My generation grew up with HGTV, with home improvement and house-hunting shows that made the idea of “flipping” properties seem attainable and highly appealing. And then we saw the crisis that was the ’08-’09 great recession caused by a bursting housing bubble. I’m not saying the people who defaulted on these loans were flippers, but that they and the banks did not think seriously enough a home purchase. The banks and the real estate agents selling these homes let people put basically nothing down and take out loans with balloon payments that they almost definitely could never afford. It was destined to fail.
In a market like NYC, you’re less likely to get into a situation like this because of the barriers to buying in a co-op or condo (higher down payments, stricter rules about liquidity). And even if you bought and have to turn around and sell a year later, you shouldn’t be in a situation where your property value has dropped to zero. But still, this odd combination of obsession with real estate investing and being convinced it’s incredibly risky has led to a lot of misinformation and fear, even in this market.
Why am I writing about this? Because this month is about selling and if you think about buying and selling correctly, with the right framework, you will end up in a good situation. If you come at it with the wrong ideas and attitude, then you will become someone who thinks home buying is a terrible idea and no one should ever do it, because look at you, you lost money when you went to sell. And you will be the type of seller who tries to cut corners to pinch ever penny, which will come back to bite you.
You can’t cut corners when you sell; you need to be smart when you buy. This is another reason I tell people not to purchase without an agent. Those tend to be the sellers who overpaid up front or didn’t think the purchase through. I know this post/month is about selling, but you can’t (usually) sell without buying first, so the two are inextricably linked.
Ok, I said you can’t flip in NYC because selling is too expensive, but why?
Here are the three main expenses selling in NYC:
Preparing the property for sale. This DEFINITELY means deep cleaning, probably means repainting and doing caulk/grout-work in the bathroom. and potentially also means staging or other improvements/repairs. Compass Concierge will front these costs now, which is amazing, but you still need to reimburse the company when you sell. A lot of sellers try to cut corners here, putting out an old, gross-looking property that sits on the market. I have seen real world examples where the owners’ refusal to spend $6,000 ended up costing them at least $60,000. Stop it.
Taxes/fees to the government. Sellers have to pay transfer taxes when they sell, on top of paying the attorney and other fees. This is the area that sellers realize they can’t really fudge, because it’s the government’s money. The one exception is capital gains taxes, as there are ways to do like-kind property exchanges or invest the gains in ways that you can avoid the tax.
Agent commission. This is the most common place that sellers try to cut corners, because they feel like all agents do is “open a door,” and that we are overpaid. First, no. I’m not overpaid and I do so, so much. As a seller, you should pay 6% unless we are talking about a property for over $5 million. Then we can discuss 5%. You probably think you’re being savvy, but you’re shooting yourself in the foot. If I see a 4% property, I know the agent has zero idea what he/she is doing and the deal is going to be a nightmare. I wouldn’t stop my client from buying it if it’s perfect for them, but if there’s anything else on the market they like, guess which one they’re more likely to purchase. Pay 6%; plan on it from the beginning. Budget it from day 1.
So if flipping isn’t a thing and selling is expensive, how do you make money on a property (aside from renting it out)? You hold onto it and keep paying off your mortgage, building up equity in the home. That’s it. All these stories you hear about someone’s apartment tripling in value — yes, maybe they bought in a neighborhood before it got really desirable, but the real way they made money was by buying something and then keeping it. I have a client who purchased in TriBeCa in 1998. Her apartment is worth almost 5x what it was back then, and that sounds like she got some crazy deal that doesn’t exist anymore. But 1998 was 22 years ago. If you bought something today, think about what it would be worth in 2042.
So the message here is that if you are smart when you buy, you hold onto the property for the recommended amount of time, and you understand that you need to pay 6% commission and potentially for painting/staging when you sell, you will do well in real estate. I’ve seen it over and over again. If you think you are smarter than the professionals, nickel and dime everything, and try to sell without investing the necessary cash up front, you will lose money and somehow think that real estate or your agent are to blame. I’ve seen that, too.
If you want to flip houses, go to Waco, TX. If you want to own in the greatest city in the USA (sorry, everywhere else), then understand that you can absolutely make money even off a primary residence. It just won’t be like Fixer Upper.
xo
Anna