Whether you acquire a house for rental income, as a primary residence, or as a second or vacation home, the strategy of buying the “worst house on the block” may be a rewarding one to follow.
When appraisers determine the market value of a home, they do so by comparing it to other similar houses in the same general location. By comparing and contrasting the pros and cons of comparable homes, they generate reports commonly referred to in real estate circles as “comps”. Because comps are an attempt to average out the value of homes, they generate a price range that runs from low to medium to high. Buyers and sellers study the comps to figure out how much to offer or ask for a house, and that helps to define the going rates for homes at any given time and in any given market.
But, for example, if you own a mansion – that has had all kinds of expensive upgrades – in a neighborhood of mediocre homes, chances are that buyers will not offer you what the house is worth or what you’ve put into it. They would rather spend the same amount of money and buy into a more prestigious neighborhood lined with similar looking mansions and luxury homes. Similarly, if you own a broken down shack surrounded by mansions, the odds are in your favor that the value of your property will rise, because people usually pay more to be in fancier neighborhoods. Your less desirable home may represent the only affordable opportunity to gain entrance to an otherwise pricey and exclusive neighborhood, so you can charge a premium for that perk.
Among investors it is often said that you should not buy the best house on the block, because they have the least amount of room for upward price appreciation. In fact, the houses that are the “best” will normally see their values dragged down by less desirable properties in the vicinity. Buy an ugly home in a pretty neighborhood and the market physics works the opposite way, however, to lift your values higher. When you buy the least expensive and “worst” home on the street, you have much more room for your value to rise before it hits a ceiling or plateau. In essence you are capturing built-in equity by buying ugly.
If you fix up that kind of property, you can add substantial equity to it while you also gain the respect and admiration of other homeowners in the area. We all appreciate it when a neighbor spruces up their place to add value and beauty to our street, and making good neighbors is one of the most important aspects of real estate investment success.
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June 25th, 2008 at 4:36 pm
I agree with the author. The homeowners in the same neighborhood as the fixer will likely see that transformation and be motivated to clean up their homes. This type of transformation happens all the time. Good article.
June 30th, 2008 at 3:39 pm
I agree with dean.because by rehabbing the house you have already created some equity in the home. excellent article.