A buyer calls and tells you they’re looking for a two-bedroom apartment. They would like to stay below $1 million, they have some money saved and they’re planning to get a mortgage.
That’s enough information to start a search.
But is it enough information to start showing apartments?
I don’t think it is.
Before we spend too much time looking at apartments, I think we need to understand where that $1 million number came from. Maybe the buyer has already spent some time figuring it out. Maybe a mortgage lender gave them the number. Or maybe it’s simply what they think they can afford.
What Can they Really Afford?
In New York City, and particularly in Manhattan, answering that question can be more complicated than it first appears.
If your buyer is looking at co-ops, which make up a large part of the Manhattan market, the question isn’t simply how much the buyer can afford or how much a lender is willing to lend them. The co-op may have its own financial requirements that determine whether the buyer is financially qualified for the apartment.
That means there may actually be three different numbers to think about: what the buyer can afford, what the lender will finance and what a co-op board is likely to approve.
You want to have some understanding of all three before you get too far into the search.
The Price Isn’t the Whole Cost
The purchase price is only one part of what a buyer has to consider.
There is the down payment and the mortgage, but there are also closing costs and the monthly cost of owning the apartment. In a co-op, that generally means maintenance. With a condo, you’re looking at common charges and real estate taxes.
And then there is the question of how much money the buyer will have left after the closing.
That’s particularly important with co-ops because many buildings want to see a certain amount of post-closing liquidity. A buyer may have enough money to make the down payment and pay the closing costs and still not meet the financial requirements of a particular building.
We don’t need to calculate all of this during the first conversation. But we need to know that it matters.
Qualified and Comfortable Aren’t the Same Thing
There is another part of affordability that sometimes gets overlooked.
A lender may be willing to lend a buyer a certain amount of money. A co-op may find the buyer financially qualified. That still doesn’t tell us what the buyer is comfortable spending.
Two buyers with similar incomes and assets can feel very differently about carrying the same monthly expense. One may be perfectly comfortable with a larger mortgage and higher monthly costs. The other may want considerably more room in the monthly budget.
Our job isn’t to decide how much they should spend. It’s to understand what they’re comfortable spending and make sure the search reflects it.
Co-op or Condo?
This is another reason I think we should talk about the type of property early in the process.
A buyer who can comfortably purchase a $1 million condo isn’t necessarily financially positioned to purchase a $1 million co-op. The down payment requirements can be different. The closing costs are different. The monthly expenses are structured differently. And, of course, a co-op board is going to look at the buyer’s finances in a way that doesn’t apply to a condo purchase.
And then there is the frequently asked question “Can I rent this apartment out?”.
So before automatically searching every apartment below the buyer’s stated price, it’s worth understanding whether co-ops, condos or both really belong in the search.
Before You Build the Search
It’s tempting to start sending listings as soon as a new buyer tells us what they’re looking for. We want to be responsive, and looking at apartments is the part of the business that both buyers and agents enjoy.
But spending a little more time at the beginning can save a lot of time later.
Before I become too comfortable with a buyer’s price range, I want to understand a few things. How much cash do they expect to use? How much do they expect to finance? Have they spoken with a lender? What kind of monthly expense are they comfortable carrying? And, particularly if we’re looking at co-ops, do we have a reasonable idea of how a building is going to look at their finances?
You don’t have to solve every financial question yourself. In fact, you shouldn’t. There are mortgage professionals, accountants, attorneys and financial advisers who can answer questions that belong to them.
We need to recognize the questions that should be answered and make sure they’re being asked early enough.
That’s an important distinction because a buyer doesn’t need us simply to find every two-bedroom apartment under $1 million. They can find most of those themselves.
They need us to help make sure they’re looking at the right ones.
And that starts before we show the first apartment.
So when that buyer calls, be sure to ask them all the questions that you need answered before setting up that first search.