It’s super tempting to buy the most expensive home you can afford. And while this is not a bad idea per se, buying the most expensive home in a particular neighborhood can cause problems down the road. Below I lay out 5 important reasons why you probably don’t want to buy the most expensive home in the neighborhood.
1. Fewer Buyers. The term median home value describes the middle…as it applies to real estate, half the homes are over this value and half are below. It’s not the average, it’s the middle. There is a median home value for every town and every neighborhood. Statistically, most of the home buyers in a particular area exist in a window around this value. So, to maximize your chance of resale, it’s best to find the middle. From a broader perspective, homes priced at the median home value in a particular city will sell faster than homes priced well above the median because there are more buyers in the middle. This holds true for neighborhoods as well.
2. Fewer “comps.” A “comp” is shorthand for comparable. Residential Home valuation is done primarily by comparing a subject property with recently sold homes in the same neighborhood. So, what is comparable? To get an accurate valuation it’s important to compare apples to apples. Comparable homes are those in the same neighborhood (or close) with roughly the same square footage, number of bedrooms, bathrooms, and amenities. So, if you buy the most expensive home in the neighborhood, chances are good that there are not many homes comparable to your own. This can cause two issues: a) It’s difficult to accurately price the home for sale without a solid basis to set that value. And b) Even if you are able to sell for full asking price, it’s difficult for an appraiser to value your home with fewer comparable homes in your neighborhood. This can sink a deal if a buyer’s lender will not fund a loan because the appraisal came in low (see #4).
3. The Principle of Regression. This is a principle of appraisal that basically means the value of a higher priced home in a moderately priced neighborhood is pulled down by the moderately priced homes. Clear as mud? It’s sort of like the time I tried to teach my friend Danny to swim. I was a pretty strong swimmer at the time and he was not. Danny grabbed onto me and nearly took me to the bottom. So while this is certainly not a perfect analogy to explain regression, hopefully it makes sense. 🙂 Regression is closely tied to the previous reason (2a) not to buy the most expensive home in a neighborhood.
4. Mortgage difficulties. Fewer Comps plus the Principle of Regression equals a higher probability your future buyer will have issues getting a mortgage on this property. To be clear, if the home does not appraise at the selling price, the mortgage company will not fund the loan…unless the buyer makes up the difference between the appraised value and the sales price. There are actually a couple of other options…You can mutually agree to lower the price or split the difference with the buyer. These issues are easier to avoid if you do not buy the most expensive home in the neighborhood.
5. Value of improvements. If you are already at the top-end of the value spectrum, you are less likely to recoup the cost of any improvements you make to the home. Most buyers will very likely pay full market value for a home, but changes to an already very expensive home for the neighborhood are not likely to yield as much as a lower priced home in the same neighborhood.
Ok, after saying all that, if you really love the home you are considering, and it will meet your long-term housing needs, then buying the most expensive home in the neighborhood may work. The risk is greater if the purchase becomes a short-term investment. But who ever said real estate was a good short term investment?
About the author: The above article “5 Reasons NOT to Buy the Most Expensive Home in the Neighborhood” was provided by Kevin Guerrero of Keller Williams Clients’ Choice Realty. To find out more about Kevin and Keller Williams check out the ABOUT US page.
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