By Tali Wee of Zillow
Home shoppers on the market have countless home details to consider before buying; how much can they afford, what are the best neighborhoods, how long are commute times, which school districts are top performers, how many bedrooms and bathrooms are necessary? Buyers must also decide on the condition of homes they’re willing to acquire. Rundown properties require time, money and construction skills to upgrade but typically cost less upfront. Meanwhile, new parents might opt for kid-proofed, move-in ready homes.
Homes that meet all of the qualifications on buyers’ must-have lists might seem like the perfect opportunities. However, homebuyers who get distracted by countless amenities might find themselves purchasing the nicest estates in their neighborhoods and regretting it long term.
As buyers narrow down their housing searches, they should step back from the emotional, lifestyle qualifications of properties and focus on the investment potential. Here are a few reasons to heed the real estate advice to not buy the best house on the block.
Location Contradicts Price Tag
Recall the real estate adage, “location, location, location?” The takeaway is that real estate is essentially land. Regardless of the home on the property, the location cannot be changed. Buyers who can afford prime locations should buy it, because the home can be improved. Alternatively, buyers of high-end homes on low-end property cannot improve their property values.
Plus, most buyers who can afford grandiose homes are likely shopping in pricey neighborhoods. Consequently, the nicest home on a block is ordinarily a poor investment and could be challenging to sell.
Neighborhoods Influence Home Values
Just as rundown houses draw neighborhood home values down, overly elaborate homes raise local values. Therefore, buying the home next door to the nicest house on the block is a smart investment, but owning the best property is not advantageous.
Before buyers make incredibly large home purchases, they usually review comparable home prices. The for-sale property should be listed at a similar price to homes that recently sold in the same neighborhood with matched square footage, number of rooms, acreage, etc. Comparable homes will pull the listing price down for the nicest home. This can create appraisal problems for the lenders of potential buyers and prevent the resale of the home. Don’t end up underwater, trapped in an expensive mortgage costing more than the value of the home.
Flat Resale Values Hinder Profitability
House hunters are generally inclined to pay higher prices for newly-added decks, recently-installed kitchen cabinets or Energy Star washers and dryers. However, each upsell raises the current purchase price. When homeowners sell their houses years later, the returns on their investments (ROI) are typically unimpressive. Those bells and whistles age with the property and sellers must make new improvements to raise resale values.
On average, homeowners spend between 1 and 4 percent of the total cost of their homes on annual maintenance. Additionally, sellers are encouraged to make curb appeal upgrades before listing their properties. New additions inspire higher offers at the expense of sellers. But upgrades are necessary to regain originally-inflated purchase prices.
In a healthy real estate market, home values appreciate approximately 3 percent each year. When properties are purchased in peak condition, sellers must assume their resale values will only be slightly higher than their original purchase prices, due to appreciation alone.
Building the Best House on the Block
Buyers aspiring to own their dream homes can plan and design major remodels. However, just as buying the nicest home on the block is problematic, so is building it. Construction costs are expensive and remodels rarely have profitable returns. On the high end, improvements might recoup 85 percent of their costs. Plus, resale is still hampered by low-priced comparable properties and mismatched target homebuyers with location.
Purchasing fixer-upper properties is still beneficial as long as the final product doesn’t create an overly-expensive home for its neighborhood. Homes in need of love still save buyers money at closing, and improvement projects satisfy the crafting tendencies of do-it-yourselfers.
Home shoppers should consider the long-term aspects of their investments before purchasing properties. Prioritizing location, evaluating comparable homes and purchase prices and settling for good condition all help homeowners avoid ill-advised purchases of the best homes on their blocks.