16. Before the Offer

You have applied the basic tests of Location, Modesty of Rents, and where possible, Self-heat. The building has passed these tests and next you applied the Value Formula. Here you learned how much the property was worth. This es­tablished a limit, with some variance permitted, of how much you could afford to pay for the property. Your final test of the Net-in-Hand Balance Sheet told you how much you could clear if you bought the property under given terms. That is, if you paid a certain amount down and obtained financing for the balance. There are several preliminary points you should understand before framing a definite offer.

The matter of flexibility is one which your MIF will deter­mine for you. If a property is one on which the MIF is attrac­tive, do not be afraid to bend a little. If you will have to pay 5 to 10 per cent more for it than you originally offered, still stay­ing close to the limit set by the Value Formula, you are free to do so, providing the higher price, when you apply the MIF test, shows that you will still clear 25 per cent or more per year on the amount you invested in cash.

The other test will guide you in the decision to pay a little more. For instance, when the location is "tops"—or the property is in fine "kept up" condition, or the tenants have occupied for 20 years or more, these are extra-desirable features that sweeten the attractiveness of the investment. Where the purchase has passed the tests with flying colors, and will leave you a good MIF, a thousand dollars or so on the purchase price makes little difference. That thousand is going to be paid off by the tenants anyway!

On the other hand, you should not let external and unrelated urges distort your view of the business. In this regard I have seen a few dangerous and personal feelings of weakness under­mine the entire project. The first was hurry.

In their anxiety to 'get going' some students have allowed their impatience to blind, or color, their reason. It is quite un­derstandable that, once you have learned the know-how of this business through this book, and you know precisely how to pro­ceed with fearless confidence, you may have some impatience to see your project under way. But this should never be per­mitted to hurry you into buying. Many students have phoned me to say, substantially, "I've been advertising for over a month now, and have seen a lot of junk, but I haven't seen anything yet that I'd even consider, except this one. It doesn't quite meet our standards but I feel that I'd like to get going, so I guess 111 buy it." A serious mistake.

Ed R., whom I mentioned earlier, was anxious too, at the start. When he had been looking around for some five or six weeks he became impatient and had reached a point where he was too willing to compromise his standards and tests. I pro­tested, but he insisted it was worth it to get started even if he just got the experience out of the deal with little profit. Dis­couraged with the seeming lack of availabilities in his home city, Brockton, he bought a four family Aunt Toby in Quincy, Mass., a city nearby. Later he bought a three-family. When things started to click in Brockton, where he had begun to think there "just aren't any," he unloaded both Quincy prop­erties at a profit, having learned, as you will, how to straighten them out and sell them. Now he concentrated on his home town. Within two years, his problem was not finding them—it was absorbing them as fast as they became available! Every one was in Brockton. He now saw that he hadn't scratched the surface of the supply. At this writing he has some seventy-six units.

Another frequent cause of trouble is the human weakness of a person who just plain "likes" the property. Often it is a hand­some looking building. Of course, the basic error here is in the student permitting his attraction to come into the picture in­stead of the attraction he should concentrate on—that of the prospective tenant. We must remember that WE are not going to have to like it as a home, nor live in it. We MUST look through the eyes of the workingman whom we hope to attract as tenant and use his standards.

Failure to do this may lead to blinding ourselves to cold hard facts. Let us never forget what a wise and successful realty investor indirectly taught me. I knew his son and talked with him about his father's adventures in real estate. He had been very successful and had capsuled the key to success to his son thus, "Never forget that we are in the arithmetic business first, and very incidentally, in the real estate business." He was right. This remark embodied the key to his success in real estate. Luckily, our business is one which can almost entirely be governed by simple arithmetic. We live by it. And there is a fine secure feeling about it. Unlike the stock investor, who cannot calculate the future of a stock, we CAN, with 98 per cent certainty.

Of all the students whom I have trained and who have used their training to make their million, I would have classified Arthur C. as the one least likely to permit his heart to blind and over-rule his arithmetic. After all, he is an Armenian and he has suffered much. He has seen and felt poverty we could never imagine possible. People around him, those not slaugh­tered, tried to keep alive by boiling grass. He was the most realistic man I ever met. I was amazed when he turned out to be the only student who weakened on this point. Here is what happened.

For years I had been holding forth on the arithmetic upon which we rely to determine the desirability of a parcel of prop­erty. Arthur well knew that I had held up as a horrible example the confiscatory tax rate in the City of Boston. I divulge no secret here when I say this, since it has been publicly an­nounced and proved many times, both in the trade publications and in such journals as the Saturday Evening Post and other lay magazines and newspapers.

For examples, I had pointed out uncontrovertible evidence adduced by recent events in that city. A few years ago, the tax burden was so heavy that many of the owners lost or aban­doned their properties to be vandalized and finally torn down or just permitted to rot, and ruin an entire neighborhood. Soon only 80 per cent of the real estate in Boston was paying taxes at all. And these were attempting to pay all the "costs" (some debated) of running 100 per cent of the city. Naturally the weaker ones buckled under the burden, and soon only 70 per cent of the real estate was paying taxes. And the budget rose. Of course, before long those among the 60 per cent who could not carry the added burden now fell by the wayside, and the entire load was dumped on the shoulders of the remaining tax­payers. Not only that, the budget was increased again and again. A sizable percentage of the real estate, distress and vol­untary, was sold to non-taxable buyers in the course of these years. This does not help the situation either. As I write this in 1960, some 50 per cent or less of the real estate in the City of Boston pays taxes at all! Even the blind can see the handwrit­ing on that wall. Today the tax rate for Boston is well over $100 per $1000 of assessed value. That assessed value is stoutly de­fended as being 66 per cent of the realistic true market value of the property.

Among some examples I always cite Mr. D's experience. He bought a building in Boston for $26,000. The current tax bill assessment was $22,000. The next year he was billed at $52,000 and there was little he could really do about it. Recently a building on Washington Street in Boston became overbur­dened and had to be auctioned off. Now we must bear in mind, that this part of Washington Street is comparable to Times Square in New York as the AAA1 location for business in Bos­ton. And it is well established that there is always a buyer for this type of location, particularly among the investment trusts and the like. They make a practice of diversification of area in their investment portfolios, and tend to buy choice spots in each of the leading cities. Likewise insurance companies, et cetera.

This building was put on the block. It had been assessed at $650,000 for tax purposes. That, reduced to simple truths, was a postulation that the property was worth $1,000,000. By all odds,if this were true, there should have been many bidders willing to offer a million, and more.

The building was sold to the highest bidder for $300,000.

Recently the Herald Traveler, one of the two leading news­papers in Boston, moved out of its intown building and built a new plant in a suburb. Their old building was assessed at $2,500,000 and this represented a claimed market value of roughly $4,000,000. The biggest price they could obtain—and there was NO forced sale or distress involved—was $1,250,000. It was sold for that.

In my lectures I pointed out other statistics such as the fact that the Boston taxpayer pays an average of twice as much out of his gross income as the national average, and other such con­crete arguments. So I was more than a little surprised to have Arthur C. phone me one day and somewhat sheepishly an­nounce that he had just bought a building in Boston. He had pointedly not asked me about it first, but this was not in itself remarkable, since he already had his million and had long since reached a point where the simple application of the Value Formula and the MIF was all the guide he needed. "I knew you wouldn't approve, Bob, but—I bought it." Of course, I con­gratulated him, and wished him luck, but I fear he sensed the banality of my trite response. I asked, "Arthur, what made you do it? You know what you are supposed to do. You know your arithmetic. How come?

His answer was the one I least expected from him. "Bob—I just liked it. It's so clean, and—and—you stand across the street and look at it and you've got to fall in love with it."

Perhaps Arthur had some secret longing to possess something more appetizing to his vanity than a long succession of Aunt Tobys (which had made him a million.) But he had made a cardinal business error, and he knew it.

A year later he phoned me. He was in a "tizzy" as the New Englanders call it.

"Bob, Bob, what am I going to do? I just got my tax bill!"

I replied, "What's the matter with it?"

"It's-it's-awful!"

"What do you mean, awful?" I asked, as if I didn't know.

"Why, listen, Bob, when I get through paying this tax bill, I am not getting one nickel out of that building. I'm operating it entirely for the City of Boston."

I wasn't particularly worried about Arthur. He wouldn't starve. I gagged, "Well, Arthur, if you don't like the building, why don't you sell it?"

'Tou know dang well why I don't sell it," he snapped. "I CAN'T sell it. Anyone I'd show it to, would soon ask how much are the taxes, figure it out, and goodbye."

"Well, Arthur, I have some good news for you. You've just been awarded a very desirable appointment. I hereby appoint you, for life, official janitor of the building, to work for a dollar a year."

"Oh, Bob," he wailed, "you're no help."

The lesson to be learned by Arthur's experience is clear. We can never afford to ignore the message that our arithmetic gives.

Before we even start to frame our offer, we must honestly decide whether the building has passed the tests. It must not matter that:

We'd like to live there ourselves, or would not.

It's a very low price—a "bargain." We rely on our own arith­metic.

It's an attractive parcel.

We are in a hurry to get along. We want experience.

The seller is in distress. Or the property is being auctioned. Or any other consideration, such as nearness to our home, et cetera.

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