7. What to Check First

There are three basic rules to follow in choosing the building you are going to invest in. The first permits of not the slightest deviation. It will be fatal to compromise on the point of location. Let us see how we test for this requirement.

Let us say you have been offered a building located on Elm Street. You go to see it. The time of day when you see it is even important. Don't go while children are in school. Many a street presents quite a different picture at 10 a.m. than it does at 4 p.m. Since we fear shimmy locations, although we do not fear slum buildings since we can correct that, we see a building and its area best for our purposes when it is at its worst. Now this building is getting $50 per month as rent from each tenant. You will find it very easy to determine definitely and unmis­takably whether this building passes the first test. Drive along the street, at 4 p.m. and look about as you approach the build­ing. Remember not to decide this on the basis of whether YOU would like to live here. Just ask yourself this, "If you were going to pay $50 per month for a flat, would you consider this loca­tion satisfactory?" In the answer you will find the yes or no to location. But see to it that all the factors are considered. If there is a noisy or smelly factory nearby, or a dump or railroad, make sure you see the place, hear the place and even smell the place at its worst. Only thus can you get the full picture.

There is one more item—wet cellars. Examine the land around the building for a few hundred yards in each direction. If any neighboring land slopes down to your building, be care­ful of the incurable curse of wet cellar and the misery that comes with it. If you are at all concerned, first examine the cellar itself, ask the lower floor tenant, and then wait for a very rainy day or spell, and go to the cellar then. If you check through in all these points, you can proceed further. Otherwise drop it. For my money there is no cure for this disease. I say this al­though many have stoutly maintained otherwise.

My experience is that in those cases where this handicap has been "cured" there really was never a cure, only an abatement of the misery by digging a trench just inside the leaky wall, filling it with gravel and letting the water come in and drain out again. A very doubtful cure. In the many other cases I’ve encountered, I've seen owners strip the soil from around the entire foundation, coat the foundation with waterproof cement and tar, and after the earth was replaced, the water seeped in as before.

Hence we peremptorily pass up the buildings that do not pass the first test, that of location. Notice that we do not ask that the location be "beautiful" or 'lovely" for all buildings. Not at all. We use the yardstick that is clearly indicated by the rental rate itself. That determines the attitude and measuring eye with which we judge location.

We try to see this location through the eyes of a prospective tenant who has come to the building to see a flat. We try to see it as he will see it, and judge it as he will judge it. This is NOT difficult. We certainly can quickly dismiss the locations that are obviously so bad that even the $50 tenant will certainly not find the location to his liking. These really give us no problem nor do those that are obviously good. It is the class of location that is "borderline" that may puzzle us.

I have taught hundreds of people this principle and many have expressed doubt about their future ability to determine the fitness of those locations which were not quite bad enough to reject at a glance, and not quite good enough to approve im­mediately. I have learned over the years that they were worrying without cause. It just does not work out that way. We have all seen that in some principles of practice, the theory is easy to understand but the practice is difficult or even impossible. Here it is reversed. The theory may be hazy, but the practice invari­ably turns out comparatively simple.

There are a few simple things that will give you your answer. I speak now only of those locations that are doubtful. The first step is to ask yourself whether in your opinion, the location would be satisfactory to a prospective tenant who was consid­ering a flat in this building at $50 (if that is the rent rate). The next step is to ask the tenants themselves, but this step must be approached with one reservation. In those cases where you are considering a building that has been "over-milked", that is, everything taken out by the landlord without putting anything back unless forced, you should approach the tenants with the mental reservation that they will probably be discontented with everything about their flats.

Thus any dissatisfaction on the part of such tenants must be weighed in the light of the general conditions which they have been forced to accept under greedy or neglectful ownership. If such a tenant were to indicate to you that he is unhappy with the LOCATION of the building, you should press him for the specific points that he finds undesirable. He may come up with some very significant answers that will bear and guide investi­gation before buying. But if his complaint is very general, with no specification, you may discount it, as merely a baseless item in a general group comprising unhappiness.

Here is a little point that may help you in judging this mat­ter of location. You should give WEIGHT but not absolute control in your judgment to this point. Find out from the pro­spective seller, or the tenants themselves, how long they have lived there. If the general average term of occupancy for each tenant is over 5 years, you should add this to the plus side in the decision, but by itself, it should not be the determining factor. We have seen that this type of tenant will often stay put in the same apartment for decades even though discontented with the accommodations. The mere fact that a tenant recites that old refrain—"been living and paying rent here for 31 years and that landlord never spends a cent"—should not carry any weight with you, since it is reasonably standard and is of the same stripe as the standard griping of G.I/s about the food. Where tenants have continued to occupy for over five years, you may assume that the accommodations are such that the loca­tion is at least adequate for that rent level. You will usually find that the tenants have, on an average, occupied much, much longer than five years, but if asked to set a minimum figure, I feel that a tenant who is really dissatisfied with location would not linger five years in the unhappy location.

Once Arthur C. came to my office, almost starry-eyed with a deal that he had been offered. To him, the price was the be-all and end-all of the deal. "Bob, I just saw the most astounding bargain! Nine buildings, all Aunt Tobys. Income over $17,000 and I can buy it for $65,000, with $5,000 down. What can I lose? It's a wow of a deal." Of course, you and I know WHY Arthur was offered a package which, if all were as it should be, would be worth $100,000. Something was wrong. And that something was usually location. When Arthur calmed down, I told him the experience of Mr. B. as I always do in these cases.

One day Mr. B. and I were asked to draw a set of better forms, such as tenant leases, et cetera, for the local real estate organization. We were leaving the session and he drove me to the outskirts where my car was parked. As we rode he confided that he was aglow with a buy he had just clinched.

"I had business on this certain street and I chatted with an elderly man who was working around a building. He said he owned all eight buildings. He said he was old and tired and wanted to sell out. I was really only joking when I asked, 'What will you take for the bunch?' He replied, 'Look, mister, you mean business? Listen, 111 sell you the whole group, 25 tenants, for a very low price!'"

Ben replied, "What do you call a low price?"

The elderly gentleman retorted, "What will you give me?"

Still not really serious, Ben shot back, "Give you $15,000."

"You got a deal," replied the man to a shocked Ben.
When Ben told me about it, he was elated over just one point. He, being a lawyer, knew that nothing was binding until signed up. He felt sure that when the owner told his lawyer to draw a purchase and sale agreement for such a ridiculous price, the lawyer would either (1) have the old man put away, or (2) buy it for himself.

"I never believed the deal would ever be sewed up," con­tinued Ben, "and when we met this morning, and all went through and we signed up, I was the most surprised lawyer in Boston. Imagine, Bob, eight three-deckers, and one has a store and three flats. All tenants heat themselves, all filled up, et cetera—it's still hard for me to believe!"

I congratulated him on the "amazing bargain" but, of course, I knew who had put one over on whom in this case—and you do, too. Let us never forget why the old gentleman's lawyer had readily permitted him to sell at this ridiculous figure. It is by focusing our attention on the fact that the lawyer had an intimate knowledge of his client's affairs and that he consum­mated the deal exactly as the owner had made it orally with Ben, that we learn the lesson here.

Two months later I saw Ben in Probate Court. He looked as if he'd aged ten years. When I asked him how the new invest­ment was going along, he peered at me.

"You knew, didn't you, Bob," he sighed, "why the thing was being sold so cheaply?"

"Well, I supposed it was the usual curse—bad location."

"It sure was," he replied, "and I'm trying to unload. I've learned a terrible lesson. There's no such thing as a price that makes up for bad location—no matter how low."

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