By VIVIAN MARINO
WHEN sales began almost two years ago at the first Northside Piers tower in Williamsburg, Brooklyn, buyers snapped up more than 20 percent of the 180 luxury condominiums in the first two months. They may have been drawn by the sweeping East River vistas and myriad amenities like valet parking and rooftop cabanas.
But then came the credit crisis and the meltdown on Wall Street. Sales traffic inside the 29-story glass building began to slow down, and today about a third of the condos remain unsold.
Faced with the prospect of empty units and static cash flow, just as sales were starting on an even larger sister tower — Two Northside Piers — the developer, Toll Brothers, decided to take a different approach and expand a program used elsewhere in the country that allows prospective owners to lease with the option to buy, using part of the rent toward the purchase.
Rent-to-own options, which come in many variations, have become increasingly common for developers in areas where home foreclosures are high, like Nevada, California and Florida. In most cases, the accumulated rent is used to lower the purchase price or to reduce closing costs. (Fannie Mae and Freddie Mac guidelines generally preclude using rent money toward the down payment, mortgage experts say, because buyers need to prove that they can save on their own and thus qualify for a loan.)
Prospective buyers at Northside Piers tower are essentially able to try out certain one- to three-bedroom apartments. If they like what they see, they can purchase them later on. Or, once the lease is up, they can simply walk away.
“It’s really experimental, but all indications so far are good,” said David Von Spreckelsen, a senior vice president of Toll Brothers City Living, a division of Toll Brothers. Two families have signed up for the rent-to-own program since it began this fall, he said.
In the last several months, as residential sales have softened in the city and throughout the region, other developments (many in parts of Brooklyn that are rife with new construction), have been offering similar deals, as have a smattering of motivated individual sellers. Some are finding help through Web sites devoted to such listings, like iRentToOwn.com — which, according to its founder, John Kobs, has had 4.4 million page views since its inception a year ago.
At the same time, real estate brokers have been revamping their approaches to marketing hard-to-move property to include renting with an option to buy (a k a lease purchase or lease option).
Fliers and promotional material inviting people to “test drive” homes and neighborhoods can be found on buildings in Manhattan, including Sutton Manor on East 53rd Street, 99 John Street, the Revere on East 54th Street and Morgan Court on Madison Avenue. In Brooklyn, the BridgeView Tower and the Decora are among those with this option, in addition to Northside Piers. Both sale prices and rents are often included in the listings.
The rent-to-own concept represents “a change in mind-set” during these tough economic times, said Jonathan J. Miller, a founder and the president of the Miller Samuel real estate appraisal firm. “The longer this drags out, the more acceptable this option becomes; this is just evolving,” he said.
The last time lease-purchase options were seen with any frequency in the New York area was in the late ’80s and early ’90s — a time when market conditions may have been even more dire than they are now, according to veteran real estate professionals, and certainly a time when interest rates were a lot higher.
“That period of time was a very severe downturn,” Mr. Miller said. “The market had about seven years of surplus inventory to be absorbed. In the period we’re in now, we have 7.9 months of inventory. We’re clearly going into a weak economic period but going into it with relative strength.”
Klara Madlin, the owner of Klara Madlin Real Estate in Manhattan, offered similar observations, and recalled handling a few lease-purchase deals in those dicey decades.
How many of these lessees ultimately bought their apartments back then? “I would say maybe 5 percent — not a lot,” Ms. Madlin said, noting that hard numbers are difficult to come by. Conversion rates were low, she said, “because the people generally who were renting to buy couldn’t really afford to buy.”
“I think it might be different this time around,” she said.
Renting to own can be attractive for both sides of a real estate transaction. It brings cash flow to properties that otherwise might be stagnant. And buyers lacking adequate down payments (perhaps because of stock losses), struggling with poor credit, or even recovering from a recent foreclosure, can build up savings and rebuild creditworthiness in order to get a mortgage.
For Simon Hall, a 40-year-old technology specialist from Britain, it is a means of establishing a credit history in this country and paving the path to eventual homeownership for himself and his American girlfriend, Vishma Victor, 28.
“Even though I have excellent credit in the U.K., it makes no difference in the U.S.,” Mr. Hall said, adding that “eventually I will have rental history and utility bill history. ”
Over the summer, before the birth of their daughter, India, the couple signed a one-year lease option on a 1,200-square-foot two-bedroom at the BridgeView Tower Condominiums near Dumbo, Brooklyn. If they agree to buy before the lease expires, he said, their $4,000 monthly rent (minus maintenance costs) will go toward the purchase of the unit, which has a current asking price of around $980,000.
Michael D. Mancuso, 29, a salesman, and Danielle J. Gendler, 26, an events and marketing manager, were not necessarily concerned about their creditworthiness, but they wanted extra time to save up for a larger down payment. In October, they signed a similar lease-purchase agreement for two years on a one-bedroom at BridgeView Tower.
“If we get most of the rent that we paid back, I’m pretty much living in Brooklyn for the next two years for nothing,” Mr. Mancuso said. By his calculations, 83 percent of the $3,000 in monthly rent will go toward the purchase, which means the $550,000 apartment will cost them around $490,000.
“It buys a little time for everyone,” said Scott Domansky, a principal of PRD Realty, the developer of the Heritage at Park Slope in Brooklyn, a 21-unit condominium, which last month began offering rent-to-own options on six unsold units. (So far no takers, he says, though he is in negotiations with interested parties.)
“I didn’t think this would be an option a year ago,” Mr. Domansky said. “The market was still strong — apartments were selling at such a rapid rate that I thought I would be sold out. But I’m happy to have renters and monthly income in lieu of a sale.”
Jason Murdock, a 33-year-old part-time disc jockey and technology consultant, is hoping that will happen for him. During the height of the real estate market, he bought several investment properties — including two in Jamaica, Queens — and now needs to sell them. He already lost one home, in Atlanta, to foreclosure, he said.
“I’ve had interest from people who wanted to purchase, but they couldn’t get a mortgage,” said Mr. Murdock, who recently moved to Charlotte, N.C., from Freeport on Long Island, and still needs to sell his house there as well. Allowing would-be buyers to lease first and use an as-yet-undetermined amount of rent toward the purchase “gives the buyers time to save up,” he said. It also shows him that they are qualified to buy eventually.
Brokers are even executing lease-purchase agreements in co-op buildings, though mostly, they say, as a last resort. (Most co-ops, however, restrict rentals.)
Karen Kelley, a broker at the Corcoran Group, said she had recently completed such a deal on a prewar three-bedroom on the Upper West Side. The place was listed for six months and the owners had to relocate to Atlanta, she explained. Meanwhile, Jill Sloane, a broker with Halstead Property, says her listings include two co-ops for rent with an option to buy; both had been previously listed for sale and are now vacant.
Brokers say they believe that more people are qualified to buy than are actually buying; many may be sidelined because they are waiting for home prices to reach their nadir or for the credit markets to loosen up.
“People really do want to buy — they look at New York real estate as a valuable commodity over time,” said Reba P. Miller, the president of R. P. Miller & Associates and the sales agent for Morgan Court in Murray Hill, which has about a dozen sponsor units available for rent with an option to buy.
Mike Tong, the developer of the BridgeView Tower in Brooklyn, said that an infusion of federal money into the banking system should eventually help business. Last month, the Federal Reserve and Treasury announced $800 billion in new lending programs.
In the meantime, Mr. Tong seems to be doing all he can to spur sales himself, even bringing in as a consultant a mortgage specialist, Debra Bock of Stanley Capital Mortgage, to counsel prospective buyers so that they can qualify for a loan. “About a third are having trouble,” Mr. Tong said. “But I would say that 100 percent of them would be able to buy in three to six months.”
Those leasing at Northside Piers in Williamsburg, as in other developments, must be prequalified by a mortgage company in order to buy a unit; prices range from $700,000 for a one-bedroom to $1.1 million for a three-bedroom. According to Mr. Von Spreckelsen, the Toll Brothers senior vice president, renters have six months to commit to buying if they expect to use all of their rent toward the purchase.
“After six months it trails off — they lose a month for each month they delay,” he said.
Jill Vegas, 37, an interior decorator and stager, and her husband, Michael Zimberg, 35, a director at BNP Paribas, a bank, have been mulling over that offer since their lease option at Northside Piers began in October. The couple have been eager to get back into the New York market, having rented since they sold their Upper West Side apartment at the peak around four years ago.
Yet while they are not necessarily concerned about qualifying for a mortgage, they are wary of the market and wonder how long it may take before all of its problems are sorted out.
“I think this building may hold its value,” Ms. Vegas said, “and when I look out the windows of my two-bedroom apartment I see beautiful, unobstructed views from the 23rd floor. But when I look down, I can count on every single block how many new developments are coming up and see thousands of new units, and that worries me.”
Sunday, December 07, 2008