
No “netting”, but that math is embarrassing, or it should be. Sold at $34mm, less the purchase price of $30,551,000, equals a (gross) profit of $3,449,000 … not very close to $4mm.
unless you are Humpty Dumpty, words have meanings
I get it that people in the business often say “profit” to refer to the difference between purchase and resale prices, without taking into account that there were some transaction costs on both sides of that round trip. But that doesn’t make it right, especially not for card-carrying members of the Media Division of the Manhattan Residential Real Estate Industrial Complex. And especially when someone like Clarke gratuitously adds “netted” to “profit”, as though some consideration had been given to the economic realities of the round trip transactions.
I hope that in no other business does the trade press ignore transaction or other expenses that erode “profit”, especially when gilding “profit” with a “net”. What else could “net” mean, other than after-considering-expenses??
It is not as though it is difficult to get a scaffold of some of the likely expenses in a condo sale. You’ve got a sales fee (often 5% or 6%, sometimes less, as we will soon see), city and state transfer taxes of 1.825%, a “mansion tax” of 1% for purchases over $1mm, and somewhat variable items such as title and filing expenses (often ball parked at 0.6%), even without getting into the necessary myriad expenses that in this instance are truly trivial (including attorney’s fees, working capital contributions).
You don’t have to know the exact numbers to realize that there are many things that will chip away at the $3,449,000 difference between purchase and resale prices before you get a”net” number.
Start with the purchase at $30,551,000 (a number that already includes the city and state transfer taxes, thanks to a change in ACRIS policy two or so years ago). The flippin’ LLC also paid the buy-side “mansion tax” of 1% ($305,510). The tax basis as of May was at least $30,856,510. I confess to being ignorant about title fees and associated expenses in the stratosphere, but if the ballpark holds, that’s another 0.6% ($183,306). Feel that drip, drip, drip yet? We are probably up to a tax basis of $31,039,816.
On the exit, the flippin’ LLC again paid the city and state transfer taxes (again 1.825%, but on the higher resale number this time: $620,500 … drip), and paid a sales fee. We show the sales fee on our listing system, and the fee was ‘only’ 4% (as, I am told, is typical of sales in the stratosphere): that’s a cool $1,360,000. Drip, drip, indeed. Not all of that $34,000,000 sale price went back into the coffers of the flippin’ LLC; just taking these two big chunks out brings the sell-side ‘net’ down to $32,019,500.
Without getting into other actually expenses that the flippin’ LLC had to consider (to take just one example the green-eye shades would insist on: the LLC probably put down at least 10% when it signed the contract to buy in November 2013, so lost the use of at least $3,055,100 for the 6 months it took to close, and then of the full $30,551,000 for the 4 months it took to flip), the raw numbers are not so very far apart, all things considered (especially considering the press):
Of course, they wanted more. They asked $40,000,000 originally, then dropped to $36,000,000 in 6 weeks, and then got negotiated down to the deal at $34,000,000 reported by The Daily News. A deal at the last ask would certainly have been more impressive (they’d have “netted” “close to $3mm”, indeed). But that’s not what happened.
does Big Money play for six-figure returns?
I have to wonder if they’d have gone through all the trouble, and parked all that money for all those months, if they’d known the return would be six figures.
Disclaimer: As our Corcoran cheat sheet for “typical” condo closing costs notes:
Additional taxes on capital gain associated with the sale of real estate including Federal, State and the specialized Medicare tax may apply. Please consult with your tax professional to ensure compliance with all applicable tax regulations. Corcoran is not a licensed tax advisor.
better more accurate headline would have been something like:
Disappointed investor flips first unit at exclusive 57th St. tower to make less than $1M profit in five months
That might not have attracted many eyeballs for The News or for TRDNY, but the text might then have expanded on this Clarke detail in The News:
The 58th-floor, three-bedroom home was originally listed for a whopping $40 million but faced competition from remaining developer-owned units at the building.
The take-away might then have been less “look at the huge flippin’ profit!” and more like the other news articles you’ve seen recently about the possible glut in the mondo condo niche. I mean articles like this one from Bloomberg, about a certain West 57th Street condo. [UPDATE 4:40PM: Or, articles like this one, on the front page of tomorrow’s New York Times Sunday Real Estate section.] Other flipping flippers have likely taken note, and little comfort.
It was the guy’s birthday this week (and the anniversary of the founding of his semi-eponymous firm), so let’s give The Miller the last word on this mondo condo world:
“In other words, the sky is not the limit.”
I’ll take the last word (here) on the Manhattan Media Division of the Residential Real Estate Industrial Complex: “net” profit means, you know, “net” of obvious and huge expenses. To simply subtract purchase price from resale price is much too simple for professional real estate writers like Clarke and for the usually reliable The Real Deal.