Scenario: You want a great bargain on a house in one of the best neighborhoods in your area. You’ve always heard that buying the “worst” house in the best neighborhood is the smart thing to do, so you’re thinking that’s the way to go.
Cast of Characters: You (and maybe your family or significant other) and your team of trusted real estate professionals.
Our Advice: Not so fast!
You’ve heard all the old cliches about being a small fish in a big pond, the low man on the totem pole, and you’re ready to apply them to your home-buying experience. According to popular advice, you’re looking for the worst house in the best neighborhood. But this is a tactic that can actually backfire.
Now, if you’re looking to buy in a specific neighborhood because you consider amenities, proximity to certain places, and school district the most important aspects, then by all means, go for it. But if your number one motivator is getting the best value, and you want to build equity quickly, this might not be your best bet.
First of all, do you really want to pay top dollar for a house you don’t love just because it’s in a neighborhood that’s supposedly the fashionable place to be? There’s always a hot new neighborhood in town, so when your currently popular and ritzy area becomes old news, you’ll be stuck there in a house that you don’t even like. In addition, a smaller, maybe less attractive house in a nicer neighborhood isn’t necessarily going to bring you a ton of equity just because it’s cheaper than the surrounding properties. Since the area’s already established, your “worst house” isn’t going to increase in value any faster than the bigger and better properties. In their book Zillow Talk: The New Rules of Real Estate, authors Spencer Rascoff and Stan Humphries break it down like this:
“If the adage were true, the bottom 10 percent of houses would need to perform better than the more expensive homes in their neighborhood. Faster appreciation would indicate that buying the cheapest house in the best neighborhood is a strategy that really does pay off. But—alas—it doesn’t. Instead, we found that only rarely does the bottom 10 percent outperform the top 90 percent of houses in a ZIP code.”
What to Do Instead
Instead of buying a so-so house in a neighborhood that’s been popular for a long time, it’s better to find a great deal on a house in an up-and-coming neighborhood. Not sure how to spot the Next Big Thing? Keep an ear to the ground and an eye on plans for your city, and go where the businesses are going. If you see an older neighborhood with a sudden influx of restaurants, shops, and other businesses, it’s a sure sign that the area is being revitalized. Neighborhoods have cycles. Older areas become new again, and they’re suddenly the place to be. If you can get in on the ground floor, so to speak, in one of these neighborhoods, you should be able to find a reasonably priced home that will build equity faster than that lower-end home in the high-end neighborhood.
The Key Takeaway
It’s just not worth paying a premium for a house that just makes you say, “Meh. It’s not what we wanted, but at least it’s in the right area.” Instead of overpaying for a house that probably won’t have much more resale value than what you paid for it, look for the hot, up-and-coming neighborhood. Find a deal on a bigger, better home than you could afford in the ritzier neighborhood, or snag a fixer-upper with great bones for an even lower price and make it your own. You’ll thank us when you find yourself sitting pretty with a nice amount of equity in just a few years’ time.