Written by PJ Wade
You can know something important and completely ignore its significance without realizing that you are.
There is one fact in real estate that is expensive to ignore, but it does not always get the attention it deserves. This fact can become buried under a mass of distracting secondary information about choosing real estate to buy.
If this happens you may purchase the wrong property, so the mistake you make will be expensive for two reasons: first, real estate is the most expensive thing you’ll buy and, second, most people mortgage heavily and usually end up paying double or triple the original amount borrowed.
The fact? The three most important factors in determining real estate value are location, location, location. You’ve heard this before. Your real estate professional probably explained the significance when discussing neighborhoods or communities within your budget. You know location is important, but do you ignore its significance without realizing that you are?
Is your attention focused on decor, granite counters, spa-like ensuites, and stainless steel appliances when you look at properties? If so, you are concentrating on changeable aspects of the property that will depreciate or lose value as styles change. Instead, concentrate on what will not depreciate or go out of style — the land. The supply of land is limited — they’re not making any more of it — and demand continues to rise.
The simple logic of location-based value should make it difficult to ignore: you cannot move land.
Homes and other buildings can be altered drastically and moved from one location to another. Trees, soil, and rocks can be shifted from one property to another — landscapers do this for a living. The surface of land, and what is under it, can be altered, but the location of a property can not be changed.
Further, land does not depreciate like buildings and other man-made features, including interior design and appliances. If you’ve bought well, the land will increase in value or appreciate over time.
The pattern of appreciation in a neighborhood will give some indication of future trends. Location value is determined by proximity to favored items like schools, transportation, walkable retail areas, and local attractions. Changes in usage including building of high rises and transit can downgrade or upgrade the value of some properties or may affect an entire area, so local knowledge is vital.
To track price changes, the Federal Housing Finance Agency publishes monthly and quarterly House Price Index (HPI) reports, which are held as accurate indicators of house price trends at various geographic locations. HPI reports can help you evaluate areas being considered.
For instance, the fourth quarter 2015 HPI report stated that:
- Home prices rose in every state and in the District of Columbia between the fourth quarter of 2014 and the fourth quarter of 2015. The top five states in annual appreciation were: 1) Nevada 12.7 percent; 2) Colorado 10.9 percent; 3) Idaho 10.7 percent; 4) Washington 10.7 percent; and 5) Oregon 10.6 percent.
- Among the 100 most populated metropolitan areas in the U.S., four-quarter price increases were greatest in the San Francisco-Redwood City-South San Francisco, CA Metropolitan Statistical Areas District (MSAD), where prices increased by 20.7 percent. Prices were weakest in New Haven-Milford, Connecticut, where they fell 1.5 percent.
Your belief in the value of a specific property is determined by a number of factors which may include the location, price, size, quality of construction, overall condition, style, layout, functionality, walkability, and factors of particular interest to your lifestyle, including amenities and parking. If you decide to shop based on how your price range and “must have” list combine to determine which locations you can choose from, you’ll have choices within the following range:
- At one extreme, the lesser location may provide the greatest fit with your “must haves” and may include additional benefits, or At the other extreme, the best location may or may not require some compromise on “must haves.”
The difference in these two approaches is based on the investment potential between opting for a property based on things that can be changed or that lose value over time, and concentrating on real estate which may offer greater appreciation over time.
The rule of thumb here is to zero in on the “worst” property on the best street or in the best area you can afford. Then, as you improve that property over the years, you’ll increase its value. Meanwhile, as the better homes continue to get better, they will cause the neighborhood to become more desirable driving values up further. In this healthy-appreciation environment, you will end up with all you want in the property and a solid increase on your initial investment.
The “worst” property may be smaller, more modest, older, more rundown, on a busier street, or merely more garishly decorated than the others. It is not necessarily a “bad buy” because the land is in a great location. In fact, the “worst” may be the best buy in the immediate area because of this potential.
Repeat the location-location-location mantra as you view properties and wander potential neighborhoods. Don’t buy decor, buy land.
For the curious…In 1956, Lord Samuel of London, a real estate magnate, was cited as being the first to make the location-location-location value statement. In fact, the adage first appeared in print in a 1926 Chicago Tribune real estate ad and was felt to be a familiar saying at that time.