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A Big House At A Bargain Price Is Not Always A Good Investment
For regular home owners being able to purchase the biggest house on the street a at bargain price can seem like a steal.
They get to enjoy bigger living spaces, have more bedrooms, and might even have the space to install a swimming pool in the premises.
But from an investment point of view, a move like that would seldom be one of the deals that an investor would talk about in the future with good memories.
This is because the valuation of houses on the same street are often affected by a real estate phenomena called conformity.
This is an unwritten law of real estate investment which states that the more houses on the same street or neighborhood is similar to each other, the better they are at holding their appraisal values and at reaching their maximum potential value.
This in turn affects the price that they can command on the open market.
The biggest house in the neighborhood would be the exception among the rest and would have it’s value dragged down by the line of conformity homes that line up the streets.
For example, let’s say the average price for house in the area is $100 per square feet, with most homes in the 1,500 square feet range. This gives each house an average value of $150,000. If the biggest house has an area of 2,000 square feet, then it is very unlikely for it to fetch $200,000 even though simple math tells us that this is so.
In all likelihood, the biggest house at 2,000 square feet would go for $160,000 to $175,000.
Which is also probably why you think that you have unearthed a bargain price for it.
Purely from a numbers perspective, houses that conform to the norm of the neighborhood would present the best investments as it’s value would appreciate with the whole area as a whole. And would not suffer from any reverse effects for being the biggest around.
And while you might find another 2,000 square feet house in another neighborhood at $150,000, it does not necessarily mean that it would be a bargain purchase at that price.
This is because this particular neighborhood might have an average price of $50 per square feet. Firmly pricing the big house in the expensive range.
There is little potential for appreciation. Most of the appreciation would instead be benefited by the houses that are in conformity.
The lesson here is that price is just an indication of how much a property is being sold at. It is no indication of value.
If resale value is something that concerns you, then buying a small home in a valuable neighborhood would be a much better investment than buying a big house in a bad neighborhood.
Buying the biggest and baddest house in a valuable neighborhood would most likely be a mistake that would haunt you for years to come.
However, if you are just a regular home owner who does not see real estate as investments, then go for the biggest house you can afford if you find that it meets all your household and family needs.