Published June 01, 2012
As the real estate market starts to heat up again in some markets, we sometimes forget what’s happened in the past. We get caught up in the home search and the desire to own. Some buyers even forget the old real estate adage: location, location, location.
So it helps if you step back for a second. Look into the future. Think about the home you want to buy now and imagine yourself selling it years later. What problems might you face then? If you take this into consideration, you might avoid making a mistake that all too many people make: Buying — or building — the best house on the block.
For example, consider the fate of what became a conspicuously large house for sale in an Atlanta suburb.
Don’t Super Size!
A few years ago, at the top of the market, the owners purchased a small fixer-upper, then renovated and significantly expanded it. Once completed, the owners tried to sell their McMansion in one of the worst real estate markets ever. After a year without success, they had to lower the asking price multiple times — and ultimately walked away with a big loss.
The fact that they bought at the top of the market and tried to sell during a decline in values certainly didn’t help. But it wasn’t the only factor by any means. On one side of the house was an apartment building. On the other sat a home that was an eyesore.
The proximity of these two properties should have been a warning to the owners: Don’t super-size your house when it’s surrounded by properties that aren’t at least equal in value. Instead, the owners had gotten caught up in the market frenzy. They didn’t think about what would happen when it came time to sell.
Look at Comps
In today’s market, potential buyers — having weathered the real estate bust and the recession — should take one look at the biggest, best house on the block and say to themselves: “No way.”
From an investment standpoint, owning the biggest house on the block has never been a good strategy. Home values in a neighborhood are intertwined because comps are so important in determining how to price — and what to pay for — a home. So the value of your McMansion will be limited if it’s surrounded by homes of considerably lesser value.
For similar reasons, you should avoid buying a house on a block with a parking garage, one full of apartment buildings,or rented homes. It is thought that renters don’t care for the properties where they live, as are absentee property owners. Their indifference can only hurt the value of nearby homes.
Buy the worst house on the block best instead
A better strategy, no matter what kind of market, is to buy the worst house on the best block. You can always improve the property and therefore increase its value. And because it’s on a great block, improvements you make to the home will be practically guaranteed to give you a top return on your investment.
Just don’t get carried away and turn the worst house on the block into the biggest and most expensive one.