Buying the worst house in the best neighborhood has been touted as a sound investment strategy for many years. People have argued the home will eventually rise, at a faster rate, and give the homeowners more equity over time. However, that is not exactly the case.
Keep in mind that buying the best house in the neighborhood is also not a good idea.
Take a look at the top 3 reasons why buying the worst house in the best neighborhood is not good advice.
First Problem: It is the Worst Home
First and foremost, if you believe in this idea, then you will be buying the worst home on the street, if not the entire neighborhood. Being worst can come in many forms. The place may be significantly smaller than the other homes, or it may have a decidedly different layout from other properties or the lot may be much smaller than the rest of the properties. Even worse is to have a combination of smaller size, smaller lot and bad layout.
Whatever makes it the worst home, makes it more expensive if you wish to bring the home up to the level of the surrounding properties. For example, if all the homes in the neighborhood have an average square footage of 1,800 and your proposed worst home has only 1,200 square feet, adding the 600 extra square feet will be quite expensive.
Second Problem: The Extra Expense Eats Away at Expected Equity
Piggybacking on the previous point, if you spend the money to bring the home up to the level of the other properties, you will incur a huge expense. This expense will then get you at the same level as the other homes, but your home will not gain in value more than the other homes.
For example, suppose you bought the worst home in a neighborhood where the average value is $250,000 but you only paid $200,000 for your property. In order to add usable square footage to your home, it will take about $50,000 in renovations. You now have a home worth approximately $250,000 after spending $250,000 between the purchase price and the remodel. Not exactly a huge advantage over the other homes.
Third problem: History Shows that Low Performers Continue to Perform Poorly
An in-depth report conducted by Spencer Rascoff and Stan Humphries that the bottom 10% of homes very rarely appreciate in value any faster than other homes. In fact, they either appreciate at the same rate or at a WORSE rate than other homes in their neighborhood.
There is a better alternative to buying the worst home in the best neighborhood. Instead, find a good home in a place that is rising in value.
How do you find a place that is going up in value? Follow the money. The best sign of an improving market is new retail developments. A new grocery store, new restaurants, and a new strip mall will be a huge indicator that more people are buying in that area, which means more homes will need to be built. Find a good home in this area and ride the wave of appreciating values from the beginning, and you will be in a much better financial position if you decide to sell the home in 5 to 10 years.
Final Thoughts On Why Buying the Worst House in the Best Neighborhood is Not Good Advice
Solid math shows that buying the absolute bottom of the barrel home in a great neighborhood basically means you are paying too much for a home that you really don’t love. Don’t get caught in the trap of feeling that you must buy in the trendy hot neighborhood. Spend some time talking with your real estate agent and get a fix on the next, upcoming hot place and you will be in a much better spot when home prices rise.
Additional Neighborhood Resources:
How To Pick A Neighborhood You’ll Love by Amanda Davidson
Tips For Choosing The Best Neighborhood by Sharon Paxson
How To Pick A Neighborhood by Bill Gassett
Choosing The Right Neighborhood by Paul Sian
About the author: This article on the “Why Buying the Worst House in the Best Neighborhood is Not Good Advice” was written by Luke Skar of www.MadisonMortgageGuys.com. As the Social Media Strategist, his role is to provide original content for all of his social media profiles as well as generating new leads from his website.
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