Can you put a price on proximity to family?
That is, how much would you be willing to give up to live close to family? Can you put a price tag on it? We tried.
We’ve been highlighting sales every month with a question around it. When our client closed on an apartment in Manhattan on the East Side. She had wanted to move to live closer to her family. Sounds pretty normal, except that it wasn’t a typical transition from one apartment to another.
She had lived in an apartment building in one of the outer boroughs for nearly four decades, in a rent-controlled apartment. So, in moving, she gave that up. She traded a very low-rent situation for living in a cooperative building, because she valued proximity to family more.
It got us thinking. Would you give up a rent-controlled apartment? And if so, how much are you leaving on the table, today and in the future? We tried to figure it out.
A quick explainer on Rent Control
Rent regulation can be broken into two big categories: Rent Control, and Rent Stabilization. Both situations give tenants the opportunities to stay at below-market rents on an ongoing basis. Rent stabilization laws allow landlords modest increases, which are determined by a Rent Stabilization Board on an annual basis.
Rent Control, however, allows a tenant to stay a fixed rent FOREVER. That is, if you moved into an apartment in 1948, one year after Rent Control rules went into effect, your rent could, theoretically, be the same 74 years later. And we’ve seen this situation: Tenants paying $250 or $500 for a 4-bedroom apartment in a building like The Belnord, where the monthly charges the landlord pays to the building and in real estate tax might be 5-10 times that number. That is, the landlord is bleeding out slowly.
For the tenant, it’s a great deal. Someone is celebrating every day with their low rent. I mean, think of the best deal you can, and then triple its goodness. You get the point.
In most cases in Manhattan, the differential between the rent and the market rent is so massive, that most tenants do not move until they pass away. Or until a landlord offers them enough money to do so. The latter is even harder to do today, given stricter rules around landlord-tenant conversations. The negotiations are high stakes; when properly done, a holdout tenant can extract serious money from a landlord who may be trying to demolish a building (this article about 220 Central Park South talks about the tenants, but as I understand it, when done right, the last tenant can really hit a jackpot).
Once, I actually heard a rent-controlled tenant say, “The landlord doesn’t own the building. I do.” Food for thought. Organizations like CHIP have something to say about it. You may, too.
What Happens When The Apartment Isn’t Worth Much?
In the end, it’s all about the market value of the apartment, whether as a rental or a sale. Many of these apartments are in buildings that converted to cooperative or condominium long ago. When a tenant moves out of – or dies in- an apartment in one of these buildings, the landlord will often renovate and sell the apartment. So if the landlord can buy out a tenant for a reasonable number, it behooves them to do it, then flip the apartment – that is, sell it. Time value of money, etc.
On the other hand, the calculus can get rather complicated. How old is the tenant? What is the likelihood the tenant will die soon? Actuary tables become part of the conversation. A rather yucky conversation, but one that is had by business people wearing their business hats.
With our client, the outer borough unit was probably worth no more than $100,000 on the market, were it to be sold. So the likelihood that a landlord would offer very much to get the tenant out is minimal. I would guess about $20,000 might be a maximum number the landlord might offer the tenant.
The Tenant’s Math
The tenant might consider what she was paying every month, compared to what she’ll be paying in a unit she’s buying. If she was paying cash for her new apartment, then the only cost is the monthly building charge. You can be sure that the difference of the outer borough rent- say, $500 at most- would be at least $1000 per month. That is, $1000 lower than the new costs. Over 10 years, that’s $120,000, plus the increases over time. So far, the tenant is giving up about $20,o00 plus the estimated $130,000. Let’s call it $150,000 in benefits she loses by moving out.
Was it worth giving up a rent control apartment and $150,000?
What would you do? Our buyer already has a pension to cover her monthly costs. She buyer gets to live near her family. She gets to have more dinners, more visits, and more quality time. She’s closer to her doctors. And she’s in a building with better staff.
We’ve had people sell apartments and lose $500,000 or $1mm to be closer to schools, or closer to family. This seems like a bargain, not to mention that New York City has, from time to time, proven to be an asset that appreciates, too.
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