Chapter OneA NEVER-ENDING STORY
My grandfather was not a gifted storyteller by any means. But there was one particular story he told with an emotion that captivated me every time I heard it. While I am sure that over the years his tale grew in size and hyperbole, it really doesn’t matter. It is the lesson of the story that is important.
My maternal grandfather was twelve years old when he, his mother, and his younger brother, like so many European immigrants in the early 1900s, anxiously crossed the Atlantic Ocean seeking a better life in America. Grandpa, as I affectionately called him, was born Dario Arditti, but an ofﬁcial at Ellis Island Americanized his name to David Arditti (in fact, I am named after Grandpa). He held several odd jobs in his teenage years, learning English and getting what education he could. His ﬁrst job as an adult was sweeping ﬂoors for a company in the garment district in New York City. Over time, he worked his way up and took on greater responsibilities. By early 1928, he was the company’s bank courier. One of his tasks was to deposit the company’s overﬂow of operating funds every Thursday morning at a branch ofﬁce of the Bank of Italy, located in Manhattan.
As his courier activities became routine, the bank manager grew particularly fond of Grandpa. Perhaps he felt an afﬁnity for the struggling young Arditti, who was regularly depositing money in the Bank of Italy. After several weeks of exchanging pleasantries, the bank manager took a greater interest in Grandpa, opening a savings account for my grandfather and convincing him to deposit one–third of his salary every week in the account. The manager began giving Grandpa tips on the stock market, recommending speciﬁc companies in which to invest. Grandpa followed his advice. Curiously, the value of every company Grandpa invested in climbed dramatically over the next two years. In fact, by the summer of 1929, Grandpa had accumulated signiﬁcant wealth for someone twenty–seven years of age.
Because he followed the advice of the bank manager, Grandpa was one of the few investors who avoided ﬁnancial ruin in the Crash of 1929. He liquidated most of his stock holdings before the crash and invested in “real” hard assets. One of his largest investments was the purchase of a gift/furniture store: the International Gift Shop. The shop was located on what was then perhaps the busiest retail intersection in America, Thirty–fourth Street and Eighth Avenue, near Macy’s department store and across the street from Madison Square Garden. By the time Grandpa was thirty–six years old, he had become a relatively wealthy man—as well as a shrewd equities investor. My grandfather owed a great debt of gratitude to the bank manager who nurtured and guided him both ﬁnancially and emotionally.
It was years later that Grandpa realized what had really happened. The Bank of Italy was founded in San Francisco. The garment company for which Grandpa worked dealt with Bank of Italy’s New York branch ofﬁce. Sometime in 1929, the Bank of Italy merged with the Bank of America. The chairman and founder of the Bank of Italy, Amadeo Giannini, became the chairman and CEO of the new and larger Bank of America. It was a name Grandpa had heard his bank manager mention from time to time; as fate had it, the bank manager was the son–in–law of Amadeo Giannini!
My grandfather realized that Giannini’s son–in–law was investing Grandpa’s savings funds in stocks of companies that the bank manager knew had applied for large loans to the Bank of Italy in order to expand their businesses. They were loans that would soon be approved by the bank. The company’s stock price usually rose after a large bank loan was approved. Of course, using inside information was more prevalent in the twenties; not until the establishment of the Securities and Exchange Act of 1934, which created the Securities and Exchange Commission, did the practice become unlawful.
My grandfather was one of the fortunate few during the Great Depression who had ﬁnancial assets left after the 1929 stock market crash. But he had to make some hard choices with his money. His younger brother (my great–uncle) had lost some of his savings, and the import business he had founded was struggling ﬁnancially. Grandpa loaned his brother the money to keep the business alive. But Grandpa faced a more important ﬁnancial decision in the mid–1930s. The owner of the skyscraper on Thirty–fourth Street that housed my grandfather’s International Gift Shop was desperately cash–poor. Knowing that his tenant had signiﬁcant funds, the owner offered Grandpa the opportunity to purchase the building for $1 million, with a down payment of a mere $100,000. Now Grandpa could make the ultimate investment—real estate. It was the hardest of hard assets in a time of economic uncertainty. The $100,000 price tag was not an obstacle—Grandpa had the money. And the $1 million price tag was a deep discount for a building that was about 55 percent occupied during the Depression. But because the real estate markets had been down across the country as a result of the Depression, rather than purchase the building, Grandpa offered instead to pay for a low–priced, three–year lease up front. This seemed a sound decision—it would give the property owner sorely needed cash and at the same time reduce the leasing costs for the International Gift Shop over a three–year period. It seemed like a win/win deal for both parties.
But it turned out to be the biggest mistake my grandfather ever made. Thirty years later, in 1969, the property owner sold the ﬁfty–story building for $150 million! Moreover, the new owner of the building tripled Grandpa’s rent, forcing the International Gift Shop to close its doors shortly afterward. Grandpa retired that year and moved to Florida.
Grandpa told me this story every year until the day he died, and he always ended the story with the same advice: Never ignore the local marketplace. What Grandpa didn’t appreciate at the time was that Thirty–fourth Street was one of the busiest and most popular streets in the world. Grandpa didn’t research the local real estate market. He made his decision about purchasing the skyscraper based on what he read in the newspapers and heard on the radio: Across the nation, jobs were scarce and families were struggling to make ends meet. He relied on national trends as well as on his experience of what was happening to those closest to him up in the Bronx, where he lived—businesses along the Grand Concourse struggling to survive. This was what was uppermost in his mind as he made his decision. He didn’t realize at the time that Manhattan was where the action was—indeed, it was the center of America at that time. Grandpa allowed the ills of the nation and the neighborhood where he lived—which he read and heard about every day—to blind him to the activity and prospects of the local marketplace in which his business was located. He had an opportunity to purchase a ﬁfty–story building on one of the most sought–after retail streets in the world for a deep discount, and he missed it. He ignored the rich potential of Manhattan because he was so focused on the nation and the Bronx. He ignored the gravity and pull of Manhattan because of the dismal stories he heard about Newark, New Jersey, and Philadelphia. He learned the hard way that local real estate values are determined by local
activity. He had made a mistake that he would not let himself, or me, ever forget.
In this book, I am following Grandpa’s lead. My objective is to offer you some valuable lessons on purchasing real estate. My grandfather was not the only person to make a mistake in real estate. Mistakes are made by many households and investors every year. The common thread among them is that they did not pay attention to local inﬂuences and activity.
Over the years, I have worked diligently evaluating local, regional, and national real estate markets, and I want to pass on some of this knowledge to you. I am also an active real estate investor, and I have built a modest but successful portfolio of investment properties of my own. I guess you could say I have come to understand what makes real estate tick. I believe that if you master the lessons that I have learned over the years on how to evaluate and purchase real estate the local way, you will become a successful real estate investor—and make Grandpa proud.
Chapter Two THERE IS NO PLACE LIKE HOME
Several years ago, an old college friend called me and asked why his investment in a two–year–old town house in Dallas, Texas, had not generated big returns. I asked him what he had expected to realize from his investment when he purchased the property. He replied that he wanted to earn what everyone else was earning from the real estate boom—annual double–digit price increases. In response, I told him: All real estate is local
The legendary Speaker of the House Thomas P. “Tip” O’Neill made famous a similar phrase about politics. But it applies equally to real estate. My college buddy made a mistake common to many people who buy real estate. He assumed that properties in his own neighborhood and city would perform as well as properties in all other areas of the country. He ignored local inﬂuences on property values. What he did not realize was that the great real estate boom of the twenty–ﬁrst century discriminated. Not every state, city, and neighborhood experienced the same highly publicized property–value increases; not every homeowner realized the same wealth gains from property ownership as others did. Dallas was left out of the boom, and so was my friend. All real estate is local
. I have found that home buyers and real estate investors who ignore these ﬁve potent words eventually make costly and avoidable mistakes. They either purchase real estate in the wrong location, like my college friend, or purchase property too late. Sometimes you also have a difﬁcult decision to make even after gathering information about a local market.
In 2002, a neighbor of mine was looking to purchase a second home— a beach house in Virginia Beach, Virginia. Beachfront homes had already appreciated by 30 percent during the previous two years. My neighbor might have just decided that the price was already too high and postponed a purchase. Instead, he examined the local Virginia Beach area economy and the then-current inﬂuences in the local real estate market. Spurred by what he learned, he made an offer on a $900,000 beach house. That house is currently worth about $1.5 million. Yes, he was lucky, but he earned his luck by becoming comfortable with the dynamics of the local market. And ﬁnally, he had the nerve to make the deal happen.
The performance of real estate—that is, how properties appreciate in value and how that price appreciation translates into household (or investor) wealth—is almost never evenly distributed. Even as I write this, the nation is a tale of two real estate markets. Most of the metropolitan areas that experienced the real estate boom during the ﬁrst ﬁve years of the twenty–ﬁrst century cooled immediately after the boom; other metros that did not experience the boom stayed the course or actually gained momentum. For example, in March 2006, Naples, Florida, which had been a well–publicized boomtown, reported a 30 percent drop in home sales for the month, increasing the inventory of homes in that local market to nine months’ supply (anything over six months is considered excess). During the same month, Cincinnati, Ohio, which never really participated in the boom, reported a 24 percent increase in home sales. No matter what time period we choose, there will always be regions (or metros) of the nation that fare well while other regions (or metros) of the nation do not.
Translation: There are always buying opportunities in the real estate markets. You just have to keep your focus on local activity
in the regions and neighborhoods in which you are interested in buying.
I spend a great deal of my professional life talking to reporters, real estate professionals, housing analysts, and many other audiences about events and trends in real estate markets. The one thing I consistently and repeatedly emphasize is that real estate is local. The Washington, D.C., market for home sales is booming—why isn’t Baltimore’s market as healthy? Naples, Florida, experiences a double–digit drop in home sales— will Fort Myers, Florida, be next? These questions and more require a local analysis. When you purchase any property—your home, a vacation home, an investment property—you are not just purchasing that particular property. You are also investing in the local marketplace in which that property resides. In real estate, the property and its local market are joined at the hip. They are one and the same.
Let me give you a rather loose analogy. When you marry, you not only establish a very intimate relationship with your wife or husband, but you also “inherit” her or his family as well. So it is with purchasing property—you establish an intimate relationship with your property, but at the same time you “inherit” the local market. You are buying the downtown, the theaters, the professional sports teams, the education system, the local university, and so on. To purchase property wisely, you need to know your property’s surroundings. You need to understand the local politics, the local economy, and the local businesses.
Every local real estate market is decidedly different from another. That is due in large part to the fact that each real estate property is unique in some way. Let’s face it—there is nothing more local (to you) than your own home. Property is not a homogeneous commodity. While a builder may construct identical four–bedroom, two–bath homes in a particular development, once a family moves into one of those homes it takes on its own personality. Decorating, landscaping, and upgrading are all personal choices that affect the home’s value. This uniqueness ﬂourishes throughout real estate markets from coast to coast. Every home is different, every neighborhood is different, and every town and city is different.
A good illustration of the unique character of real estate can be seen by comparing the pricing of a used home with the pricing of a used automobile. An automobile is a commodity that can be relocated anywhere. Its value is determined by the supply and demand for a particular model, based on upgrades and condition. For example, if two 2004 Lexus RX 330s were available for sale and had identical upgrades, color, and mileage, the only differentiating factor would be condition. If one vehicle was in poor condition (e.g., a tear in the leather seats or an engine leaking oil) and the other vehicle was in excellent condition, the vehicle in poorer condition would be priced lower.
A home’s value is also determined by the supply and demand for the home based on the model of the home (colonial or ranch, condominium), upgrades (Formica or granite or marble countertops), and the current state of the home—in other words, whether it is in good shape. But there is one large difference between a car and a home. A home cannot travel. It is ﬁrmly entrenched where it is built (except, of course, with a mobile home). Thus, a home’s value, unlike the automobile’s, is as dependent on its location as on its characteristics and amenities. Even if a home is in excellent condition, if the neighborhood in which it resides deteriorates, so will the value of the home.
Most people view the value of their home in a simplistic way—add a bathroom, renovate your kitchen, and value goes up. Or be lucky enough to be in a real estate market where there are not many homes available for sale, but many buyers, and your price will probably go up. Or when mortgage rates go down, there are usually more households looking to purchase homes, so there may be some upward pressure on prices. But most households believe that if you hold on to your home for a long enough time, values eventually go up.
But it is not that simple. There are many times when you do not control the value of your home. You can make as many home improvements as you want, but if your neighborhood is deteriorating, home values could stagnate or even fall. Similarly, you can have a great house in a great neighborhood, but if your metropolitan area is losing jobs (as happened in Detroit—see below), values may stagnate or drop. If your neighborhood is experiencing high crime rates or your local government decides to build a highway through your neighborhood, home values are destined to decline.
And there are positive inﬂuences on home values that you might not suspect. If Major League Baseball decides to bring professional baseball to your city or if the local government works with some big developers to revitalize the downtown, property values will probably rise over time. Or let’s say CBS decides to air a popular television show that is set in your city, or Oprah dedicates one of her shows to her favorite towns and your town makes the list. The increased exposure is likely to raise your town’s popularity, attracting both visitors (thus helping the local economy) and households looking to move there permanently. Do not underestimate the inﬂuential reach of Oprah (see Chapter Six).
As you can see, determining the value of a property is not as simple as supply and demand. There are so many factors and inﬂuences beyond your control. That is what makes real estate unique. You buy your home, but you are also buying the neighborhood and the city. You are buying the local property tax rate, the state income tax, and the Democrats or Republicans who are running your town and the political decisions they make. Some of those decisions will affect the value of your home. And because your home is probably your largest and most expensive asset, you need to pay attention. You may not be able to control some of the events and factors that inﬂuence property values, but the more you are aware of, the more successful you will be in purchasing and investing in real estate. This is the fate of real estate. Because of its uniqueness and inability to relocate, all real estate is local. It is a mantra you will hear throughout the pages of this book.From the Hardcover edition.
Excerpted from All Real Estate Is Local by David Lereah. Copyright © 2007 by David Lereah. Excerpted by permission of Crown Business, a division of Random House LLC. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.