All Real Estate Is Local: What You Need to Know to Profit in Real Estate - in a Buyer's and a Seller's Market

Book by Lereah David

Chapter One
A 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, an...