Real Estate Anecdotes: 2008-2009

As I tinker with twenty-plus years of real estate sequences, lessons and comic relief, “ curses…foiled-again” stories, and the wealth of minutiae which makes our days worthwhile… trying to assemble a second novel out of that mix… here are some out-takes that for various reasons
would not be in my book… for better or worse. I’ll try to toss out a vignette or two every other month from this point on.

Keep in mind my disclaimer, which I’ll use in all my novels too—

This is a fictional work, and any resemblance to persons living or
dead is purely coincidental-- though I love a good coincidence, don’t you?

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Rent-With-Option With Happy Ending

Talk about superhuman patience. I am friendly with a local married couple who might have just set an American ( or New York State, at least) record for the longest rent-with-option in history. Since 1978, they have been paying rent on a somewhat down-trodden old classic home that must have been a superb rustic estate about 80 or 90 years ago. While their other friends were buying and owning over the past couple of decades, they inhabited—and put up with, as tenants-- a semi-ramshackle brick farmhouse that needed tons of work.

Early on, they felt that the rental was perfect, as the property had considerable acreage at their disposal, plus potential areas for paddocks and facilities for horses, which they loved. There were barns on the property that dated back to the Civil War, and bore earmarks of prior owners of that era to prove it. My friends cleared and built fencing for a paddock or two over time, and for years they enjoyed having their long-retired racehorse stabled adjacent to the house.

The beauty, the trauma, and the drama of living in that home have always been intertwined—though it was a low-priced rental even thirty years ago, and even more of a bargain in the most recent decade as rental prices around Saratoga climbed sharply. The trick was, they had to bear the burden of any repairs and maintenance themselves, and not bother the landlord with any of the headaches—that was the trade-off for the low, long-term, rental fee. If the roof leaked, which it often did, they dealt with it. If the balky old oil furnace went kablooie and belched black smoke, they fixed it at their expense, and ended up heating almost exclusively with labor-intensive wood in any case. When the septic failed, they had to arrange and pay for code-compliant repair. For years, we wondered—as friends-- why they put up with such ordeals, when they could’ve afforded a newer house, minus the rattling windows and frosted over panes. But they never claimed to be new house people, never worried about keeping up with any Joneses, and rarely complained. Something about the primitive wide-plank interior and plastered walls appealed to them, even as they raised a couple of great kids and saw them through all the standard events of high school years, graduation, and got them successfully off to college. They went all those years without a mortgage deduction at tax time, and without any recourse for the endless repairs and expenses of living there. Their landlord for all those years was a classic benefactor himself, rarely if ever coming back to the one-time family homestead, but not in a hurry to sell it to them either, for reasons of his own. He seemed not to need the rent money so much as he wanted to know that the place was being kept livable, and appreciated, as it was.

Eventually, a year or two ago, the grand ole gentleman passed away, and his lawyer in Schenectady was in charge of administering the estate. There were no close relatives in the area, and certainly none young or rustic enough to have ever expressed an interest in living there themselves. This was why the patriarchal owner must have been so content to allow my friends long-term occupancy, a win-win situation with very few ripples in the relationship, I’m told.

But one day, after the aforesaid 30 years (!), they got a letter from the attorney saying it was time to liquidate the estate, with the money from the sale of the property destined to go to a charitable foundation the patriarch had appointed in his will. Would they be interested in making a fair offer to purchase the estate?

Of course they would, at long last. With two kids in college by then, it might not have been the best time for the offer to emerge, but they called me and asked my opinion of value after the owner’s attorney had arranged for 2 or 3 appraisals of his own choosing. While the home remained in the fixer-upper category for all those years, and the barns had sagged a bit over time, the land that went with the property was exquisite, mature forest land, including a piece of the steep ridge behind their house that allowed for their total privacy, as well as some self-sufficiency in the firewood department.

Long story short—they closed on the property at a fair price last fall, in a very quiet closing. I felt it was fair on the Estate of the Seller’s part that my friends, these loyal tenants, were rewarded with right of first refusal for all those years of stewardship they had put in, without complaint. It seemed a rare case in modern times of (pardon the expression) some “Indentured Tenants” being granted a valuable deed to a parcel upon which they’d invested considerable sweat equity. Even though I am a Realtor, I felt this was a case wherein the property should NOT have been subject to sale on the open market, and I was thrilled for my friends that their perseverance had paid off with eventual ownership.

A verbal or handshake agreement made years before, by a since-deceased man, had been honored, and hence a happy ending had ensued for two people who really deserved it. Many a similar situation may have resulted in a different type of ending, if greedy family members had appeared late in the game to demand a much higher price than the tenants could have afforded. That could’ve been tragic, but for it didn’t go that way.

*****

Anyone who reads this website knows I have a deep affection for Saratoga and its surrounding areas…having chosen to live here for over 30 years, and raising my family here. They also know I promote its real estate values, and to some extent defend the fact that they are higher than other regions of upstate New York, and are consistently among the highest in the Capital District.

But I am also bluntly honest about certain delusions which impede the market from moving forward, and being as good as it could be. Here is one such example:

The Underpinnings of the Multifamily Market

Let’s conjecture that there was a 4-unit apartment building for sale within walking distance of downtown, listed in the high-$400’s. The apartments were large but unremarkable—other than hardwood floors,there was nothing stunning about them, as reflected by the rents being in a range from $700-$800./month, for 1-2 BRs each. Some of the large, ancient windows were cracked or broken, and the sills were in various states of chipped disrepair—most likely a lead-paint nightmare if an inspector looked closely enough. There was evidence of water infiltration coming down an old chimney shaft, and in the back of the building signs of a prior roof leak.
The apartments must have been a bit drafty, as some of the tenants were using space heaters here and there to augment the heat. None of the apartments had any recent updating done to kitchens or baths, it would seem, since the 1970’s, if then. There was no trace of recent painting, the halls and stairways were filthy, and the basement was full of debris and detritus—in short, it was, let’s say, NOT a meticulously-maintained multi-family. Given all of the above, however, the place could still have been considered viable as an investment, primarily because of its location near the core of a vibrant city, its proximity to more expensive properties (flanked by million-dollar-plus structures, in fact), and the likelihood that, with considerable sweat-equity, (i.e. expenditure of more cash and effort than the current owners had put into it), the rents could go higher. So many listings will say that: Rents could be higher… which always begs the question, Well, why aren’t they?

The rents as they were did not come close to justifying the asking price, according to any investor’s analysis method I’ve ever encountered. The Sellers and their agent were touting the location as pre-eminent, but if that were true, why weren’t good tenants lining up to pay more for the individual units? They also touted the (limited) off-street parking and the possibility of commercial conversion, but given the number of highly visible vacancies downtown on Broadway and out by the Hospital at present, that did not seem an attractive prospect. So, in the big picture, why could an aggressive investor not try to hammer out a deal for this place?

One thing about Saratoga Springs, NY, is that even in a down market,
like that which had befallen most of the country in 2008, there are still plenty of people with cash, looking to pounce on a good investment. In the conjectural circumstance above, for instance, I’d imagine there would be 20, 30 or even 40 showings to qualified, interested, buyers during the course of a 6-12 month listing. On the part of the listing agents, that involves a ton of phone calling, messages left to tenants, and arranging for keys to be available to Buyer’s Agents—endless questions asked and answered—and ultimately, you would think, a contract negotiation would ensue that was successful.

What’s The Fatal Flaw…?

Often there is a specific reason a property in Saratoga doesn’t sell—
a specific flaw that local Realtors come to be aware of, which is not overtly obvious from MLS pictures or numerical analysis or even a casual showing.
Some people I work with, while not engineers themselves, are savvy enough in evaluating property to virtually perform a structural inspection themselves
during the first viewing. They might look to professionals to ultimately back them up on certain issues, but rarely will expensive-to-correct flaws slip past their attention, or mine.

In our example, let’s say that during an inspection of the basement, something curious was found. As with most 100+ year old buildings, a portion of the cellar floor was raw dirt, uneven and a bit damp, not a problem in and of itself. But in a back area, there was a stud wall and sheetrock installed at some point in the past, as if trying to finish or dress up an area that would never qualify as a rec room, so perhaps it was for storage? It looked like an unfinished project. There was a dark passageway behind the wall, leading nowhere, with no light back there. The main beam of the structure ran behind it, effectively concealed by the dummy wall. When a flashlight was procured to investigate, something alarming was revealed— a couple of the floor joists that ran parallel with the front wall did not quite meet the main beam anymore—their ends were apparently decayed or rotted away—whether from termites or other insects, moisture, or flaws in the wood itself, it would be hard to tell. Whatever it was, on first view, it seemed that someone might have gone to some trouble to cover up the problem (by building the stud wall, and sheetrocking it) rather than fixing the problem of support itself. Let’s say that this ironic little flaw was pointed out to the listing agent, who dutifully relayed the information to the
manager of the building, who relayed it to the owners.

Let’s also say, that despite that, my particular client still had some interest in the property, but was leery of the cost of repair that might be required to fix a serious structural flaw in the first level’s sub-floor. It would be only natural to want to find out the correct fix from an engineer or architect, and to know the cost of such a fix. No information was forthcoming on that cost, and let’s say we moved on to looking at other properties. A month or two later, let’s say we return to the place with the flawed basement beams, to see, theoretically, if anything has been improved or changed. One apartment was now vacant, above the area of the unconnected floor joists. It looks less attractive than when the tenants lived there. The rest of the building looks a bit more dismal as well, now that the first blush of the listing is past.

But the bigger concern is that the basement problem has been addressed in a manner, shall we say, that is less-than-official. Instead of re-building or re-supporting the damaged joists where they connect to the massive main beam, more work has been done on concealing the problem. A slap-dash concrete job of some sort, on top of the dirt floor, has attempted to buttress the dummy wall, and one visible part of the bad joist was cut away and replaced with a one-foot section of new wood to make it look like it connected to the main beam. Having walked through several hundred structural inspections in my time, some cursory and others intensive, I can’t imagine any inspector being impressed by what had been done to mask the lack of floor supports in that area. A Paul Simon once sang: Who do, Who do ya think you’re foolin’?

Almost anything can be fixed, for a price. When I mention the theoretical phrase “Fatal Flaw”—that only applies in a case where the property owner A) does not admit to the existence of a certain problem, or B) won’t negotiate the cost of such a problem. Some people in our more-fortunate marketplace think that just because their building sits within the City Limits of Saratoga Springs that their property should sell for full price, or damn close to it, with no questions asked. Not true anymore, if it ever was at all. Last time I checked, the conjectural listing described above
was still available.

No one can force a property owner to sell for less than they want to, but when legitimate offers are made and refused, one has to wonder about the size of the rift in the market between buyers and sellers.

Many multi-family properties contain the verbiage: Great money-maker! Positive cash flow! Easy to rent! Rents could be higher! These statements are always fairly useless to the new buyer, unless he knows what price at which he or she can acquire the property. The claims of positive cash flow are based on the mortgage of the property when it was acquired by the Seller—which may have been a long time ago—or based on the fact that there IS no mortgage. For the buyer who has to pay today’s price and base his purchase price on today’s rent roll, some of these claims or statements are facetious. To pay today’s price with yesterday’s rents in most cases makes no sense, not even close. Nine out of ten multi-family
properties are accordingly over-priced, and the 10th one—the exception— is likely sold before a willing buyer can get to it. Most investors can do the math—and once expenses and taxes are factored in, even the Saratoga properties with reasonably high rents do not break even, much less make a profit. Therefore the onus is always on the new buyers to make improvements, upgrade the apartments, and hope to attract higher rents. In this market it’s too much of a gamble that way—hence, the properties stay on the market interminably, unless there is a proper reduction, or a hard-negotiating buyer agent.

The most common problem with many multi-family investments, other than rents not supporting the price, is that often heat or utilities are included in the rent, and the tenants have no incentive to keep the costs down. Windows will be left open in winter, or the heat will be jacked up to 80 degrees in January. Profit is flowing out the leaky windows, walls, and doorways in such cases, which an infrared picture, or the bills themselves, would reveal.

What I am giving you here is one theoretical picture of what I’ve seen, which might indicate to the reader why some properties sit on the market for so long, or don’t sell at all. Price is almost always the issue, and in some cases the seller does not have the room to move on the number, based on what is owed—or in other situations, they have in their mind how much profit they need to realize, though the buyer doesn’t really care about that. The market has its own logic, from the buyer’s perspective. And finally, when behaving in the role of a Buyer’s Agent, I must reflect that, as best I can.

Not everyone out there can handle the Buyer’s version of the truth…but I am always on the lookout for those who can, and will, negotiate a contract to resolution in this very challenging market.