Risks with buying new launch condo property project in Manhattan
Posted by Wei Min Tan on May 4, 2020
Buying into new launch condo projects in Manhattan is an extremely fun experience. We visit the multi million dollar sales gallery, we get served coffee and whatever fancy bottled water we want, and we view the model condo which has the best quality materials. The fun level with viewing a new launch condo is 10x that of viewing a resale condo where we buy from an individual seller. Enough about upsides. What are the risks and downsides?
My business is representing investor buyers and the split is 50/50 between new launch condo projects and resale condos. While new launch condo projects have many upsides, we always advise clients on downside risks. The top three downside risks when buying into a new property project in Manhattan are below.
Risk 1: Competition within same building to rent out
Like my investor clients, there are many other investors who have the same objective of renting out their newly finished condos after closing. Closings are usually 2 years from when the project started selling. And closings are usually from the bottom floors up. Right after closing, you will see investors’ condos in the project listed for rent.
In a resale situation the competition is sometimes with landlords within the same building and more likely with landlords at different buildings. But with a Manhattan new property project, competition will be from new landlords within the same building. There may be multiple one bedrooms for rent, multiple two bedrooms for rent etc. Some landlords purchased in cash and can lower asking rent to be more competitive. But lowering asking rent is more challenging for landlords with a mortgage to cover every month. While a tenant may wow over the high quality finishes, the tenant will also mention that he is debating between your unit and the other 2 units in the same building.
Weimin’s article, Being the early bird when buying new launch Manhattan condo projects
Deal example: The Sutton, Turtle Bay, Midtown East. This Toll Brothers development only required 10 percent reservation deposit. Represented multiple buyers at the $2 million price point. Location, classic style windows and luxury finishes make this a good investment. Close to United Nations, Citigroup Center, Blackstone, Blackrock. Rented at premium rents from the beginning.
Risk 2: Project not 100% done for months after closing
In addition to competition from other landlords, amenities are usually not done until a few months after closing! This means tenants who come to view will see outstanding construction work in the lobby, fitness center still under construction, resident lounge still under construction etc. Naturally, these tenants complain and may offer lower than asking rent. Developers can notice buyers to close after the condo unit is done, not after all amenities are done. This is a way to complete the deal sooner for developers.
Weimin’s article, Strategy for buying new condo in Manhattan
Risk 3: If project doesn’t sell well, later buyers may get more benefits
When buying into a new project, we can only forecast what the appreciation may be after the project is completed. The advantage is the buyer books at a discounted price. The assumption is that over the 2 years it takes to complete a project, the price increases along the way. The magnitude of price increase depends on demand for the building.
Sometimes the unexpected happen. A recession may hit in the middle of construction and the building doesn’t sell as anticipated. Buyers always want to be the first ones in because that is usually when pricing is lowest. Let’s say a buyer books a unit at the very first launch party (complete with wine, sushi etc). The building doesn’t sell as anticipated. To entice later buyers (over the 2 years of construction), the developer may eventually offer incentives such as paying for 1-2 years of common charges or paying transfer taxes – benefits that the very first set of buyers did’t get.
In summary, while new launch condo projects are so attractive and sexy, there are risks. It is important to understand the risks from the beginning, especially in this industry where everyone only talks about the upsides.
Weimin’s article, How recessions impact Manhattan property
What We Do
We focus on global investors buying Manhattan condos for portfolio diversification and long term return-on-investment.
1) Identify the right buy based on objectives
2) Manage the buy process
3) Rent out the property
4) Manage tenants
5) Market the property at the eventual sale
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