THE BLOG
07/02/2013 03:27 pm ET | Updated Sep 01, 2013

Inside Manhattan's Real Estate Bubble: A Reality Check for Buyers...

The Dogs of War

As we close the books on the first six months of the year, we find ourselves in one of the most treacherous market cycles in memory. Although rising mortgage interest rates, uncertainty about the economy and chaos in the bond market may conspire against the run of the bulls in real estate, there is not much headwind at the moment to slow down the runaway train called Manhattan's co-op and condo sales environment. Current conditions are quite difficult for buyers and a few observations may be helpful, before pen is put to paper and the check is delivered...

What's the Definition of Insanity?

My friend and broker, Michael Daly, likes to recite the definition of insanity: "doing the same thing over and over again and expecting a different result." Such is the case with the so called loan "pre-approval letter." Despite my efforts to convince brokers and buyers that the pre-approval letter means virtually nothing, both parties refuse to accept the reality that the pre-approval letter does not guaranty that the buyer will eventually be sitting at the closing table after that epistle is issued. So, students, let's go through it again. The pre-approval letter is the beginning of the loan underwriting process and not the end thereof. Many things can come up in the underwriting meat grinder that will slow down final loan approval, or perhaps, cause same never to happen. There are beaucoup co-ops and condos out there with lousy financials. If the co-op or condo cannot pass scrutiny under the glare of the lender's ever changing guidelines, the co-op or condo will not make the cut, even if the borrower has cleared underwriting. The result: a condition on the commitment letter that cannot be satisfied. Ergo, your new mantra: the pre-approval letter means zilch...

"If You Really Want this Deal..."

The above being said, it amazes me that some brokers still encourage their customers to sign contracts without financing and funding contingencies. The state of lending has not improved one iota, and buyers who need financing in order to complete the transaction should strongly resist any pressure to sign a contract that does not protect them if the loan blows up. Yes, there is an inventory shortage, and yes, there are multiple bids, overbids and bidding wars. Nevertheless, if you don't have the cash to close if your financing does not work out, you should not sign a contract without financing and funding contingencies.

Attorney as Clydesdale

Without question, the attorney in a co-op or condo transaction is viewed by many in the brokerage community as a pack horse. We only exist to carry the weight of the transaction. With very few exceptions, I am fortunate that the brokers I work with understand the pressures we are under to comply with silly signing deadlines, when managing agents are slow to respond to due diligence inquiries. Others in the industry, who are grinding out as many sides as they can (lingo for a share of the brokerage commission) simply don't care. And attorneys make it worse on themselves, by willingly lowering fees to capture clients. When an attorney grudgingly agrees to lower a fee so a deal won't be lost, the client often simultaneously lowers his or her opinion of that attorney's professional worth. Buyers and sellers seem clueless about the potential for things to go wrong in the proverbial "simple transaction" and look for the cheapest purveyor of legal services, irrespective of the size of the deal. The attorney who goes along to get along may be popular with certain brokers, but the risk for buyers and sellers is significant.

Riding the Wave...

An interesting set of metrics is at work in the Manhattan market. In addition to a scarcity of listings, Hurricane Sandy and the Second Avenue subway have steered buyers away from some neighborhoods and have added additional pressures in the fight for the limited pool of apartments in other parts of the island. The question on the minds of many in the business, therefore, is how long can this wave of activity continue? Perhaps longer that one might think. Despite rising interest rates and the inevitable ascent of pricing, market activity could continue at its current pace for several years.

About that Bubble

Although the threat of another bubble in real estate seems remote at the moment, there is another bubble presently covering Gotham. Inside that dome is a world where buying decisions have to be made in frighteningly short time periods. Where no negative issue about the finances of a co-op or condo, physical condition of a building or apartment, shoddy construction, devious developers or problems in the neighborhood should ever cause a buyer to walk away from a potential deal. It is a world in a constant state of branding and social media hype, luring and seducing the uninitiated buyer into the churning vortex of the Manhattan real estate machine.

Residential Reality: Careful Out There...

So buyers, the deck is a bit stacked against you at the moment. And yes, you may be forced to act quickly not to lose a property. Just remember, buying an apartment is a big decision that can have significant financial consequences for many years to come. Make sure you making the right one...