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March 22nd, 2007

THE HAMPTONS: LET’S ALL PLAY THE BIG REAL ESTATE CHALLENGE

by Sean Jaeger

You gotta love strip searches if you want to live in New York City. It’s the great social equalizer. Get busted and you get a perp walk in handcuffs and a strip search by friendly prison guards just inside the front door at Riker’s Island. Try to buy a multi-million dollar vertical McMansion co-op on the Fifth Avenue gold coast of Central Park and the people giving you the deep cavity body search are the people standing next to you in the elevator. That’s right. The reason that nosy looking geek in the other corner of the elevator is staring at you is because he knows where and how much money you have in the bank, what you made (to the penny) last year, and every thing you put down on your income tax–not just the address of that over-priced hovel you bought last year on the wrong side of the tracks in Hampton Bays. He also knows your social security number, your monthly mortgage payment, and the fact that your friendly neighborhood mortgage broker screwed you for an extra 1 per cent on the interest rate. Even if you are only trying to buy an overpriced studio apartment – not much bigger or better decorated than one of those cells on Riker’s Island – in one of those 1960’s white toilet tile brick monsters that clog the Upper East Side. Every member of the board and all their friends (your neighbors) will know more about what’s in your wallet than the guy who gave you that colonoscopy knows about your insides. It’s called board approval. Anywhere else in the country it would qualify as a public, social, and financial deep cavity probe. So, if you want to buy an apartment in New York City, get ready to bend over and spread ’em.

Every day apartment hungry New Yorkers trade in the whole constitution and the bill of rights for what they call proprietary shares in a co-op, because when you buy one, you don’t even own it. You just own shares in a corporation called a co-op with a board of directors that are literally a law unto themselves. It should be easier to sell the Brooklyn Bridge. It really is impossible to understand how anyone ever even thought of this con, let alone got away with it. You’ve got to love New York, where we have the best politicians money can buy. And what do we get? A shaft the size of the Holland Tunnel.

But don’t believe everything you read about the real estate market just because it’s crazy. In journalism, business, politics, real estate and crime (not that there is really much difference between the last four activities on the list) there really is only one cardinal rule for finding the truth: Follow the money. The big money, the kind of money that when people start counting on their fingers they are counting in billions of dollars. And what they are buying is – take a guess – real estate. And they are biting off really big chunks, like Stuyvesant Town down there on the edge of Alphabet City. Their alphabet is spelled REIT (that’s Real Estate Investment Trusts) and they are going on a buying frenzy. Even the king of McMansions, Toll Bros, is looking in the concrete canyons of New York City.

Of course, some pastures are greener than others. Change is coming fast after the biggest real estate deal in history, $5.4 billion for Stuyvesant Town and Peter Cooper Village, with a sudden surge of rent increases and eviction proceedings. All of this is happening in the vertical suburbs of affordable middle class housing on the East River, a high-rise urban Levittown down where bathtubs used to be in the kitchens of railroad flats. Buyer and seller are making out like bandits. A big chunk of that $5 billion dollar price tag is made up of land and streets acquired with massive tax breaks and eminent domain. What is the tax rate of return on Manhattan land for free? Chances are it won’t show on MetLife’s taxes. So what’s happening out where the buffalo roam (they do you know) out near the end of Roanoke Avenue in Riverhead…where the Hamptons meet the North Fork? Well, things are going to get all shook up pretty soon. The dirty little secret of all those real estate stores up and down the street in Bridgehampton, East Hampton, Southampton and even Westhampton Beach, is that if they aren’t Prudential and they aren’t independent they are all a Cendant spin-off–Corcoran, Coldwell Banker, Century 21, Sotheby’s, Allan M. Schneider, the lot. And by the way, Cendant is a company with a history and a reputation almost as good as, say, a real estate broker, or a used car salesman. Former Cendant chairman Walter Forbes has been sentenced to 12 years in federal prison and ordered to pay more than $3 billion in restitution. At least one big broker has opted out of the corporate giant in the Hamptons in favor of ReMax. But too many storefronts, with too many agents, who suddenly have a growing inventory of houses to sell and not many customers to buy them, at least not at anything like the asking price, is going to lead to a big shake out. Too many offices, too many agents, and not enough commissions to go around means something has to give, like the surplus of real estate offices and real estate agents. Just how bad is the housing market? Nationwide, new home sales dropped 17 percent, the worst since 1990. Home sales in the Hamptons dropped almost 25 percent. And prices? The Andy Warhol estate in Montauk reportedly finally sold for $30 Million, after years on the market with an asking price of $50 million. And a whole lot of north of the highway prices went way south.

Fear not, there are knights on white horses ready to ride in and save the real estate market in the city and Hamptons beaches. They are knights of Wall Street, the ultimate bonus babies. The big investment banks spread around about $36 billion dollars in bonuses at the end of 2006. It was a very good year on Wall Street, and the swinging cod pieces that work there. They’ve got enough money to make it worth following. But they are not buying budget properties.

Don’t look for the low end, low value, and overpriced to leap off the shelves as it sometimes seemed they did over the last few years.

Remember, the ultimate uber-broker, Barbara Corcoran, took the big real estate challenge on one of the network morning news shows recently. She picked a house for sale. She puffed it, and fluffed it and buffed it with every trick of the trade, as only Barbara Corcoran (founder and eventually seller of Corcoran Real Estate, what does that tell you?) can. She pumped it on national television as well as every other medium to be found. The result: no sale. The lesson: Brokers sell brokers. Houses sell houses. Brokers with good contacts get good houses and house hunters with money. People buying $16 million houses and $32 million dollar houses may or may not pick their brokers but they do pick their own houses. So do a lot of buyers with a lot less money. A very educated city broker, who also buys and sells houses in the Hamptons, says to showing brokers, “Show me your exclusives. Show me open listings.” The subtext is, “If I want to see another broker’s exclusives, I’ll call them. Cut out the middleman in the negotiations, and in the deal.” How bad can that advice be?

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