this explains some of the funny (non-round) numbers
This may be a bit too inside baseball for some (many?), but the way New York City reports real estate sales prices changed in March, and The Real Deal stirred things up this week by reporting how StreetEasy retroactively changed sales prices in response to this change.
Long story, short: the closing price has been re-set to include the contract price and certain "concessions", if a seller paid things that a buyer typically would. As The Real Deal says, this change has caused a "lively debate" in the Manhattan Real Estate Industrial Complex.
what is included?
Here is how The Real Deal summarized what has now been (again!) included:
With the exception of the coop sale by sponsor (addressed below), this all makes sense to me, such that I wonder why people are upset by this. I generally agree with Noah over at Urban Digs about information problems in the industry and transparency, but I think he is just wrong about this:
Rosenblatt said closing costs in particular shouldn’t be viewed as part of the price, even if they are shouldered by the buyer instead of the seller.
"Transaction costs should not be included in the recorded sales price," he said. "Buyers want to know where the bid-ask met, not the all-in transactional cost."
Why would buyers only want to know about the bid-ask? And if the entire system has been reset, how does this meddle with transparency?
new development sales will be easier to comp
Let’s take one example of how this change makes it easier to analyze new development sales. It has been my working assumption that sponsors have been more negotiable about transfer tax concessions than about price, at least in part because their numbers "looked better" if they report a transaction as at (or close to) full asking price than if they also disclosed that the sponsor paid the transfer taxes. Before, the sponsor would negotiate separately with each buyer about who pays the transfer tax, with the buyer not knowing if the sponsor had made that concession to earlier buyers.
The Real Deal uses a sponsor sale at 170 East End Avenue #9A to illustrate how the change works (although the article erroneously calls that a resale). StreetEasy shows that sale was a sponsor sale, with the parties apparently having negotiated a contract price of $4.2mm and agreeing that the buyer would pay the transfer taxes of $76,650 on top of the $4.2mm.
Judging from the fact that only two sponsor sales in this entire building came out as round numbers, it looks to me as though the buyers of these units got the sponsor to pay transfer taxes: #15B ($5mm on April 24, 2009); #10A ($5mm on March 4, 2009). And it looks as though the buyers paid the transfer taxes in every one of the 92 other recorded sales in the building.
Note that this does not mean that the #15B and #10A got better deals than the other 92 buyers, only that they were the only ones not to pay the transfer taxes.
With this history, I wonder if the #15B buyer knew that the #10A buyer had already done that, and I also wonder why each of them structured their deals this way, instead of netting the transfer taxes out of whatever they had to pay ‘just’ for the apartment. And, of course, why the sponsor made exceptions for these two buyers.
I suppose that if I am buying a new development, I would have a mild preference to not pay transfer taxes (but to pay a higher price for the apartment) because I would not be able to finance the transfer taxes but can mortgage the purchase price. But that would be a mild preference. I can’t think of another advantage to a buyer, either way.
If I am trying to negotiate for a new development, I would certainly be more interested in the total of the checks I would have to pay in buying the apartment (sales price plus transfer taxes, if any) and would appreciate it if the comps netted the buy-side checks the same way. Note that other ‘transaction costs’ should not be treated the same way, because as a buyer I have no realistic expectation that I could get the seller (sponsor) to pay (for example) my title insurance costs. Not to get too squirrel-y here, but if I could get the seller to pay some of those other closing costs, I should be able to negotiate that savings directly in the purchase price.
I don’t know enough about sponsor-side bookkeeping to be sure, but with this change in reporting transfer taxes as part of the transaction price if the buyer pays them, I suspect that future new development sales will all have the buyer pay the transfer taxes. This reporting change probably eliminates any sponsor-side benefit to ‘artificially inflating’ the sale price by offering the concession that seller pays the transfer taxes.
where was I?
If you’ve followed along, I hope you get my point that this change makes it easier, not harder, to compare new development sales.
looking at coops
But I don’t get why ACRIS would report "a buyer’s portion of the underlying mortgage of the building to the purchase price" in the total transaction price. Unless what I am missing is that the buyer at closing writes a check to the sponsor for the underlying mortgage allocable to his coop shares, in addition to paying the contract price. How is the sponsor sale different from a coop resale, when (as is typical) there is an underlying mortgage? In both situations, the new shareholder is on the hook for the mortgage and the seller no longer has that liability. If anyone can explain, please do so….
everything new was old
This sturm and drang over this reporting change is all the more remarkable to me because this is the way the city reported sales until a few years ago (still quoting The Real Deal here):
So we have had a few years in which numbers got reported in a way that obscured the total amount a buyer committed to in buying a coop or condo in New York City, and now we have returned to a reporting universe in which the old way is back, and data has been retroactively re-set to standardize reporting. This doesn’t seem very dramatic to me.
a 2% solution
For the coop and condo market in Manhattan, it seems to me that the greatest impact of this change will be in reporting on new development sales in which (usually) the buyer had paid the transfer taxes but sometimes the sponsor paid. When you realize that the city and state transfer taxes total 1.85%, you see that this should not be such a big problem in assessing comps under any circumstances.
As I have said many, many times, The Market is made up of many, many individual transactions between individual sellers and individual buyers, and the likelihood that a messy (inefficient) market will result in the simultaneous sale of two precisely comparable apartments or lofts at the exact same price is essentially zero.
Let me say this gently: if a real estate agent, bank, appraiser or Curbed commenter thinks that their valuation model is so precise that it would be thwarted by a variation of 1.85%, I would say that that agent, professional or loon is kidding him (her) self. The Market will take all this into account and make up a price at which a seller and a buyer meet. It is always thus.
In other words, I suspect that Noah will be calm about this when he gets back from his vacation in Prague.
© Sandy Mattingly 2010