According to many real estate experts, you should avoid buying the most expensive house on the block. How valid is this investment strategy?
A property's value is influenced by the surrounding homes. A large home in a neighborhood of small bungalows will usually sell for less than the same home would sell for if it was located in a neighborhood of larger homes.
Buyers have an easier time paying a seller's price if the price can be supported by comparable sales from the surrounding neighborhood. It's natural for the seller of the largest home on the block to want to ask a higher price than might be justified for the neighborhood. But, without comparable sales to justify the higher price, buyers will be reluctant to buy. Even if the home does sell for the seller's price, it might not appraise for the purchase price and this could blow the sale.
The value of a smaller home in a neighborhood of larger, more expensive homes will often be more than it would be if it were located in a homogeneous neighborhood of smaller homes. This is particularly so if the home offers expansion potential. It's easy to justify paying a higher price if you can improve the property to make it more valuable without over-improving for the neighborhood.
From an investment standpoint, it's better to buy a smaller home in a neighborhood of larger homes than it is to buy the best home on the block. But, suppose you have a large family, or you work out of your home, and you need a lot of space. Maybe you can't afford to buy in an affluent area. Your budget might limit you to a modest neighborhood where you can hope to find a home that's large enough to suit your needs.
First Time Tip: Buying the best home on the block isn't a bad investment if you pay the right price. To make sure you don't overpay, ask your agent to provide you with comparable sales data of similar properties that have sold. If the property is unique for the area, it may be difficult to find truly comparable properties. In this case, the sellers might try to justify their price by using comparable sales from other neighborhoods. If the comparable sales are from more affluent neighborhoods, you should pay a discounted price that reflects this disparity.
Although it's hard to think about resale when you buy, it's important to keep in mind that you'll probably have to discount the price for a future buyer. The next buyer will no doubt have the same objections you have to buying the more expensive house on the block. It also may take longer to sell the largest home on the block, depending on market conditions.
Buying the most expensive home on the block isn't a mistake if the home suits your long-term housing needs, and if you can't afford to buy what you need in a more expensive neighborhood. But, such a home probably wouldn't be a wise investment if it needs to be remodeled extensively to satisfy your housing needs.
Over-improving a home for the neighborhood usually isn't a good idea because you're unlikely to recoup your investment. A buyer will pay fair market value for a property but this may not be the same as the price you paid for it plus the costs of the improvements.