In our “Ask the Experts” section this month, The Apple Peeled asked The ESPINAL ADLER Team’s very own Marie Espinal to share her insights into modern-day, New York City real estate negotiating.
The Apple Peeled Question: Of all the qualities that go into being a successful New York City real estate agent, where does “effective negotiator” land on the list?
Marie: This is New York City. It’s competitive. You have to constantly prove yourself and be able to consistently demonstrate your value. Shrewd negotiating is a huge part of that. Tough talk on a phone call only scratches the surface. You have to understand the landscape of the industry, and be able to see the big picture before you can effectively strategize on how to negotiate the best possible deal. You have to be knowledgeable and you have to think outside of the box.
The Apple Peeled Question: How much room for creativity is there in a real estate negotiation?
Marie: There’s plenty of room, in New York City especially. There’s a lot of new development inventory and the owners of those buildings are more comfortable with some deal structures compared to others. They might prefer to offer a concession instead of a price cut.
Creative structuring plays a significant role in other ways too. Our clients want to make a good financial decision. Negotiating the best terms with a seller is part of that, but our team explores many alternative ways for our clients to save money and/or meet certain financial benchmarks to create a solution. We carefully comb through our clients’ financial objectives and desired loan structure to carve out areas where we think we can negotiate better terms.
The Apple Peeled Question: You mentioned that a developer might prefer to offer concessions rather than a discount to purchase price. What type of concessions are you talking about?
Marie: A concession is a credit from seller to buyer, for the buyer to use toward that transaction. It’s important to point out that there are many different ways that credit can be applied:
- Closing costs. More often than not, a concession is applied to traditional closing costs. Sometimes we negotiate for the seller to pay for something very specific, like mansion tax, especially since the mansion tax rate was recently increased, or something like the flip tax, in the case of a co-op. But other times we might negotiate for a specific dollar amount. For example, we might ask the seller for a $50,000 credit to be applied toward our buyer’s closing costs.
- Rate Buydown. For our borrowers that finance their purchase through a mortgage, their monthly payment is often a primary consideration. They can get that payment lower If they use a credit from the seller to permanently “buy-down” their mortgage rate.
- Example: Our client is borrowing $1,200,000. She is quoted a rate of 4.25% and she is not paying any “points” to obtain that rate. The corresponding monthly payment is $5,903.
- 1 “point” is equal to 1% of a loan amount. So, using this example, 1 point would cost $12,000. The general rule of thumb when it comes to mortgages, paying a point should result in the lender offering a rate that is ¼ percent lower.
- If our client opts to pay 2 points and use $24,000 of a negotiated concession, and applies it toward buying down the rate from 4.25% to 3.75%, the corresponding monthly payment is $5,557 vs. the original $5,903, resulting in a savings of $346 every month.
- $24,000 toward a rate buydown has the same impact on the monthly payment as putting an extra $88,000 of your own cash into the deal.
- If our client made regularly scheduled mortgage payments for 30 years at 4.25%, they’d pay $925,180 in total interest. If our client made regularly scheduled mortgage payments for 30 years at 3.75%, they’d pay $800,659 in total interest, a savings of $124,521. That’s very real and material money that we would rather our clients invest elsewhere.
- In some instances, the lower payment accomplished through the buydown can be the difference between meeting or exceeding debt-to-income thresholds put in place by lenders and co-op boards.
- Maintenance or Common Charges. In many instances, we’ve negotiated for a seller to pay monthly maintenance or common charges for a full year or even more.
- Decorating Credits.
- Storage Units.
- Parking Spaces.
Apple Peeled Question: Is there a reason that sellers would be more willing to offer a concession, or another perk like a storage unit or a parking space before they agreed to cut the price?
Marie: Definitely. There are a few great examples that come to mind:
- New Development. Every time a unit in a new building sells, it sets the market value for all the other units in the building that are like it. It becomes the best new “comp.” So, a developer would rather keep the purchase price exactly where it is and would be a lot more willing to offer concessions. A good negotiator that understands the situation would be able to maximize all concessions for their client.
- Co-op. 99% of all co-op buyers have to get approved by a Board before they can complete their purchase. It’s a corporation and the Board wants to vet any potential shareholder, but they also want to protect the value of each and every unit. The Board could deny an applicant if they thought the sale price was too low, which is where an experienced listing agent would definitely prefer a concession to a price cut. The higher the sale price, the happier the co-op Board is, and the more likely a deal is consummated.
- It’s at least worth mentioning that quite often a flip tax based on the sale price of a co-op unit is paid to the co-op upon completion of all sales. The higher the sale price, the higher the flip tax. Another reason the board would frown upon a purchase price that was too low.
- It’s also worth noting that closing costs against a co-op are much lower compared to a condo or a townhouse.
- Not Just New Development. Re-sale properties are in competition with new development properties. So, if new development is being liberal with concessions, it stands to reason that a good buyer’s agent can negotiate for similar concessions on a re-sale. The team has been pretty successful with that lately.
The Apple Peeled Question: From a buyer’s perspective, what’s better? A price reduction or a concession?
Marie: At least from a liquidity standpoint, a buyer is much better off pushing for a concession compared to a price cut. This one always gets me because buyers are always so focused on purchase price when they should be thinking about the bottom line.
Example: The asking price of a condo is $1.2 Million. If a buyer’s aim was to put 20% down, he’d need $240,000 and upwards of another $50,000 in closing costs, rounding up to a total of around $290,000. If the buyer loved the property but was worried about having an asset cushion after closing at that price point, we could negotiate for a price reduction or for a concession.
- If the seller agreed to reduce the purchase price by $50,000, down to $1,150,000, the buyer would presumably contribute 20% of $1,150,000 instead of 20% of $1,200,000. So, they’d need $230,000 and still somewhere close to $50,000 in closing costs, totaling $280,000.
- If the purchase price remained at $1.2 Million, but the seller agreed to a $50,000 concession instead of the $50,000 price cut, the buyer could apply the $50,000 concession toward closing costs. In that scenario, the buyer would need just their own $240,000 contribution.
- The first scenario reduced the buyer’s out-of-pocket requirement by only $10,000. The second scenario reduced the buyer’s out-of-pocket requirement by a full $50,000.