I’ve heard this for years. We probably all have. I’m curious if there’s real credence to it and, if so, why that might be.
From what I can determine perusing online sites, people on the whole would rather buy the more modest home in a nice neighborhood than the nicest home in a modest neighborhood. The value of nicer homes would then pull yours up while, conversely, if yours was the most expensive then the lower sale price of others would drop the maximum dollar per foot you could ever hope to realize.
The degree to which this is true would appear to be mitigated if the number of years you intend to stay is lengthened. If it’ll be for around 5 or less, then it’s sound advice. If it’ll be for 10 or more then it’s less of a concern.
The reason I ask, I plugged our requirements for cost, square footage, pool, school district, lot size, etc into a realty search engine. We get just what you’d expect, a nice home in an upscale neighborhood or a really spacious plan with extraordinary ammenities on a huge lot in an older neighborhood. With that one we’d be 20% higher than the next expensive, which would rise to around 50% after making the changes we’d like to make.
Personally, it wouldn’t bother me to have the least or most expensive home. This particular one is very unpretentious. The difference in value is hidden in the unapparent size and elements that are visible only inside and in the back. I’d buy a house like this in a heartbeat. Question is… would others?
What’s your experience/opinion with realizing the value along the cost scale?
I always heard it as “buy the worst house in the best neighborhood you can afford,” the logic being that because all the comps are going to be higher-priced, any improvements you make will have a sort of multiplied-payback effect. Adding granite counter-tops to the kitchen of a house in a neighborhood filled with Formica counter-tops, and all you’re doing is making your home look overpriced come resale time. But if all the other houses already have granite, and you bring yours up to par, you’ll see a larger percentage of payback.
In out neighborhood every house is around the same size. However, there is one home on our street which is twice the size as everyone elses. We call it “the mansion”. Becasue it’s the biggest most expensive home in the neighborhood ineviatably whenever it sells someone always gets a deal on it, and when the same person sells it they have to sell it for a deal.
The major drawback is that while it is bought and sold at a discounted price it is assessed by the city at an inflated price. They pay a ton more on property taxes than everyone else.
I see a couple of reasons for this to have some truth.
As said, one is the resale issue. The same physical house is worth more in a better area. I once rented a really nice house that the owners had been trying to sell for a while. The problem was, they owned a pool company that had done really well and they had put in a nice in ground pool, pool house, a sun room, and generally made the house much nicer than all the others in the neighborhood. Anyone who wanted to pay as much as they were asking wanted to live in a nicer neighborhood.
There is also the property tax issue. In many places, local school and recreation budgets are based on property taxes. If you want to pay X amount for house, you will get better value for property taxes if everyone else pays at least as much as you do.
Restaurants and others commonly have an expensive entree or bottle of wine on their menus. This doesn’t sell, but the next most expensive one sells really well. I think that is a factor in not buying the most expensive house in the neighborhood.
Property taxes and school budgets are established at a greater than neighborhood level, so that isn’t an issue. The issue might be that standardized test scores for elementary schools in a less expensive neighborhood may lag those in a more expensive neighborhood. That could be a resale issue.
The only reason I could see for not buying the least expensive house is that you might feel pressure to make improvements above your budget to keep up with the Jones’. I haven’t heard that particular piece of advice before.
As a real estate agent friend of mine said to me, “you can always improve a house, but you can’t improve the land it’s on.” When you look around at different neighbourhoods you often see very similar houses but there may be a big difference in price. Why? Because the land the house is sitting on is more or less desirable and is therefore more or less expensive, so the price difference comes from the land, not the house. When you buy a crap house in a good area, you have ample opportunity to improve the house and increase the value of your investment. If you buy a great house in a crap area, you really have no way of increasing the value of your house other than waiting for something exceptional to happen to the housing market.
But if you buy a great house in a crap area at crap area prices, all the extra amenities are a bonus, yes? You just have to assume that you are also going to sell at crap prices–but you are no worse off then if you’d bought crap to begin with.
I’ve always heard “don’t improve a house beyond its neighborhood” because it’s true that you’ll never see the value of the improvements you made. But I don’t see the downside of buying someone else’s big improvements at a huge discount (except possibly property taxes and, perhaps, maintenance on things like a pool).
In this market, I would think that houses that have been improved beyond their neighborhood might be the best bargain out there–people who watched too much HGTV and plowed an equity loan into a house but now have to sell quickly will probably see little or none of the value they added–so someone will get a sweet deal.
A lot of sound advice and insight here. Thank you all for that.
Taken on the whole it falls in line with what I kind of feared but needed to hear. In a situation like this we’re getting a deal but would invariably be giving it back for a song later, and then we’d probably be even more dependant upon selling only in a good market. The money we’d sink into it to make it right would likely never be regained because it would then be so far above anything else around. The amenities would be wonderful but when it comes time to sell we’ve limited our number of potential buyers to the point where we’d have to be prepared to maybe sit on the house for an inordinate period of time. I’ve seen others stuck there an it looks like no fun at all.
Again, thank you very much for sharing your observations. It gives us needed perspective in our considerations.
Also, when people are looking to buy at a certain price point, it seems that they are more concerned with the area. As long as the house isn’t a total shack, (and sometimes, even if it as), as long as it is in that certain zip code, the buyer might not care.
Well, if you buy a great house in a crap area then sure, you have a great house, but that’s all you’ll have unless something remarkable happens to the house market in that area. There’s nothing you can really do yourself to make that house worth more. If, on the other hand, you were to buy a crap house in a great area then when you had some spare cash you could spend $30,000 on improvements which may increase the value of your house by $90,000, but your loan is still the same, so basically you’ve suddenly got more equity in your house. You can then use that to do other things such as buy another property for an investment. Now you’ve got yourself an ok house in a great area (after your improvements) AND another property which is paying for itself because it’s leased to someone else.
That’s the theory I guess, I’m too gutless to do anything like that, mainly because I can’t be bothered doing major renovations. I’m buying a house at the moment, and I’m basically looking for something nice in a good area that has modest potential for improvements. So the house is pretty good but I can get a bit more out of it by doing the kitchen up, after that I’m relying on improvements in the market to increase its value, but that’s ok because I may not live in it for long, and it is in a good area for rentals, so I should be able to rent it out when I move.
Yes I think you’re quite right. The thing is that “this market” for you is probably quite different from how it is for me. The property market where I live is fine (not great, but not bad either), so I’m not about to get any awesome houses at a big discount. But if you can buy someone else’s improvements at a heavily discounted price, I can’t see how that would be a bad investment. You’re essentially in a situation where you can count on good things happening to the market provided you have the stability to ride out the current downturn, so relying on the market to increase the value of your house is a reasonable thing to do.
There’s a similar, though less well-known, theory in (UK) new car buying: if given the choice of a loaded smaller model or a stripped out bigger model, you take the bigger one. The logic is that you never get your money back on the options when it comes to resale time, because nobody really cares about heated seats or auto-dimming mirrors or whether the CD changer holds 6 CDs or 10 and so on, but they certainly care about whether the dog will fit in the back.
It doesn’t seem to work quite the same way here in the US because Americans seem to consider more in-car amenities as requirements- auto 'box, A/C, and so on.
For what it’s worth, we bought the worst house in our neighborhood - one of only two that were previously rentals - and the interesting this is that while everyone else’s home values have dropped considerably in the current economy, ours has stayed essentially static.
My humble opinion is that the projected ownersgip period mentioned in the OP is the most relevant consideration. That is, if you’ve found the best house for you and you have no plans to move again in the next lots of years, then it doesn’t really matter whether its the best or the worst in the neighborhood.
I think it would also depend on how good you are at sticking to plans, and how good you are at planning.
I mean, if Jack and Jill buy a house and tell everyone they’re going to live there together for eighty years, but are already in counseling, might be best if they bought the easily sellable house.
Two comments, probably more relevant to more urban areas than far suburbs.
Different families have different values for neighborhoods, especially if quality of schools is an issue. One family might think a shack in the swanky area is a great deal because it gets the kids into the swanky school system, so they’ll pay a premium for it. Whereas the empty-nesters would put relatively more value on the nicer house in the safe-but-not-as-good-schools neighborhood.
In cities, the value of neighborhoods can change. So buying the most expensive house in a neighborhood can be a gamble: if crime increases in the area, you’ll lose a lot more value.
But if you buy a really nice house that someone else sunk a lot of money into for 10% higher than the house next to it, for a modest increase in your monthly payment you have a really nice house to live in. Then, since you don’t need to update anything, you can invest the money you would have spent into something else. And in the end, even if you sell the house for only 5% more than its neighbors, you had the advantage of all the amenities for all those years.
I just don’t see how you could lose money on someone else’s improvements, unless you are foolish enough to pay anything like what the original owners paid for them.
Since everybody knows this “rule”, it stands to reason that the worst house in a given neighborhood will always be sold at a premium, because it’s the one everyone wants to buy.
Therefore, the real trick must be to buy the second-worst house in the neighborhood and hope that the guy who owns the worst house sinks some money into it.
I believe in the “worst house in the best neighborhood” philosophy. My first house was a decrepit 100 year old farmhouse, in a town with millionaires living in it-and some of the best schools in the state. We did some modest renovation (painting, new fixtures, landscaping) ,and were able to sell for a 30% gain in 3 years.
That’s the virtue of buying in a good area-you are always able to sell.
You’re not likely to lose money, but your ability to make money is limited, and if you’re going to put yourself into an incredible amount of debt (I think the amount of money people borrow to buy a house is crazy) for a house then you’d be wise to find a balance between having a comfortable house to live in and having an opportunity to use the value of that house to your advantage. Exactly what that balance is just depends on what you want.