When It Comes To Home Buying, Location Is King
Shopping for a home? Stack the deck in your favor by choosing the location best suited to you.
The real estate adage “location, location, location” has been around for decades. Real estate agents, investors and experienced home buyers will tell you that location trumps everything. I always advise clients that you can make changes to a home, but you can’t change the location — short of moving the house.
Some neighborhoods change over time, of course, and most improve rather than getting worse. So as you set out to buy a home, should you look for the best home on the worst block? The worst home on the best block? The best home on the best block? (In real estate, “block” is a loose term for an area or neighborhood.) Here’s what you need to know.
How to buy in a great area at a lower price
A home could be in the best school district in the top neighborhood of any town, but if it’s on a busy street, across from a commercial center, next to a school or near a freeway on or off-ramp, that home’s value will always be significantly less than the values of comparable homes nearby. If you want to be in a great area but don’t want to pay top dollar, buying a home near a slightly undesirable feature could be an option, so long as the broader location is good.
The worst house on the best block: go for it, if you’re willing to work on it
If you have a good location, nobody can take that away from you. Smart real estate investors and developers know that if a home is in a good location, it’s a good investment. In places like San Francisco, it’s not uncommon to see 10 developers make offers on an absolutely ugly, tear-down house simply because of the location. If it’s a good house, there’s a huge upside for the person who renovates it.
For a home buyer who wants to live in the home and isn’t afraid of a little work, this is the best purchase to make. Why? Because once the renovations are done, you’re sitting on equity. The lesson here: Don’t be afraid to buy a home that needs work, particularly if it’s in a prime location.
The best house on the best block: a great choice if you plan to stick around
Buying a fully renovated home in an A+ neighborhood is a safe choice because it will likely hold its value. But it will not have the same upside seen by its fixer-upper neighbor down the street. While there will likely be dozens of buyers lined up to purchase a move-in ready home on a prime block, a home buyer needs to understand that they’re paying top market value for the house.
In this next generation of real estate, the world moves faster. People get job transfers more often, and it’s less common for someone to stay in their home for 30 years. If you pay top dollar for the best house on the best block and then have to sell it within a few years, your investment may not have time to appreciate enough to cover your selling closing costs.
The worst house on the worst block: could be worth the gamble
Though there are no absolutes, you should have second and third thoughts about buying the worst house on the worst block.
Some folks prefer to be off the beaten path or buy in a transitioning neighborhood. And it’s true, areas can change rapidly these days. Once unsafe or out-of-the-way neighborhoods emerge as the next “it” spot. You can’t always predict which neighborhoods will change. And when real estate markets slow down, it’s often these gentrifying areas that feel it first.
If you’re comfortable challenging the status quo of the location game, buy a home that needs some work. As described above, you can build equity after making improvements. That built-in equity, plus the potential upside if and when the neighborhood changes, could equate to a great long-term investment.
The best house on the worst block: proceed with caution
The riskiest real estate move is to buy the absolute best home on the worst block. Paying top dollar for a fully renovated home in a bad location could present serious financial consequences. You may never gain any equity or fully recoup your investment, even after years of living in the home. That’s why this type of purchase is best suited for long-term, experienced investors.
Some markets are stronger than others today, and it’s nearly impossible to give blanket market advice across multiple markets. But these theories hold true across any neighborhood, school district or block no matter the market. If you are a buyer, keep these in mind as you consider the investment side of your purchase.