Sunday, March 15, 2020

Location, Location, Location

The three L's in Real Estate might mean different things.

There is an old saying in the Real Estate business - the three most important things are: Location, Location, and Location.   What does this actually mean?  And are Real Estate Agents really just repeating themselves?  In my mind, there are three kinds of location:  Status, Schools, and Commute.

Location has a number of meanings, but does indeed affect value.   Near where we lived in Alexandria, was an area called Belleview, which had a country club and fancy houses - one of the Bush brothers lived there.   Million-dollar homes in an era where a million dollars was a lot of money.

But not a quarter-mile away was Bucknell Manor, which just sounds lower class, doesn't it?   It was the best place to go to see Christmas decorations, and houses there rarely broke the $200,000 barrier when we lived there.   Of course, all of that has changed by now.

But two neighborhoods, within walking distance of each other, and yet one is considered a desirable tony address, and the other perhaps lower-middle-class at best (at the time - it has gentrified since then, more about that later).

I could give you dozens of other examples - and I am sure you know a few.  In Syracuse, there is a neighborhood called Sedgewick Farms named after those Sedgewicks, and it is considered a desirable, upscale place to live.   Less than a half-mile away is the worst sort of ghetto.   I asked a friend who lived there if he wasn't afraid of crime, and his response was, "Well, we're uphill from the ghetto, and criminals are too lazy to walk uphill!"   I am not sure if that is true or not, but they rarely had problems with break-ins.

But getting back to location, the first aspect of location is Status.   Having the "right address" is important to many people, and the right location provides this.  My parents had a house on Stoneleigh Court in Pittsford (Rochester) New York.  No status there!  So they built a house on tony Allens Creek Road - and got invited to join the Country Club.

It isn't just homes, either.  I worked for a firm that had an office building one-half block off Pennsylvania Avenue.   Pennsylvania Avenue runs diagonal to the street grid, so one corner of the building was less than a half-block from the street.   The developer convinced the Post Office to grant them a Pennsylvania Avenue address, as this made the property worth a lot more money.  Perception is everything, particularly when it comes to status.

But location can mean much more.   What school district you are in matters a lot to parents - and to you, even if you have no kids in school.   When you go to re-sell your house, if it is in a crappy school district, it will be harder to sell.   A better school district also means better neighbors, so you may be less likely to be broken into, or a victim of crime, or have a neighbor with junked cars on his lawn.

School district is also a code word for racism, in some instances.   Real Estate Agents can no longer use coded words to describe racial makeup of a neighborhood.  They can't say "good neighbors" or "good neighborhood" but they can mention "good schools" or the school by name.   Buyers can fill in the blanks.

But Schools are indeed the second "L" in Location, Location, Location.

The third and final "L" is the Commute or actual location.   A property that is located two hours from where you work is not going to be very desirable.   One with easy access to uncrowded roads will sell much faster.

Sadly, a lot of people, when they go house shopping, drive out some weekend to some godforsaken cornfield that has been turned into mini-mansion hell.  Since they drive out on a weekend and are not paying attention, they fail to realize they are buying a nightmare commute.  Mark used to advise clients to get up very early one day, drive to where the house they want to buy is located, and then commute into work.   It can be illuminating.

When the crash came in 1989, a lot of these cornfield condos and mini-mansions in Woodbridge and beyond plummeted in price, as people realized they would spend the good portion of each day in gridlock traffic, on some of the worst roads in the area.   I am told that some of these areas really never recovered.

So what does this all mean when investing in Real Estate?   Well, you can pay top dollar for a home that hits all three "L"s or you can perhaps think about where the market is going.

We bought our house in Hollin Hall in 1989.  It was a ten-minute commute down the uncrowded Mt. Vernon Parkway - a four-lane highway that extends from Old Town to George Washington's home.   It was a pleasant drive and once in Old Town, it wasn't far into DC.   But for some reason, many people eschewed properties in this area.  Believe it or not, much waterfront was undeveloped because people thought the Potomac was still the polluted nightmare it was in decades past.  We looked a several acres on the water once, at the end of Alexandria Avenue, asking price $250,000. It might as well have been a billion - I didn't have the money, and in the post-1989 meltdown, no one else did, either.  A developer bought it years later and built ten homes for over a million each.

Today, our home in Hollin Hall is no more - replaced with two million-plus dollar homes.  People got tired of buying mini-mansions in Fredricksberg or out near Front Royal and having hours-long commutes.  Suddenly, this overlooked area south of Old Town became hot.

And schools had something to do with it.  When we moved there, our school system was "West Potomac Drive-By High" as I called it.  There was a lot of drug activity and violence at the school (including shootings) as they picked up a lot of trash who lived along Route 1.  And from Maine to Florida, anything along Route 1 is going to be sketchy.   But over time, they cleaned up the place and the school now has a much better reputation.   So as the school improved, well, the real estate values did as well.

Our townhouse and condo were also in this area - near Huntington Metro.   It was a depressed area when we bought, but as the DC area expanded, more and more people started moving into the Huntington area and buying up these properties.   The big change for us was when they repaved the streets.  The paving company offered to install driveways for the townhouses, and we opted in.  Overnight, the nature of the neighborhood changed.  Once a narrow street lined with endless cars, it now was a wide-appearing street with houses, trees, and lawns.   Not only that, it was no longer a hassle to find a place to park!

Nationwide, we are seeing this effect.  Some call it "gentrification" and decry it.  But others see a diamond-in-the-rough and wonder why prime real estate near the heart of a city should be so cheap, run-down, and full of welfare recipients and drug users.   After all, can't you abuse drugs and collect welfare in some less prime area?   Believe it or not, some "housing advocates" argue that people should have a right to live wherever they choose - even in a resort location such as Key West - and have the government provide "affordable housing" for them.   Nonsense like that is how Trump got elected, sadly.

But taking mindless left-wing AOC politics aside, it makes sense from an environmental point of view and an economic point of view for prime real estate to be utilized to its fullest.  Better to build higher density housing closer in to a city than to sprawl into cornfields.  Some say that is the problem in San Francisco - housing ordinances limit housing density, which some others claim was an attempt to keep out minorities from certain neighborhoods, back in the day.   Gentrification, indeed.   Yet the AOC's of the world would be the first to decry a new housing project on the grounds it was destroying a gritty, decaying neighborhood ("culture" they call it) and at the same time, decrying the lack of housing.

Our remaining condo is no longer a condo - we voted to abolish the condominium.   In a few months, demolition will begin, and new, medium-rise apartments and condos will replace the decaying "garden-style" apartments that are slowly sliding down the hill.   It may end up as a small payday for us.

Did we see this coming?  Yes and no.  When we bought our home in Hollin Hall, it was on two deeded lots, and at the time, we said the land was worth more than the houses and that "someday" someone would figure this out, tear it all down and build appropriate houses for the area.  Someday came.   When we bought the townhouse, we were mystified as to why it was so cheap - after all, it was within walking distance of a Metro station.   Not a few years before, we could not afford to even rent there, much less buy.   My Office building at 917 Duke Street is now a residence.  Back when I bought it, the area was somewhat blighted, being near a busy street.  Today, this part of Old Town is now a major office and condo complex, housing the Patent Office (how smart was I to foresee that! I wasn't!) as well as the "Rocket Docket" Eastern District of Virginia courthouse.   When we bought there, most of that land was abandoned, with little more than an old roundhouse, a tire store, and an out-of-business lumberyard.

On the other hand, there are neighborhoods which may never appreciate in value.  One reason the areas we bought in increased was that the government of Fairfax County and to a lesser extent, the City of Alexandria, somewhat have their shit together and want to improve neighborhoods and increase property tax revenue.  When we wanted to abolish the condominium, the County was like, "what took so long?" whereas in DC, we would have faced endless red tape and likely had to pay bribes.   So there are areas that may never improve, even if they have one or two of the cherished "L"s to work with.

Our present home fell along the same lines - the State has plowed money into our island and people are "discovering" it.   When we moved there, it was nothing but abandoned hotels, some of which were plowed under and left as vacant lots for over a decade (the last vacant lot is apparently going to be built on soon, and when we left, another hotel was under construction).   Better to buy on the way up, than on the way down.

Our vacation home in the Finger Lakes region is an example of where we forgot about all of the L's.  There was no status to the location, as the house was surrounded by poorer neighbors, and in fact, had been one of those cornfields a few year before.  Nice house, nice view, nice lake front - but it wasn't a desirable location from a status point of view.  We didn't care about that, but other people do.   Those other people are called "buyers".

The school system was "OK" I guess, although most of your fellow students would be farm kids.  New York has good public schools - they should, given how much they pay teachers - but no one was moving to that area for the schools.

The Commute was the killer - halfway between Ithaca and Auburn, it was a shitty commute to either - and people did it, flying down back roads at speed, even in the snow.  

The net result was, when it was time to sell (and there is always a time to sell) there wasn't a very large audience for the house.  Compared to the local housing stock it was an "expensive" home at the whopping sales price of $400,000.   Most neighbors were living in trailers.

So, no, I am not some Real Estate genius - never confuse getting lucky with being brilliant!   But I have had some luck - and some bad luck - and have learned from these experiences and realized what made me successful and what mistakes I made (and didn't try to externalize my errors to others).

Location, Location, Location!   There are three different types, which may be why Real Estate Agents say it three times.

P.S. - Went to the beach yesterday. No one seemed to be acting weird. Place was jammed. Virus crises OVER!  Just kidding. Politicians have to milk this for another few weeks, at least.