Would you buy a sub 400 sq foot property?

Question

I'm deciding whether or not I should proceed with a condo in Manhattan that is less than 400 square feet. Though it's a common size for NYC properties, the small square footage makes the property non-warrantable, so it is not possible to get a conventional loan (the apartment is also not Fannie Mae approved). The condo is being offered at a great price, however, and it's a wonderful building with great amenities.

While I am able to find other lending options, my concern is regarding when I eventually have to sell the property. In my opinion, it seems that it will be tough to sell this property since only a full cash transaction or unconventional loan option would be the two ways to purchase the property.

Would you purchase this property considering the future difficulty that could arise when trying to sell it? What else should I consider and what are your overall thoughts on this? Thank you.

Rick Albert · Answer

I would spend a considerable amount of time on the comps in this specific building. Go back 2-3 years and see the activity. Maybe it is common for these units to have cash buyers and the average days on market is low so it is a non-event.

You can also factor in that you are buying at a discount because of this, so you will just pass that discount along to the next buyer when the time comes. Kind of like buying on a busy street, etc.

Good news is there isn't land to build in Manhattan so the existing inventory is kind of it. Therefore general low inventory is likely to happen in the foreseeable future (obviously no guarantees).

I have only heard of this, but is there a chance later on down the road to buy a neighboring unit and combine? It's not common in Los Angeles but heard about it in New York. Maybe that's an option down the line.

Abel Curiel · Answer

Agreed with @Rick Albert, check out historical comps in the building. StreetEasy makes it simple, just search the building and click "view unavailable units".

Regarding reselling in the future, banks could finance deals in this building down the road. They would just need to review building/association documents.

Apartments currently listed below 400 sq ft. account for 0.5% of active studio & 1-bedroom unit apartments. Since these are rare units, it may take a little longer to sell when compared to larger studios & 1-bed apartments.

Sometimes, banks do not have a particular building on their "approved" list because they haven't financed a deal there in over 2 years (or ever). Other times, lenders just need to review building financials in order to finance the purchase of a unit. Lastly, if a building is primarily occupied by renters, financing could be difficult but not impossible.

I would also check out the rents in the building. On streeteasy you can view active and 'unavailable' rental listings to see how rents are trending and what the price per sq ft is. All the best!

Abel

Uddipto Bose · Answer

Thanks for the clarity regarding this, Abel!