Home > Buying a home > Ugliest House Principle – Will it help you build equity faster?

Ugliest House Principle – Will it help you build equity faster?

A little background before we start on the subject of ugly houses.

Real Estate Markets are very, very local – so this article is based on recent experiences with clients who are buying homes in Danbury, buying homes in Bethel, buying homes in Brookfield and buying homes in New Milford.

Our MLS system in Greater Fairfield County, CT, showed 11 homes the other day with price increases.  There were many more than that where the prices are being reduced so I can’t conclude that we are now in an appreciating market but…. although they are a bit confusing there some signs out there that we may be climbing out of the bottom.

The challenge for sellers over the last few years has been coming to grips with the fact that their home isn’t worth what they would like it to be. Soon, the real challenge may be for buyers.

WAITING FOR THE PERFECT STORM – PERFECT PRICE, RATE AND HOUSE

The challenge for buyers recently, has been that they don’t want to buy until we are “AT THE BOTTOM”.  Many people, who need to move for a variety of reasons, don’t want to buy a house until they are sure that it will not continue to fall in value.

People are staying in their existing homes or apartments much longer they would probably like to because they only want to buy when their new house is going to appreciate.

IT ALL DEPENDS ON YOUR PRIORITIES

It’s all about individual preference, I suppose.  Shereen and I bought our condo in June of 2007.

It is now September, 2009 and the value of our home is down roughly 14%.   While we’d certainly like it if the value had gone up, we can’t even begin to express how much happier we are living where we do, than living where we were. It’s a much nicer, newer, bigger place and we are loving it.  Had we held out for the bottom, we’d still be living where we were – all stressed out, waiting to move until the market changed.

In the end, if we’d put off our move until today, more than 2 years later, we’d probably have sold for 15% less than we did, so we’d have spent 2 more years wanting to move and we wouldn’t have made out any better financially.

HOW WILL WE KNOW WHEN WE HIT BOTTOM

My loyal Blogosphere fans have heard me talk about “the bottom” before, specifically that we are not going to know where it is until we can see it in our rear-view mirrors.

Having said that there are many who are saying that homes in the Danbury, Brookfield, Bethel area, might just be at the bottom. The challenge with hitting the bottom, is that the turning of the market is not going to be clear cut.  It will be a series of little dips, climbs, more dips and then a steady, if slow climb.

SO – IF THE MARKET IS HEADED UP, WHAT IS THE FASTEST WAY TO GAIN EQUITY WHEN YOU BUY?

Finally – back to the topic at hand.

Lately, I’ve had a number of buyer clients who have asked me about the “Ugliest Home Principle”.    In Real Estate Lingo we call this the Principle of Progression.  The counter to it is the Principle of Regression. Here’s what they mean in simple terms.

The Principle of Progression says if you have the most modestly valued home in a neighborhood of higher priced homes, your value will move closer to the value of the higher priced homes.  In a down market, your home will drop more slowly and in an up market your home will rise more quickly.

The Principle of Regression says that if you have the highest valued home in a neighborhood of lower priced homes, your value will move closer to the more modestly priced homes.  In a down market your home will drop more quickly and in an up market your home will rise more slowly.

Before we talk about the actual financial wisdom of this, you first need to answer to yourself the following two questions.

  1. When you find this ugly, small, low value home, willl it suit your life needs in terms of size, bathrooms, bedrooms, location etc.?
  2. Will you be happy living in the ugliest, smallest, lowest value home in the neighborhood?

If you can honestly answer “YES”,  then let’s look at the principles themselves and consider if they hold true.

DO THESE PRINCIPLES ACTUALLY WORK?

The answer is that they both Progression and Regression do work – but there are a couple of caveats.

First – they work best with a new home.  If there is a neighborhood of 3000SF, 4BR 2.5 Bath Colonials on 1.5 acres and you build a 1500SF Hi-Ranch with 3BR  1.5 baths on .35 acreage, your house will likely appreciate faster than if you built the same one in a neighborhood of other modest hi-ranches.

If the neighborhood has been around for 20 years and are looking to buy that 1500SF Hi-Ranch that was built 15 years ago, you have to keep in mind  most of the Progression has already happened.  Remember, the value of the modest home gets “closer” to the value of the higher-priced homes but it they’ll never be equal. It doesn’t keep going up forever.

Secondly, let’s assume that the “ugly” home is only 5 years old and the value has gone up – here’s the catch.  The person selling the home also knows about this principle and guess what – HE wants to take the increased equity. This is not a secret plan that only you know about. So you’re not going to “trick” the seller into selling below market value and then magically gain the value from Progression.

WHY ARE YOU BUYING A NEW HOME IN THE FIRST PLACE?

As a Realtor this is the question I always ask my buyer clients to consider carefully before deciding what home to buy?

Most often, people are moving to accommodate some change in lifestyle.

  • Moving up for a growing family
  • Downsizing after empty nest syndrome kicks in
  • New job – new commute
  • Moving into a town that suits you better

or a hundred other reasons.  The thing is you have to keep those reasons in mind. If you are choosing a house for lifestyle reasons but overlay that reason with wanting to buy a house that is going to gain equity the fastest, you will have to compromise somewhere.  You can’t serve two masters and get what you want.

Pick the investment avenue or pick the lifestyle avenue and move in the direction that you think is most important to you. After narrowing down the choices, you can compare the short list in terms of the “other master” and see how close you can come.

Be true and honest with yourself about why you want to move and let your Realtor help you find the home that suits your personal needs.

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