Buying The Worst House In The Best Neighborhood

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Not A Smart Move

Always dig deeper

There’s an oft-evoked proverb in the real-estate world: “Buy the worst house in the best neighborhood”. Theoretically, the higher value of the surrounding homes will lift the prices of the homes around it.

However, our data helps separate truth from adage. When looking at the cheapest 10 percent of homes in a premiere LA ZIP code, we found that buying the cheapest house in the best neighborhood is a proverb that sounds great, but doesn’t pay off. Only rarely does the bottom 10 percent outperform the top 90 percent of houses in a ZIP code. More often than not, buying the worst home in a nice neighborhood is a neutral investment strategy and definitely not impervious to backfiring.

In higher-priced neighborhoods, homebuyers are looking for higher-priced homes. Therefore, there is less demand for lower-priced homes in these areas. Simply because you got a steal in a hot neighborhood doesn’t mean that wealthy future homeowners are looking for a steal. They’re in another financial stratosphere, and they don’t shop at the discount rack.

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Now, there are certain conditions in which it may be advisable to invest in the bottom 10 percent of houses. Our research shows, that its more advisable to look for such housing stock in the hottest neighborhoods, as opposed to the best. What counts as a “hot” neighborhood? We classify “hot” neighborhoods as those which have seen five consecutive years of higher-than-average home value appreciation, or in our current state of normalization, zips or areas with high single digit or low double digit growth.

Even in these situations, timing is everything. There are no guarantees, and if you miss the proverbial “boat” on up-and-coming neighborhood, its possible that a cheap home purchase could do worse than homes in the top 10 percent generally do. This is often the result after all prime locations have already been scooped up during the neighborhood’s “renaissance”, leaving only the least desirable properties for the late-comers.

Regardless of strategy, the data doesn’t lie. The best house is a decent one in the right neighborhood. Data proves that the “right” neighborhood is the most expensive one where you can afford a home that is not in the bottom 10 percent. So set your sights a little higher, and decide which neighborhood is right for you.