Homebuying 101: Don’t buy the best house on the block

We’re in a tough real estate market. It’s tough for buyers, because many are worried about making the financial commitment in this economy. And it’s difficult for sellers, because there’s a lot of inventory competing on the market for a smaller pool of buyers.

So to help you navigate this challenging market, today’s ‘Home buying 101’ topic is: Why you shouldn’t buy the best house on the block.

The value of a McMansion is limited by surrounding homes

On a block of small houses and condo buildings in San Francisco’s Noe Valley sits—and sits, and sits—a conspicuously large house for sale. A few years ago, the owners renovated and significantly expanded the once-modest home. They’ve been trying to sell the property for months now and have had to lower the asking price several times.

It doesn’t help that on one side of the house is an apartment building. And on the other, there’s a home that’s a bit of an eyesore.

A few years ago, an expanded home like this might have sold for asking price—or even more. But in this economy, the house screams ‘bad investment.’ Potential buyers are walking away, viewing the home as too big and too expensive, particularly in the context of the block where it’s located.

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 a McMansion will be limited in how much it can increase if it’s surrounded by homes of considerably lesser value.

For similar reasons, you should avoid buying a house on a block full of apartment buildings or rented homes. Renters are notorious for not keeping up 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 best block instead

A better strategy, particularly in this market, is to buy the worst house on the best block. You can always improve the house, 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.

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