The Harlem Shuffle

After spending the last two decades buying and fixing up houses for Long Islanders, Larry Nelson decided this spring that it was time to get into the nonprofit housing business. Launching the Alliance for Individualized Ministries (AIM) and signing up for a federal loan program for rehabbing old dilapidated buildings, Nelson thought only of creating cheap, decent housing for poor families in and around Hempstead. He never imagined he'd be making someone else rich.

Then a contractor friend told him that he knew some people who could help Nelson become a nonprofit development expert. There was just one catch: Nelson would have to go a little farther afield--to Harlem and Brooklyn, in fact. "They told me there were brownstones that I could pick up and help people get affordable housing," Nelson recalls.

Within the month, a real estate lawyer named Andrew Graynor had set Nelson up with a mortgage company in Farmingdale, Long Island, and a real estate appraiser in Melville. The contractor friend also introduced Nelson to one of Graynor's clients, a real estate investor named Howard Finger, who found 10 brownstones for him to buy in Upper Manhattan and Brooklyn. Nelson says Graynor even gave him $5,000 per property to cover business expenses. For Nelson, the deal sounded great: He would buy the buildings, rehab them immediately, and transfer the mortgage to new buyers soon after.

But he soon found out that Graynor's generosity wasn't quite what he bargained for. In fact, it came at a high price: hundreds of thousands of dollars. That's the profit that Finger's real estate company, No Exit Place Realty Corp., made when it sold Nelson the buildings. No Exit Place bought each townhouse cheaply, passing it on to Nelson within a day or two at a substantial markup. In August No Exit Place bought 52 West 126 Street for $130,000, then sold it to Nelson the next day for $262,000. In another transaction, 66 West 126th Street, the realty paid $130,000 and sold it the same day to Nelson for $206,000. (All sale prices in this story are calculated based on property transfer taxes.) So each time he bought a building, Nelson was on the receiving end of someone else's property flip--and each time, he paid handsomely for the privilege.

All the elements of the deal, from loan to realty company to appraiser to mortgage lender, fit together neatly. Nelson was getting his buildings through insured loans backed by the Federal Housing Administration, courtesy of a unique program that combines both purchase price and rehab costs into one insured mortgage. In consultation with the appraiser, the mortgage company approved loans large enough to meet No Exit Place's steep asking prices, even though the buildings needed extensive work and had been on the market for much less just days before.

Nelson soon figured out that it wasn't such a great deal after all. "As a nonprofit organization I really lost money when I should have gone to the seller and not used the middleman," Nelson says ruefully. "It's totally legal, but it just didn't sit right. There was a lot of money to be made." By May, Nelson was fed up with No Exit Place, Graynor and the contractor friend who started it all. He decided to get out of the deal, demanding that they sell off the properties for him immediately.

"We sell property at a fair market value," Finger responds. "Right now market value is $250,000 and $260,000, and I sometimes sell under fair market value."

Graynor, too, says that his real estate clients sell within the going market rate--they just happen to find great deals when they buy property. "[Nelson] may not be getting the same deal that my client got. That is the nature of real estate investment," Graynor says. "No one is forcing them to buy." Asked whether he recalls providing $50,000 to Nelson, Graynor responds, "I honestly do not know."