Three fundamental principles for selecting your home.
There are three fundamental rules that one should try and adhere to when selecting a home to purchase. These are not hard and fast rules and exceptions do exist.
The principle of progression: Buy one of the cheaper homes on the block
You will be advised by certain professionals such as real estate agent or the property appraiser that it makes more sense to buy the cheaper homes on a certain block. This means that if you are getting a home in a certain area where all the rest of the other houses are priced much higher than what you are getting your home for, then it is likely to be a good and profitable buy.
For example although the homes in that neighborhood are in the range of $200,000-$225,000, you are getting to purchase a home in the same neighborhood for $165,000. This usually means a good deal for you because anytime that you want to sell in the future, you are likely to get a much better price.
In a nutshell, the value of the homes and properties around your house which are more highly priced tend to pull up the price of your property as well. However, things may not be exactly as they seem to be. There might be a good reason why the home you are getting is valued at a lower price. So before you pull out the checkbook and make the payment, look at the property carefully and have it deftly appraised.
It is possible that the property is going for a cheaper price because it has certain defects.
- Curable defects. When a property has defects that are mostly cosmetic and minor in nature, they are known as curable defects. This means that even though you have to put in extra money to bring the property up to a certain mark and standard, it will still be a deal and cost less as compared to the prices of the property existing in the same neighborhood.
Let’s say that the property only needs a good paint job or a little bit of landscaping to make it livable. Perhaps it means repairs like replacing of the floorboards or addition of certain facilities like lighting fixtures. If you have to put an additional $20,000 in a curable defects for a home that you are getting for $165,000, the purchase of the home still costs you $185,000 which is a deal as compared to the price of the home’s existing close by which range between $200,000-$225,000.
Problems in the property such as small deficiencies you can cure by upgrading, repairing or replacing in an inexpensive manner are known as curable defects. These include painting, modernizing a bathroom or kitchen, installing new counters and cabinets and upgrading electrical systems.
- Incurable defects. Another reason why you might be getting a property at a cheaper price as compared to the neighboring houses is that it might have some serious problems which are not so easily fixed. For example the property might be located next to a garbage dump or might be really ugly. If you have to spend another hundred thousand dollars in replacing the foundation, putting in a new plumbing or complete rewiring, purchasing such as the property doesn’t make sense.
Serious deficiencies in a property like this are called incurable defects.
They are not feasible to correct if you want to maintain a semblance of order in your home affordability. Not only will it eat into your financial resources but will more than likely make you end up owning the most expensive house in the neighborhood which is never really good in terms of recovering the money that you’ve spent one it comes to reselling the home.
This does not mean that all rehabs are to be frowned upon. You just have to get into a more careful analysis of several factors and how it is going to affect the prospect of getting your money back when you sell in the future.
There is a benefit in renovating cheaper homes as long as you’re getting it for a price that is much less than the prevailing value of the homes in the neighborhood. The amounts that you can spend on a home to rehabilitate it usually depends upon the difference in the price of the home that you purchase and the prevailing price of the average home in the neighborhood.
If you take the previous example in mind, buying a house for $165,000 where the prevailing market rate is $225,000 means that you can afford to spend no more than $60,000 to bring your home up to the prevailing standard set by the other homes in the neighborhood. This is because, staying within limit and carefully planning the rehabilitation of the home ensures that you get your money back when you resell the home in the future.
The principle of progression works well with the location principle when choosing a home. Buying one of the less expensive homes in a good neighborhood improves your chances of property appreciation in the years ahead and maximizing your return on the sale.
Principle of regression: Do not buy the most expensive house on the block
The principle of regression is completely opposite to the principle of progression. This principle states that when you buy the most expensive house on the block, you are likely to suffer when you sell the home in the future.
Just like the higher value of homes around the cheaper home tend to pull its value up, the cheaper homes around a very expensive home might tend to pull its value down. Another problem with buying the most expensive house in the neighborhood is that bringing any improvements in the home do not increase their value at all.
The value of the home is already high as far as the home appraisal is concerned because it is already estimated to be more highly priced than any of the other homes in the neighborhood. If you buy a home that is worth $200,000 in a neighborhood where all of the homes are around the $150,000 mark, putting an additional $50,000 to modernize the bathroom or putting in a new kitchen will not increase the value of the home to $250,000.
This is going to be a problem when you resell the house. While nobody will deny that you have indeed rehabilitated or improved the home by putting in a new kitchen, people are typically hesitant to buy $250,000 home in a neighborhood where no other house matches the same kind of quality standard.
When people want to spend $250,000 on purchasing a home they want to stay in the neighborhood were all near the homes are of the same standard as well.
Over improving a home by excessive improvements is a possibility and a trap that many homeowners have indeed fallen into. The money might be well worth the expenditure as long as you are going to stay in it and use the improvements you have made.
But it is a fact that most of the homeowners change homes twice or thrice in their lifetime.
While some people stay in the home for their entire lives, most of us change residences. The point is that the improvements might serve you well for as long as you’re staying in the home but when you try to sell the home, those improvements will not fetch you an extra price. The money that is spent on the rehabilitation goes to waste. This phenomenon is called over improving a property.
Over improving the property is not just applicable to the more expensive homes but can also happen when you buy it one of the least expensive homes in the neighborhood.
It is just a matter of controlling and evaluating how much you should spend it in fixing the home up. You should take a clear view of the kind of properties that exist in your neighborhood and the best time to do it is before you start the rehab work. If you are going to end up with the most expensive house on the block when you finish a project, it is usually advised that you should not do the project.
The principle of conformity: Unusual is usually costly
If you want to have a maximum chance of future appreciation of your home that you buy, you should typically conform in size, age and condition and style to other homes in your neighborhood. This is called the principle of conformity.
Buyers usually do not want to buy a home that sticks out as a sore thumb as compared to every other house on the block. This does not mean that your house should be identical to all of the houses in the neighborhood but should follow a certain pattern which does not make it stand out very overtly.
- Size This principle suggests that your house should not tower the other houses on the block or vice versa. For a house is smaller than the surrounding houses, use the principle of progression as a guide to bring it into size conformity with the other houses and you will increase your homes value. On the other hand, if you increase the size of your home which is already larger than the existing houses in your neighborhood, you are not likely to add any value to the home as far as appreciation and resale value is concerned.
- Age It is uncommon to see an older home in the middle of a row of modern houses. However, you can every now and then find a brand-new house located in the middle of older homes. A modern home will look out of place in such a neighborhood and will in fact not fetch a higher value when it comes to reselling the home.
- Condition The coThe condition that your house is and will obviously have an effect on the resale value. If your house is extremely ill maintained and looks like a dump, it will not fetch a high price. Similarly, by being the best maintained home in the entire locality, you are not likely to increase its resale price either. Even if your home conforms to all of the houses in style you can still over-improve your home with the quality of material, workmanship and appliances in your home if all that greatly exceeds the prevailing neighborhood quality standards.
- Style and Architecture This is not saying being that the architectural style of your house has to be like all the houses in the neighborhood but simply means that it should follow conformity principle to the general overall look and style of the housing in the neighborhood.
All this does not mean that your house is to be as bland or boring as every other house on the block. The warning sign in to watch out is when people tend to look at your home and think it’s weird, eccentric or feel that it sticks out like a sore thumb or is highly noticeable as compared to the rest of the houses in the neighborhood.