Real estate wisdom: don’t build the nicest McMansion on the block

An oft-cited piece of real estate wisdom is that you shouldn’t buy or build the nicest home in a neighborhood. Here is an update on that tale: especially don’t do this when you are building a McMansion.

For example, consider the fate of what became a conspicuously large house for sale in an Atlanta suburb.

A few years ago, at the top of the market, the owners purchased a small fixer-upper, then renovated and significantly expanded it. Once completed, the owners tried to sell their McMansion in one of the worst real estate markets ever. After a year without success, they had to lower the asking price multiple times — and ultimately walked away with a big loss.

The fact that they bought at the top of the market and tried to sell during a decline in values certainly didn’t help. But it wasn’t the only factor by any means. On one side of the house was an apartment building. On the other sat a home that was an eyesore.

The proximity of these two properties should have been a warning to the owners: Don’t super-size your house when it’s surrounded by properties that aren’t at least equal in value. Instead, the owners had gotten caught up in the market frenzy. They didn’t think about what would happen when it came time to sell…

A better strategy, no matter what kind of market, is to buy the worst house on the best block. You can always improve the property and therefore increase its value. And because it’s on a great block, improvements you make to the home will be practically guaranteed to give you a top return on your investment.

I wonder if there aren’t two factors here that could mitigate the reduced selling price of the McMansion:

1. The owners really really wanted to be in this particular neighborhood. And if they have the money to build the bigger home and absorb the loss more easily (the article doesn’t say), perhaps this was more about the block than the particular house. Sure, they may have not made the most money they could have on their property but perhaps that wasn’t the most important thing.

2. If one does pursue the strategy of buying the worst house on the block, might one have to pay more to buy into a nicer block compared to buying a nicer house in a worse block? In other words, this advice partly depends on the context of the neighborhood. To buy into a nicer neighborhood at the start, one is likely to have to overpay, particularly in neighborhoods that are really hot or where there is a lot of pressure to tear down the existing home and build something bigger and better.

Overall, I’m intrigued by the general logic here from real estate agents: all that matters is the spread between what an owner paid (plus what they end up putting into the house) and what they get when they sell the home. In a perfect real estate world, all homeowners are told that they too can make money off their homes. Is this really possible? Is it even realistic for most owners? There are other reasons people buy homes and wealthier homeowners have more financial latitude to do what they want.

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