So this week’s topic comes from a conversation I recently had with a would-be-client who, sadly, I may never hear from again because he wasn’t thrilled with the news I gave him.
Let me start out by telling you a couple founding principals of the real estate industry.
The first you’ve probably heard time and time again — the three most important aspects of a property’s value is “Location, location, location.” Everyone wants a great home, sure. But they also want something in a nice neighborhood. Something close to work. Something close to shopping but not so close to the airport.
The 2nd and 3rd principals I want you to know are Progression and Regression.
Progression means this: a smaller, less assuming house in a neighborhood of larger more valuable homes will have its own value increased by the homes around it.
Regression is the opposite: a large expensive home will have its value decreased if it’s among a sea of small, less valuable homes.
And now that you know those terms, it’s storytime.
About a week or so ago, I had a would-be-client on the phone. He had this enormous, multi-million dollar home that he’d been building up over the years to turn it into a “McMansion”. Thousands upon thousands of square feet, 2 stories high, gorgeous front lawn with a custom-made fountain, brick walls around the manicured property, these extravagant pillars by the front door, a huge 3-car garage, big back yard.
This place is huge. And nice!
And the owner was talking about more additions and renovations he’s wanting to do - increasing the size even further, finishing that landscaping, a custom kitchen and super-fancy staircase.
This house could go on the market for easily three-to-four million dollars, if not more!
At least... it could a few miles away in one of the more ritzy coastal neighborhoods or maybe up in Beverly Hills. Places where there are dozens of homes with similar size and extravagance.
There’s just one problem: this house is in a neighborhood of smaller one-story homes. It’s still a nice neighborhood, but the majority of the properties around it are single-story homes in the $700K-$850K range.
And then there’s this house that’s literally twice the size of anything else on its block.
And here’s where regression comes into play. Because of those other smaller homes around it, the value of this McMansion drops. A lot. Like down to about 1/3 of what it could bring in if it were located in one of those ritzier neighborhoods I mentioned.
And it’s all because of location.
Now don’t get me wrong, I totally understand how that might seem like a classist or elitist thing to say. But the sad truth is it’s true. A home’s value is not based on the home itself. Ever.
Even appraisers will figure out what a home is worth by comparing it to other homes in the area and adjusting up or down accordingly. But they’re not comparing it to like-homes in different neighborhoods. They’re comparing it to anything that might be similar in the same neighborhood.
Granted, this is THE most valuable home on the block! But when those comparables are so much less valuable, the price goes down.
Think of it like a teacher grading the class on a curve.
So here’s the lesson: you want your home (whether buying or selling) to be roughly the same as the other houses on the block. The biggest house on the block has its value brought down by the rest. The smallest house on the block has its value brought up by the rest.
Conformity. Conformity makes all the houses valuable in equal measure.
If you’re looking to buy or sell a home, please reach out to me via email at [email protected] or phone at (734) 819-3257 or find me on facebook.