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The catch behind one of real estate’s oldest ‘truths’

Looking for a bargain? Beware! We look at whether there’s any substance to this long-standing piece of property advice.

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It’s long been considered a real estate truism that, if you’re looking to make a savvy property purchase, you should buy the ‘worst house on the best street’.

The argument in its favour is that such properties represent a sound investment: if the surrounding homes are higher in value, they work to lift the surrounding houses – even the worst-kept ones – to better a market price.

In 2015, US real estate authors Spencer Rascoff and Stan Humphries crunched the numbers to reveal the proposition was not an open-and-shut case. At best, they found it to be a neutral investment strategy, as in the majority of cases studied such bottom-tier homes perform neither better nor worse than others in the area.

In fact, such a purchase is more likely to backfire. The reason?

Simply, they found that the more affluent the surrounding area is, the worse the bottom 10% of homes within it tend to perform.

From their findings, the authors speculate that this is because people buying in such neighbourhoods have sufficient means to buy a nice enough house that they need not worry about taking on the additional work and expense of ‘a renovator’s delight’.

By passing the money pits.

Although it is difficult to draw direct comparisons between the US and Australian markets, such findings should be enough to make any buyer who has considered following such advice think twice. Because unless you do sufficient due diligence, the house you think is a bargain may actually cost you big, requiring a thorough update inside out.

For instance, it may need rewiring, restumping, or even be saddled with things you just can’t fix – particularly if its on a transport corridor. And that eats into any appreciation you might be hoping for.

Be smart about things.

So is there such a thing as a sure thing? Well, that depends. What can be said with certainty is that buying cheap in good performing neighbourhoods can provide you with some real gains. The crucial element comes down to timing.

Miss the curve of the neighbourhood’s boom, and your ‘savvy’ purchase may see you lose out in the long run.

Our advice?

  • If the price of a home sounds too good to be true, it probably is. Make sure to do your homework on any such cheap prospects.
  • Do your research on prices in the area and if you’re looking for a solid prospect, aim to pick up something that doesn’t fall in that bottom tenth-percentile. It has a better chance of performing in line with higher-value properties in the neighbourhood.
  • Look at areas that have at least a couple of consecutive years of higher-than-average home value appreciation. You may have an opportunity to maximise your yield with some light renovation.

Ultimately, your best option is to talk to someone who knows what prices are doing across a range of areas. At hockingstuart, our network of over 45 offices can help you zero in on the most promising properties in up-and-coming neighbourhoods, potentially saving you a lot of heartache.

Residential