A Real Approach To Real Estate

Almost every american family has its tales of fabulous real estate opportunities that were missed or ignored by one or another of its members at some time in the past.

"Forty years ago, my grandfather turned down a chance to buy 1000 acres of land at $10 per acre. Today, that land is worth $30,000 an acre ..."

"I could have bought an empty lot at the south end of Main Street for $750 in 1932. Last week, that same lot sold for $20,000 ..."

"We sold our house for $5000 just before World War II. Now the land on which the house stood is alone worth more than 10 times that amount ..."

Such stories are to be heard whenever real estate crops up as a subject for discussion. I have more than a few to tell about my own family -- and about myself.

In the 1880s, the city of Detroit, Michigan, had a population of about 116,000. My mother's brother-in-law, Travers Leach, owned a 160-acre farm outside what were then Detroit's city limits. Sometime before the turn of the century, Leach sold the farm for a few thousand dollars, making what he considered a fair profit on the sale.

Unfortunately, Travers Leach could not foresee that by 1920 the population of Detroit would soar to nearly one million and that a mushrooming urban area would engulf his farmland. Had he held onto his farm, he and his heirs would have become multimillionaires. By 1920, each of his 160 acres was worth many, many times what the entire property had been worth in the 1890s. Today, of course, a 160-acre tract in what has become virtually the heart of Detroit would fetch an astronomical sum.

In 1906, my father could have purchased all of 70-square-mile Santa Catalina Island off the Southern California coast for only $250,000. He turned the offer down. Catalina Island was later purchased by the Wrigley interests and transformed into one of the best-known and most profitable resort areas on the West Coast. For years, the value of Santa Catalina Island has been calculated in the tens of millions of dollars.

During the Depression years, I could have picked up huge parcels of undeveloped land in Southern California and elsewhere for only a few dollars per acre. In those days, the tracts were far outside the limits of any incorporated town or city. Since 1945, the towns and cities have grown with lightning speed, spreading out in all directions. The once practically worthless tracts have become thriving residential or industrial areas. Much land that sold for as little as $500 an acre -- and even less -- in the Depression days now brings $50,000 and even more per acre.

But, for every such story of missed opportunity, there is one that tells of opportunities which were recognized and exploited to the full. It is obvious that someone ultimately reaped huge profits from Travers Leach's Detroit farmland. The Wrigley interests recognized the potentials of Catalina Island, bought it and profited accordingly. Other men purchased the tracts I turned down in the 1930s and eventually reaped gigantic profits by subdividing and developing the property.

My father may have bobbled his chance to buy Catalina Island at a bargain price, but he made many other shrewd and profitable real estate investments. In 1907, Father bought some land on Wilshire Boulevard in Los Angeles for about $10,000 and built our family home on it. The land was then well outside the city's built-up areas -- so much so that it was surrounded on all sides by meadowland, and the nearest paved road was more than a mile distant. In the 1920s, he was offered $300,000 for the property, but he refused to sell. The property, which is still owned by "Getty interests," is now worth somewhere in the neighborhood of $2,000,000.

I, myself, have bought real estate at rock-bottom prices and have seen the (continued on page 100) Real Estate (continued from page 90) values of the properties increase in my own lifetime -- often even within a few years. I acquired the 42-story Hotel Pierre in New York City in 1938, paying $2,350,000 -- less than one fourth its original, 1929-30, cost -- for it. Taking into consideration current land values and construction costs, the cost of duplicating the Pierre today would be between $25,000,000 and $30,000,000.

On another occasion some years ago, I purchased several dozen acres of land in Malibu, California, paying about $150,000 for the property. Today, real estate brokers tell me, I could probably realize $4,000,000 on my investment if I were to subdivide and sell the land.

I'm seldom eager to sell simply for the sake of making a quick profit. I always remember how, in 1926, a friend of mine bought a piece of land for $4000 on one day and sold it to me on the following day for $8000 because he was overjoyed at the thought that he was doubling his money overnight. Some time later, I drilled four oil wells on that property and, in the next 12 years, those four wells showed an excess recovery -- a net profit -- of $800,000.

(I hardly expect to find oil under the basement floor of the Hotel Pierre, and I have no intention of drilling oil wells in Malibu Beach. I relate this anecdote only to show that a quick profit is not always the biggest profit.)

I have not cited these examples of my successful real estate dealings in order to boast or gloat. I mentioned them solely to show that real estate can be a highly profitable form of investment.

At first glance, it might seem that I consider it easy to make money in real estate. I probably appear to be expounding a theory that one needs only to buy cheap land far outside a city's expanding limits and then wait until the city grows out to meet the property, and that the buyer will make money if he can hold onto his property long enough.

Unfortunately, it's seldom as simple as that. The real estate investor can never be certain that cities will mushroom in any particular direction, nor even that they will grow at all. If he buys property within the city, called income property, he has no assurance that it will increase in value. It may, in fact, lose value if, for example, a neighborhood ceases to be fashionable.

Then, no matter how low the price of an undeveloped property may be, its purchase still entails a capital outlay -- and that capital sum may have to be tied up for a very long time without producing any income before property values begin to rise. Also, there are property taxes, assessments and other expenses which must be paid, and these can add up to large sums over the years.

Some time ago, a friend of mine bought 200 undeveloped acres at the northern edge of a Midwestern city, paying $100,000 for the land. He was quite correct in his basic assumption that the city would expand and grow -- but he could not foresee that when it did, public taste and preference would cause the growth to take place in the city's southern and eastern sections.

My friend still owns the property, which is worth no more today than it was when he bought it. His $100,000 investment has brought him absolutely no income for more than a decade, and it has been necessary for him to pay annual property taxes on the acreage. In addition, he has spent sizable amounts in efforts to attract buyers for the property -- all to no avail. He has already suffered considerable financial loss. He will continue to lose money on his investment unless he can sell the land, for there is no indication that the city's northern suburbs will ever find favor with homeowners or industrial firms.

In short, a prospective investor must always bear in mind that while real estate can be a highly profitable form of investment, it can also prove quite risky. Often there are many variable factors which affect the value of a property, and these factors are not always obvious even to experienced eyes. It is sometimes difficult to appraise the value of a given property accurately, and mistakes in appraisal can be costly. Another potential drawback to investing heavily in real estate is that an individual who ties a large amount of his capital up in real property and then has a sudden need for cash may well find it difficult to sell and realize cash quickly without incurring considerable losses.

In real estate, as in the stock market, it is the intelligent, patient investor who is most likely to make money in the long run. The real estate speculator, like his stock market counterpart, may make some short-term profits, but he takes much greater chances, and his profits will never be anywhere near those of the investor.

Generally speaking, real estate investors can be divided into two broad categories. The first includes those who buy at very low prices before an upward trend begins and hold onto their properties for many years, patiently waiting for values to rise to high levels. They may buy undeveloped land with, possibly, a view to subdividing it, or they may purchase income property which they hope will eventually increase in value, even while it produces regular returns on their invested capital.

The second type of real estate investor buys soon after a real estate boom has already begun. He pays more for a property than investors in the first category because prices are already on the way up when he gets into the market. On the other hand, he immobilizes his capital for much shorter periods.

Naturally, everyone would like to belong to the first category of investor. The trouble is that not too many people have large amounts of capital they can invest and allow to lie more or less fallow for long periods. Also, there aren't many people who can foresee a boom early enough or gauge its duration with sufficient accuracy to take full advantage of it.

One man I know correctly anticipated the postwar housing shortage and bought several large apartment houses at comparatively low prices in 1943. In 1950, he was offered 80 percent more than he had paid for the properties.

"I'm going to sell out," he announced to his real estate broker. "I've made a fairly good income on my investment over the last seven years, but I figure I had best take my profit now. I don't believe that property values can possibly go any higher than they are."

"I think you're making a big mistake," the broker cautioned. "If I were you, I'd hold on. Property values will go considerably higher in the next few years. You're going to miss a wonderful opportunity if you sell."

The man ignored his broker's prophetic advice and sold his apartment houses in 1950. He has been regretting his decision ever since. Today, the properties are worth at least three times what he paid for them in 1943.

Many investors have made the same error during the current real estate boom. They sold out prematurely because they were convinced the peak had been reached or that it would be reached within a very short time. They feared the consequences of the bust they were certain would follow. Their reasoning and their fears were based on past experiences or on recollections of the histories of such ill-starred real estate booms as those which drove real property prices into the stratosphere in Florida, California and elsewhere in the 1920s.

I, personally, do not believe there is any similarity between those booms and the one which began at the end of World War II and is still continuing today. The great real estate balloons which were inflated -- and then burst so disastrously -- during the Roaring Twenties were almost entirely fueled by purely speculative buying and selling. Despite all the frenzied activity of property trading, there was little genuine desire for ownership on the part of the speculators. In those days, a piece of property could -- and often did -- change hands dozens of times, but not because anyone anywhere along the line actually (continued on page 156) Real Estate (continued from page 100) wanted to own land, build a home or operate income property. Each momentary "owner" of a piece of property had but a single thought in his mind -- to sell as soon as he could and to make as large a profit as possible.

For example, there were an estimated 2000 real estate offices and 25,000 real estate salesmen in Miami, Florida, alone in 1925. Theoretically, they sold property -- ranging from single lots to huge tracts of land. In actual practice, all that most of them sold were "binders." The buyer paid a small percentage of the agreed sales price of a property and received a receipt which constituted a binder; the property was then his until the next payment fell due 30 or 60 days later. The overwhelming majority of buyers sold their binders just as soon as they could realize a profit on them. With prices spiraling wildly, they seldom had to wait more than a few days -- or at most, a few weeks -- before finding another feverish speculator who would give them more money than they'd paid.

There was more truth than humor in the following tale that made the rounds at the height of the 1920s' Florida land boom. According to the story, a Miami realtor had taken a prospective buyer out to look at a dismal and utterly useless swamp tract. The client stared at the forbidding landscape in dismay.

"No one could ever build anything on this land!" he said. "It's worthless!"

"So what?" the realtor shrugged. "Land down here ain't for ownin'; it's for tradin' ... !"

The post--World War II real estate boom is entirely different from those which took place during the Twenties. There is a solid demand for building sites, for homes, commercial and industrial sites and buildings and income properties. The people and the firms who are in the market for such properties are serious buyers. They want to buy or build houses, stores, factories -- or whatever -- for their own use or for the purpose of leasing or renting them to others in order to earn income for themselves. In short, they really want to own the properties they buy. The number of out-and-out speculators today is, as far as I can see, negligible.

Current real estate prices aren't high because they have been driven up by irresponsible speculation, as was so often the case in the past. Prices have risen because a constantly increasing population with money to invest has created -- and continues to create -- a great demand for real property of all kinds in almost every part of the country.

I, for one, do not anticipate any major break in real estate values in the foreseeable future. Some soft spots may develop here and there, and there may be tendencies to oversell or overbuild in some areas, but I believe the overall trend in real estate will continue to be up for a considerable time to come.

Of late, the companies I control and I have made sizable investments in real estate. The Tidewater Oil Company Building on Wilshire Boulevard in Los Angeles was completed not long ago at a cost of nearly $10,000,000. This building is designed for expansion after restrictive zoning regulations now in force have expired. Plans call for the addition of seven floors to the present six-story structure in the near future. The new 15-story Skelly Oil Company Building in Tulsa, Oklahoma, also represents a $10,000,000 investment. The even newer 22-story Getty Oil Company Building in New York City involved an investment of some $14,000,000.

I would imagine that these and the other real estate investments my companies and I have undertaken in recent years provide convincing demonstrations of the confidence my associates and I have in the reality of real estate values.

Investors can find many potentially profitable opportunities in real estate today. They must, however, know what they are doing before and after they invest their money if they hope to reap profits. I think that I've already indicated that real estate is not always the safest form of investment for the inexperienced. This applies even to the simplest, most common type of real estate investment -- home buying or building.

The home builder or buyer should take great care in selecting the site or house he buys. He should, for example, acquaint himself thoroughly with the zoning regulations which govern building and the use of property in the neighborhood or section in which the property he wishes to buy is located. It's not enough merely to ask the real estate salesman or the neighbors. Many a happy family has moved into its vine-covered dream cottage only to wake up one fine morning and discover that a glue factory or sewage-disposal plant was being built next door.

The home builder or buyer should also know something -- and the more the better -- about building. He should be able to judge -- at least within reasonable limits -- whether or not a house is built well. If he doesn't know about such things himself, he should most certainly have someone who does know make an inspection of the house for him before he buys, or keep an eye on the progress of construction if he builds.

As for the professional or semiprofessional real estate investor, in order to have any hope of success, he must have knowledge of a vast range of subjects running the alphabetical gamut from architecture to zoning laws. He should also retain a much-better-than-average lawyer. If it's true that possession is nine points of the law, it's equally true that nine tenths of the problems involved in the possession of real property are legal ones.

It's not possible to list any specific, universally applicable rules to guide the real estate investor. There are far too many different types of real property -- ranging from single lots in uninhabited areas to entire complexes of residential, industrial or commercial buildings. The rules investors follow -- or should follow -- vary widely according to the type of property involved, the use which is to be made of it and local and even individual considerations. To illustrate what I mean, I'll pose four hypothetical -- but valid -- real estate situations:

1. A Cleveland, Ohio, salesman wants to buy a home in the $15,000 price bracket for himself and his family.

2. A South Carolina executive wants to purchase a 24-unit apartment house as an income-producing investment.

3. An Oregon lumberman is considering the purchase of 1000 acres of virgin timberland.

4. A New York financier is planning to buy an entire block of brownstone houses, demolish them and build a sky-scraping office building on the site.

Save for the fact that all four of these individuals want to invest their money in real estate, there is very little that they have in common. Their intents and purposes vary widely. They could not use precisely the same business yardsticks to measure the properties they contemplate buying. This is true of almost all real estate deals. Each one has its own set of variable factors and differs from the next. Nonetheless, there are some general rules and pointers which provide a valuable checklist of things to do -- and not to do -- for anyone who is thinking of making an investment in any kind of real estate.

1. Make a thorough study of the real estate market and its prospects in your area before you buy. Naturally, you should seek to buy when prices are low and the indications are that values will rise. Always take into consideration such factors as the rate of population increase and the general prospects of business in the area. There is no quicker way to lose money in real estate than by investing it in property located in declining areas.

2. Know or learn as much as possible about every aspect of the particular use to which you intend putting the property you wish to buy. In other words, don't buy a house unless you're certain that it's suited to the requirements of your family and that it's well built. Don't plan on having a house built unless you know something about building -- or at the very least until you've found an architect and a building contractor in whom you have complete confidence.

Don't consider buying, say, a motel unless you know enough about motel management to have a fair chance of operating it profitably -- or again at the very least, until you know enough to efficiently supervise anyone you hire to run the motel for you.

3. Deal only through licensed and reputable real estate brokers. Beware the fast-talking, high-pressure real estate salesman who promises everything -- verbally. He is probably a fly-by-night who doesn't much care what he sells you or anyone else.

4. If you buy a property with a view to improving it or building on it, be certain that you have adequate capital or are able to obtain adequate financing to complete the project.

5. If at all possible, always obtain at least one impartial, third-party appraisal of any property before you buy it.

6. If buying a building of any kind -- be it Cape Cod cottage, 1000-room hotel or Willow Run-size factory -- have it inspected carefully by qualified and disinterested architects or builders before entering into any binding commitments. If buying an existing income property such as an apartment house, have the owner's books checked by a disinterested accountant. If the owner of the building or the income property balks at such inspections, look out.

7. Whether you're in the market for a cabin site or a skyscraper, shop around widely and cautiously. Unless you happen to run across an irresistible bargain you must snap up immediately, take your time about making up your mind. Don't allow yourself to be stampeded into paying any deposits or binders until you're absolutely certain you've found the property you want. Remember that the purchase of real property usually involves heavy capital investment; don't take unnecessary chances with your money.

8. Make certain you have the best available legal advice before signing any agreements, contracts or other documents. I do not mean to suggest that there is anything dishonest or misleading in the majority of such documents. On the other hand, few laymen are able to follow the labyrinthine mazes of legal terminology which are used in them. To avoid misunderstandings, it is always best to have an attorney translate the "whereas"-studded fine-print clauses into coherent everyday English. Even seasoned real estate investors sometimes fail to have this done -- and the ensuing squabbles between buyers and sellers usually wind up in courtrooms.

9. Always insure the title to any property you buy. Even the most meticulous title search may fail to turn up all the pertinent facts about the history of a property. The cost of title insurance is negligible. The expense of fighting a lawsuit over a clouded title can be staggering -- as many real estate investors, I among them, have discovered to their regret.

10. Once you've bought your property, treat it as a long-term investment, not as a short-term speculation. You'll find that -- 99 times out of a hundred -- you'll make much greater profits that way. In fact, if you wish to make money in real estate, always think in terms of investing and never in terms of speculating.

These 10 pointers do not, by any means, comprise an all-inclusive guide to successful real estate investment. Nor does the individual who follows them -- however faithfully -- have any guarantee that he will make a profit when he invests his money in real property.

But, I believe that the person who observes these rules goes a long way toward eliminating a significant portion of the most common dangers inherent in any transaction involving real property. And that, in itself, is sufficient to give him a healthy head start on the road to successful real estate investment.