HOW TO WEATHER THE STORM

By C. J. Hughes

The Real Deal
October 2007

There’s a saying among sailors that anyone can sail in strong winds, but it takes skill to sail in light winds. The same holds true for the real estate industry, where the ongoing credit crunch is taking the wind out of brokers’ sails.

While broker ranks haven’t significantly thinned yet, tougher market conditions could mean more brokers dropping out of the ranks in the future, making it especially important to have an edge on the competition.

Brokers have plenty of suggestions for staying on top of a changing market, including pricing properties correctly, persuading sellers to be realistic and knowing where to get financing as lenders get tighter with money. Brokers now warn clients to be even more diligent about getting their financial houses in order and to put remodeling plans on hold until they actually own the home.

“When the market is strong, everybody thinks they could do well,” said Carrie Chiang, senior vice president with the Corcoran Group, who for 20 years has been selling homes in New York, most of them priced upwards of $10 million. But when the market is down, “it requires expertise to advise buyers or sellers properly.”

Today, the best price can be lower than what sellers are seeking.

One Upper East Side seller had trouble coming to terms with market realities. He recently priced his co-op for $2,000 a square foot, a price that Chiang believed was far too high.

“But he wouldn’t listen, so I had to drop him,” she said. After all, surviving depends on commissions, and shopping a property that has no chance of finding a buyer could be a waste of resources and time, according to Chiang.

Brokers don’t need third-quarter reports to know that that there’s been a perceptible change in the sales climate over the past few months, and that homes aren’t changing hands quite as quickly.

Most industries experiencing a slowdown would see jobs lost. Brokers are realizing that possibility is distinct.

“I almost wish some brokers would be laid off because they don’t know what they are doing,” Chiang joked.

Any thinning of the ranks of brokers could be seen as a natural market response to a workforce that in recent years has ballooned.

How large? Today, in New York City, there are more than 42,000 licensed salespeople, versus about 20,000 two decades ago, according to Esther Muller, co-founder of the Academy for Continuing Education, which offers popular real estate classes.

Muller suggests that to survive, brokers need to be more knowledgeable than before about where buyers can turn to get the financing needed to buy a home.

Having an ample supply of mortgage broker contacts in the Rolodex is also useful when credit lines are becoming harder to come by.

“Chase may not be available anymore, but you can tell them, ‘I have a bank in Astoria for you,'” she said. “Good information empowers you.”

In addition to Astoria Federal Savings, brokers report, Hudson City Savings Bank and Sovereign Bank have mortgages available for interest rates that start at 6.5 percent for credit-worthy borrowers.

But Muller, who’s also a broker with 30-plus years of experience, has seen strong housing markets even when home loans were comparatively more expensive to come by. That means brokers shouldn’t worry about rates, which are at historically low levels, but instead where they can get money.

“I used to sell condos when there were 16 percent interest rates, so I don’t think the interest rate going up a point or two is a major issue,” she said. “The major issue is who will give you the money.”

These days, it helps for clients to know their eligibility for financing in advance, said Kathryn Higgins, a sales associate with DJK Residential who focuses on Upper East Side and Upper West Side properties priced between $800,000 and $5 million.

“Before, my customers were running around with their income tax and bank statements,” to create the illusion that they were serious about getting approved, knowing full well that a background check would more likely consist of nothing more than a call to their office to verify employment, Higgins said. “Now, before I see them, I want them to be preapproved, not just prequalified,” which means actually turning over pay stubs and W-2 forms.

That preapproval today will generally require a FICO credit score higher than 700 (out of 900), she said, when previously scores in the low 600s sufficed. A common blemish on credit reports is unpaid cell phone bills, usually the result of customers’ changing service providers and not paying final fees.

“You need to make sure these kinds of mistakes don’t happen” by demanding that clients get their financial houses in order before any credit check is run, Higgins said.

Also, to pass muster with lenders, it’s no longer enough just to have a job, but increasingly, a job that the buyer has had for years, in a stable profession, according to Higgins. Ask your clients the right questions early on, brokers say. You’ll know what to expect later, or have the chance to take a pass on them entirely.

It’s not only lenders who are ratcheting up scrutiny. So are condo boards. In fact, in mid-September a “high-end status couple” had signed a contract on a unit in an existing Upper East Side building, a step that used to be tantamount to closing a deal, and started planning renovations. A week later, though, the condo board hadn’t yet green-lighted them, an unusual move. Warn clients not to hire expensive contractors until they have keys in hand, brokers said, lest the client blame you for the overruns, spoiling a potentially long-term professional relationship.

“You used to be able to start measuring the drapes instantly,” Higgins said. “Now, there’s a pause.”

Overall, brokers rise and fall on referrals from satisfied customers, so if customers aren’t finding homes, or ending up in ones they can’t afford because mortgage payments are too high, brokers will ultimately suffer.

“It may be a little more tedious this way, to have all these conversations about finances at the beginning,” Higgins said. “But at the end, they will probably say thank you.”

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