Nov. 20, 2008 - how big a discount for renovation? 64 West 15 Street closes with and without

how big a drag is a big job?
I've been thinking about the difficulties in this market of selling a Manhattan loft that needs a lot of work. Unit #2E at 64 West 15 Street is a recent example, as it just closed (deed filed November 3). At least in this instance, there was not as big a market discount for the fact that major renvaotion was needed as I would have thought. Let's explore....

more cash, greater income, more scrutiny
Anyone who buys a 'project' loft needs substantially more liquidity than the buyer of a fully renvoated / updated loft because the cost of the renovation (a) won't be folded into a first mortgage, (b) if financed, will be at higher rates than a first mortgage, and (c) will be subject to greater scutiny by the coop board and lender and will require higher income to support the appropriate debt-to-income ratio. Many coops will view a purchase application for a major renovation project as though the buyer will pay cash for the renovation, and judge the buyer's financial profile accordingly.

a strong stomach
Further, I find that there are fewer buyers out there with the appetite for a major renvoation than before. The buyer will need somewhere else to live for some months (and probably longer than originally planned). That means the buy will be paying for two living spaces for the duration of the renovation, or camping out with family or friends. (Buyers who need to sell another home in order to buy the to-be-renovated loft are particularly vulnerable here.) The buyer needs to have the courage and confidence that the renovation can be brought in close enough to budget to have the project make economic sense. Of course, the contractor version of Murphy's Law is a major concern here, as few major renovations seem to be brought in on time and on the money. Especially with lofts, there is a legitimate fear of the unknown -- while it can be exciting to see what is really behind some walls, not everyone has the stomach for such excitement.

Then there's the risk that the finished product will not match the buyer's dreams or architect/contractor's renderings. For many people, the certainty of buying the 'done' apartment warrants a premium over the hope that buying (and successfully completing) a project will result in the same level of finishes or pizzazz.

I will try to keep an eye out for examples to test how The Market reacts in these situations. 64 West 15 Street turned out better (for the seller of a project loft) than I would have expected.

point
Said to be "1,400 sq ft", #2E was marketed as a real project ("[t]he possibilities are endless, bring your imagination and start dreaming!"). With only two interior pix (one showing glass bricks, my form of 'carbon-dating' a loft renovation to 1980 or so), I will take the Smiling Blumsteins at their implied word that this unit needs a lot of work. The asking price of $1.299mm certainly offered some discount for the work to be done -- and it was manifestly enough of a discount, as confirmed by the fact that it did the job (contract within four weeks of coming to market on July 12 at the full asking price). Props to those Blumsteins and to the (happy, quick) seller.

counterpoint
In wonderful counterpoint, #2W closed recently, with a deed filed on August 26 for $2.3m, off an asking price of $2.395mm (reduced twice from $2.7mm since February). Based on lisings for other "W" units in the building, #2W looks to be "2,000 sq ft", so it sold for $1,150/ft in a "meticulously rebovated" condition. (The StreetEasy listing page is here.)

Compared to the meticulously renovated clearing price of $1,150/ft for #2W, the $928/ft for the endless possibilities of #2E matches just about exactly the notional ballpark figure of $200/ft for a major renovation (we established that ballpark about a year ago, in the December 10, 2007 need renovation stories / a reader writes for help), with hardly any wiggle room priced in for delay and the risk of the renovation working out. That surprises me a little.

Does anyone out there have another current example?