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October 6, 2008
Break contract or not?
A couple of months ago I entered into a contract on a one bedroom apartment. I put 10% of the $380,000 purchase price down at contact. I am scheduled to close at the end of October. The apartment is great and I can afford the monthly payments (only slightly higher than our current rent). The apartment is priced around or a little lower than comps in the past year.
I have been getting cold feet watching the news this past month and have been thinking about walking away and losing my deposit. Is that crazy? Also, is there anyway I could recover even part of the 10% deposit? I've already passed the board interview otherwise I would think of talking about my love of piano playing, etc.
Comments
If you already have financing secured, then no, you probably cannot get out of the contract. If you still don't have a mortgage yet and are unable to get one, then normally there is a carve-out so that you can get your deposit back.
Honestly, if I were in your shoes, unless you can get 100% of your deposit back I would not even consider backing out of the deal. Yes, prices may fall 10% in Brooklyn, but they also may not, I wouldn't chance $38k on the possibility that you find something you like that's $39k+ cheaper because it just might never happen. Way too risky of a gamble. At least you will have some equity in your new home with the $38k instead of zilch. You say it's a great place, and at/under comps, I would stick with your initial instincts and go through with the deal. Last minute panicky decisions are the easiest kind of decisions to regret.
Posted by: setancre at October 6, 2008 10:31 PM
Look talk to your lawyer. I know the seller could enforce specific performance but maybe you can work out a settlement. Did you get a commitment? That's the big question.
Look it's your life take the time to think what is best for you, good luck.
The What
Someday this war is gonna end...
Posted by: what at October 6, 2008 10:57 PM
All I know is that I would do whatever the What says. He is such a paragon of good manners and good advice. He is my brother and team-mate til the end. Anything he says should be treated as god's honest truth.
Good luck is the least genuine thing you have ever said What.
Posted by: wasder at October 6, 2008 11:55 PM
I would go ahead with the deal. You need a place to live right? Well big deal even if the place goes down 20% from when you buy it. If you hold for 5 years and in a year or 2 prices go up at the rate of inflation usually 4 % a year You will get that 20% back. That is if the prices go down 20%. When everyone thinks the worst that is usually the best time to do the reverse.
Posted by: sebb at October 6, 2008 11:56 PM
Wow, the What should get points for his measured response (and should also feel vindicated that his predictions are coming true...)
Anyway, I just saw something in the NY Times where Barbara Corcoran advised people to renegotiate rather than break a contract - can you try that? Good luck!
Posted by: Miss Muffett at October 6, 2008 11:58 PM
Walk away. In 1990, prices of 1brs in manhattan went from 300k->90k.
Posted by: thwackamole at October 7, 2008 6:42 AM
You should talk to your lawyer as What says. My husband and I are buying in Brooklyn too, and we're closing early in November. We wouldn't even consider backing out. We figure that our purchase will significantly improve our living standards with only a moderate increase in housing costs. A real estate investment should be considered a seven to ten year investment at a minimum. Whilst Manhattan coop prices may have tanked in the 1990's, the city is a different place now, crime is lower, which makes it safer, and energy costs are significantly higher, which makes it significantly cheaper to live close to the subway system and in an apartment rather than a house. The attractions of NY will not go away. While we may see some decline in apartment prices in the short term, I don't see any structural changes that make me think that there is going to be another round of middle class flight that would cause prices to tank.
Posted by: bohuma at October 7, 2008 9:17 AM
Dollars aside, my sense of right and wrong dictates you don't back out of a contract because of cold feet. Lost your job? Family emergency that requires you to move immediately to the West coast? Maybe. But not cold feet.
Remember that there is a seller on the other end of that contract, and your bad faith has consequences for that person, too.
Posted by: curiositykilledthecat at October 7, 2008 9:43 AM
I do have financing secured. My contract of sale limits the seller's remedy to the contract deposit for damages so I don't think they could seek specific performance.
Posted by: parrotgirl at October 7, 2008 9:55 AM
If you really like the place and feel that it's a good fit for you, go for it. Hedging your bets that the price will fall a bit more seems like a big risk to take. If the seller is eager to get on with the closing, perhaps your reluctance can spur them to renegotiate your deal -- get them to pay the transfer taxes or other closing costs, pay the common charges for a year or throw in some new appliances, something like that.
Posted by: ctrlaltdel at October 7, 2008 9:57 AM
If this apartment is in an established neighborhood, you have little to fear. It is in areas that have just started to (forgive me) gentrify that are most likely to see 30% price drops. And it sounds (you had a board interview) like this is an established coop. What is the downside? If you want to sell, you may be competing with those who bought lower and can sell lower but if you stay for 5 years or so... Are you permitted to sublet the place? If you can and you can cover your mortgage/maintenance, you should be ok.
Posted by: BH76 at October 7, 2008 10:05 AM
You are not alone, my husband and I are inthe same predicament but we are choosing to stick it out. Unless you live rent free- you will be spending that same amount of money ( that could be going toward equity) on rent. Yeah- the prices may go down but after that they will go up. there is no perfect situation in real estate. We decided that we would rather pay more now at a lower rate than pay less later at a higher rate. Maybe its the same thing but it made us feel better. You are lucky- you have secured financing and the place is ready for you to move in. There are others who are still trying to secure finacing and won't be moving in anytime soon - and still willing to ride out the storm. Sounds like you are in a good place and should move forward. Trust yourself over anything else.
Good luck!-
Posted by: Dappledo at October 7, 2008 10:06 AM
If you are thinking of walking away that means that you believe the apartment may be worth less than $342000. That may be the case but ask yourself if it looks like good value at $342000. In the end only you can answer that question but...
When I look at value in real estate I take rental and other expenses into account. Obviously the level of expenses changes the equasion (and unfortunately it is a co-op rather than a condo so renting options are limited) but the analysis may still help you.
If you can rent it for $2000 a month that is a 7% return before expenses. Work out what your rent return would be and if you can keep it above 5% I would say that is starting to look like value. No matter what anyone says there is also potential for capital appreciation over a sensible timeline.
Posted by: Aussie at October 7, 2008 10:11 AM
From what I read in your post, I would say you should keep the place. You're buying the home to live in it, so resale value should not be that high of a priority at this moment. Even if it were to depreciate slightly, I do not see how losing 38k and continuing to pay rent year offsets the depreciation. An apartment at 380k is also a good deal because that's the price range that the market is heading to and so your home will be stable. If you had purchased a 900k coop, then I'd say talk to your lawyer and see what your options are for backing out.
Posted by: professorf at October 7, 2008 10:33 AM
Personally, I would keep the place. But, since I'm not you, that advice can go only so far.
Definitely talk to your lawyer. I do know if I were the seller that I would definitely be enforcing specific performance, and keeping a whole big chunk (if not 100 percent) of your deposit.
Posted by: BrooklynButler at October 7, 2008 11:54 AM
It's a wonder you have the money to lose with the thought process behind your post. I haven't read all the replies, so I don't know if you stated the other units in the building are selling for well below what you are paying. However, it's probably safe to bet that the 10% down payment plus your legal fees and other expenses to date, is far more of a hit than you would take in terms of lost value in further market downturn. Additionally, your mortgage payment is deductible and your rent is not. Walking away, when you can afford not to, would be an egregious financial error.
Posted by: bilk at October 8, 2008 9:08 AM
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