The Opportunist’s Guide to Real Estate

Stefania Patinella and George Evageliou live in a 200-square-foot studio apartment at the top of a five-story tenement building near Avenue C. Evageliou, a professional carpenter who found the rent-stabilized place in the mid-nineties, has devoted years to making the tiny space comfortable, lining its walls with shelves, crafting a desk beneath the loft bed, and building a kitchen island next to the stove for his wife, who runs a nutrition program for a children’s charity. Much as the couple might have appreciated more room, their lease was too good to give up, and ownership seemed like a fantasy—at least until recently.

For almost as long as Patinella and Evageliou could remember, apartment prices in New York had only moved in one direction: upward and out of their reach. “Long ago, it had crossed past the point at which any of it was connected to reality, as far as I was concerned,” Evageliou said one recent Saturday morning, as he and his wife reflected on the sudden, nerve-racking, and tantalizing possibility of turnabout. Over the course of the last year, amid terrifying economic indicators, the couple has been scouring sale listings and tromping through open houses all over the city. As real-estate disasters mount around them, casting shadows across a thicket of glass towers full of empty million-dollar condos, Patinella and Evageliou—like many New Yorkers—see a redemptive glimmer of justice, and just maybe a buying opportunity.

It’s easy to imagine why. Home values are dropping everywhere, not just in quintessential bubble markets like Las Vegas and Phoenix, but in sociologically similar locales like San Francisco, where prices have fallen by a third over the last year, according to the Case-Shiller index. In New York, the plunge hasn’t happened yet; instead, the market has ground to a halt. Many sellers have dropped their asking prices to levels not seen for a few years, but the reductions can’t keep up with the savings expectations of would-be buyers. So sales volume has decreased dramatically: It is down by almost half in Manhattan in the last quarter when compared to the same period of the year before, according to a report by the appraisal firm Miller Samuel for Prudential Douglas Elliman. It’s the same story in Queens, and even worse in Brooklyn, where sales are off 57 percent.

Brokers are reporting that after a desolate winter, prospective buyers have begun to materialize, as they always do in the spring. This year, many of them are renters with middle-class incomes that are unconnected to the financial industry, the kind of people who were shunted to the sidelines during the boom. That is, bargain hunters. The newspapers are full of stories about opulent properties that have dropped millions from their asking prices. But right now, the action—to the extent there is action—is strongest in the segment that lists below the Manhattan average sale price of $1.8 million, and especially in the six-figure market. Those are the options that Patinella and Evageliou are exploring. They have seen scores of properties since last May, and lately they’ve been looking back at neighborhoods they once dismissed as unaffordable, like Windsor Terrace. “I’m getting kind of ballsy,” said Patinella. “I’m like, $535,000? That’s just an asking price—it’s really $400.”

“What is that reality? Is it what New York was ten years ago?” Evageliou asked aloud, before proposing a tentative answer. “I think things can fall a lot farther.”

Over the last few months, brokers have been passing around an anecdote—a ghost story, really—that I’ve heard in several different variations. A cash-rich buyer looks at a property and offers 50 percent off the asking price. Later, it turns out he did the same thing at ten other properties, and—here comes the crucial part—one of the sellers actually bit. Though identifying details are hard to come by, because brokers don’t want to give anyone ideas, many say they’ve seen it happen. “We’re actually a little shocked,” said Vals Osborne, senior vice-president of Stribling and a veteran of the high-end market. “There is something crass about it.”

Crass, perhaps—but from a buyer’s perspective, smart. During the high times, real-estate people preached the virtues of the free market, while those looking to buy often felt preyed upon, but now it’s just the opposite. At One Rector Park, for instance, a just-completed 174-unit conversion in Battery Park City, developer Andrew Heiberger is offering condos at $800 to $1,000 per square foot, considerably below costs in comparable buildings in the area. But what he sees as a steep concession to the stalled market, some shoppers treat as a starting point. At another recent project in the financial district, Greenwich Club Residences, potential buyers came in with offers of $600 per square foot. “Those people are just dismissed,” Heiberger says indignantly, contending that such “bottom-feeders” don’t understand real-estate economics. But as any bottom-feeder knows, all you need to find is one seriously motivated seller—and if that’s not Heiberger, it might very well be someone else.

In theory, market forces should close the gap between buyers and sellers. But since last fall, the national scarcity of mortgage financing made most sale discussions irrelevant. That’s starting to change now, observes Rosemary Scanlon, an economist who teaches at NYU’s Schack Institute of Real Estate. “Nobody has repealed the law of supply and demand,” Scanlon says. “This is a slice of time—and I can’t tell you how long it lasts, whether it’s a month or three months, before the bidding process starts working.”

As the standoff lingers, longtime renters have already started hunting, letting their imaginations run wild. Who hasn’t heard the tale of the bohemian couple who bought a Soho loft for pocket change during the Beame administration, or the folks who snapped up a brownstone in Fort Greene back when Spike Lee still lived there? People who were brave enough to buy during the last major real-estate downturn, in the early nineties, realized fantastic returns on their investments. And if you look closely, scouring the transaction records and the blogs, you can already see isolated cases of serious discounts.

Take Wayne Isaak, a consultant and producer who works in the entertainment industry. He sold his apartment in Soho in the summer of 2006, near the height of the market, and moved with his family into a rental in Boerum Hill. For two years, he aggressively trolled the market, working with multiple brokers. After making offers on several properties, none of which were accepted, he came across a brick townhouse in Cobble Hill that had been put up for an estate sale. Last September, the townhouse was listed at almost $1.7 million. Isaak got it for $1.1 million, more than a third off the asking price.

The properties that are most vulnerable to changing market conditions are the many luxury condominiums that started construction at the top of the boom, and are just arriving on the market now. Their developers often have to answer to their own lenders, and they’ve typically promised banks that they won’t go below a certain price per square foot. At the same time, tighter mortgage standards have made business unusually difficult. (Banks are leery of giving mortgages to buyers in new buildings—particularly in ones that are small, or less than 50 percent sold. And according to laws governing condominiums, projects must reach a threshold number of sale contracts before closings can occur, meaning that a buyer’s payoff for putting down a deposit can be a long, stressful wait for well-financed neighbors.)

In order to reach critical mass, some developers have adopted new strategies, such as advertising low “introductory” prices, like at One Rector Park. Rockrose Development, a major residential builder, is taking on buyers’ mortgage notes and also offering “rent-to-buy” deals, in which a buyer signs a lease that gives him the option to buy the apartment down the road, at a set price. “I will do what it takes, because I don’t have much of a choice given these market conditions,” says Kevin P. Singleton, a Rockrose senior vice-president. A few building owners are talking of turning to online auctions to unload unsold condos. Though the method is untried and developer interest is tepid so far, a company called Bid on the City will launch its first auction on May 17, promising to break the pricing standoff through the purest expression of the market.

Some developers are quietly marketing large blocs of units to wealthy investors, who can rent them out until the sale market improves. “A lot of the real-estate families are getting ready,” says Josh Rahmani, senior managing director of Venture Capital Properties, which specializes in what he calls “discreet” disposition of properties. The website Curbed recently reported that Rahmani’s firm was marketing 80 units at 20 Pine Street, a luxury development in the financial district, at the half-off price of $64 million, something the building’s marketing agent, Michael Shvo, denied, and Rahmani declined to confirm. Rahmani did say, however, that such deals were becoming more common, as the professional opportunists—including some hedge funds, which are said to be looking for inflation-resistant places to park their money—are poking around foundering projects. “There’s lots of people circling with cash,” confirms developer Cary Tamarkin, who says he is one of those looking to capitalize.

What will happen as vulture investors take over empty buildings, or banks acquire them through foreclosure? In the near term, new owners may prefer to rent the units before accepting fire-sale prices. But as time goes on, there should be plenty of room for prices to fall, and not only in new construction. After all, only a decade ago, the average cost of a Manhattan apartment was merely $500,000—less than a third of what it is today.

On a rainy Saturday afternoon a couple of weeks ago, I met an acquaintance of mine, whom I’ll call Deirdre, at One Hunters Point, a condominium project in Long Island City. Deirdre is an attorney at a midtown firm where business is still brisk. Over the course of the last year, she’s saved up enough money for a down payment, and she is looking at studios and one-bedrooms in the half-million-dollar range.

The asking prices of the units Deirdre saw averaged around $600,000, but the agent assured her they were very negotiable. Still, Deirdre didn’t sense the urgency that she’d felt while looking around Chelsea and the West Village. “There,” she said, “you can really smell the desperation on the brokers.” We tried the sales office at the Piano Factory, another big new development—locked up, bizarrely, on a weekend afternoon—and then walked into Astoria, down streets lined with forlorn, half-finished buildings. Over lunch at a Greek restaurant, Deirdre recounted some other stops in her search, including a one-bedroom co-op on Bethune Street that had been drastically reduced to $550,000. She showed me a listing for a one-bedroom in Chelsea. “This place is where the guy said, ‘Make an offer that’s where you think the market could be a year from now,’ ” Deirdre said. She’s still trying to puzzle out that instruction.

Even the experts, at least those smart enough to avoid embarrassment, are making no predictions about where prices will settle. Maybe they’ll stabilize at 2005 levels, a drop of 25 to 30 percent, but even then, some buyers will argue that they belong back in 2003, or 1999—a process of regression that reels backward to Peter Minuit and his beads. The perception of opportunity is a relative thing. That’s why the experts always say that you shouldn’t try to time the market, because the perfect moment is usually gone by the time you recognize it.

Here’s a story about picking real opportunities. In 2002, Eric Stuart, a musician, bought a three-story townhouse in Carroll Gardens for $650,000. He’d grown up in the neighborhood, and watched with amazement as Carroll Gardens proceeded to be transformed by an invasion of big-spending yuppies. “It was kind of comical to me,” says Stuart. “Those were made-up numbers.” When he decided to move to Nashville, he made up a sizable number of his own, listing the house at $1.65 million.

Cara Sadownick, a broker at the Corcoran Group, brought the property on the market in September—just in time for the meltdown. Over the course of several months, she talked Stuart into two substantial price reductions. Finally, in February, David and Naama Bloom came to see the place. They are having a baby, and had an all-cash buyer for their apartment on the Upper West Side. They made an offer, and after some negotiation, the two sides agreed to a deal at $1.45 million. Stuart figured his timing had cost him $200,000, but was consoled by his overall profit. The Blooms thought they overpaid by $75,000, but realized they got a house they couldn’t have afforded a few months before. Everyone felt a mixture of defeat and satisfaction—the free market had worked.

The Opportunist’s Guide to Real Estate