When looking at homes, one is tempted to buy the best home in a neighbourhood. Should you buy the most expensive home in the street ? No.
Assume you fall in love with the masterpiece home in a particular neighbourhood. It has everything you could dream of: black bottom pool, marble, an incredible kitchen, top of the line windows, stunning brick work and so on. The sellers obviously put a lot of time, effort and money into the home. Accordingly, it stands out as the pearl in the street. Why wouldn’t you want to snap it up immediately ?
Before you start signing documents, take a look at the sales prices of comparable homes, “comps”, in the neighbourhood. If you compare the comp prices to the dream home, you should notice a pretty significant price difference. This difference should act as a metaphorical slap in the face or pouring of cold water over your head. The dream home is undoubtedly selling for a price range far beyond the comps. Warning lights should be going off at this point.
You are going to have a problem if you give into temptation and purchase the most expensive home on the block. In fact, you are going to have two problems.
The first problem is the appreciation of the value of the home. The appreciation on the best home in a neighbourhood is always going to be dragged down by the structures around it. If you take a €900,000 home from a private community and put it in a street of €250,000 built-alike homes, the €900,000 value is going to come down a lot because the neighbourhood will not support it. When you eventually sell, buyers are going to look at the comps in the neighbourhood and laugh at a €900,000 asking price.
The second problem is “hemming.” Since you own the most expensive house in the neighbourhood, your appreciation potential is already limited. This becomes a bigger problem if you want to remodel or add on to the home. Taking such action would typically add to the value of a home. With the most expensive home, not only will it not add value, it may cut into your equity. Why ? If you do a €50,000 remodel, you may see a €10,000 gain for your €50,000 cost. You just lost €40,000.
Dream or Nightmare
Unless you can accurately predict an increase in valuations for an entire neighbuorhood, you shouldn’t buy the most expensive home in the street. If you do, the dream home could quickly turn into a nightmare.