All across the country, for the majority of neighborhoods, there is a general price range where most houses in the area will fall.
Most neighborhoods have a spread of about 10-15%, meaning an area with a $100,000 average sale price would have a list range around $85,000-$115,000. When homeowners make the mistake of overbuilding, they put their home’s appraised value way outside of that window.
This ties in with one of the most well-known saying in real estate:
“location, location, location.”
Let’s look at the example of the happy family of a father, mother with a baby girl on the way, and an annoying teenage son. They live in an area of mostly 1 story, 2 bedroom houses- but they really love the area. Instead of moving into a bigger house in another neighborhood, they decide to add another story onto their home, practically doubling the gross living space.
This seems like a fantastic idea- the family stays in an area they love, watching their daughter grow up in the same neighborhood as their son . But now we come to 20 years down the road- after two kids are finished with or still in college, the two exhausted parents are ready to settle down in the countryside. It’s time to sell the house.
After spending upwards of $150,000 on that second story, it seems irrational not to charge more for their house. As the median sold price in the neighborhood has bounced around $50-60k across the last few years, they decide to list their home at $200,000.
A month later, they list at $190,000. After another month, $185,000.
Across this time period, their neighbors across the street sold their home, as well as the couple down the block. Why isn’t this family getting any offers?
To be as blunt as possible… no one wants to buy a mansion in a slum.
Most potential buyers are looking at homes in the neighborhood because it matches their price range. In this case, most potential buyers don’t have an extra $100,000 to spare (wouldn’t THAT be nice). In cases like this, sellers often settle for a price including less than 60% of what they invested to update it, or the property just sits on the market for a ridiculous amount of time. Extremely overbuilt properties can even go for below the median price for the neighborhood, and are actually torn down to build a property that conforms.
When you hear the word neighborhood, what do you think of? Do you think of a street scattered with huge mansions next to tiny houses? Probably not. Most people think of the classic little boxes on the hillside- all made out of ticky tacky, and all just the same. As real estate appraisers, it’s a hassle to find comparables for over or under-built houses. We often have to extend our search area way beyond the norm, and are then faced with questions like “why are all your comps so far away?” Our answer is always the same- because there aren’t any homes similar to yours close-by.
Have you ever come across an overbuilt house in your own line of work? Let us know in a comment below.
Jonathan Montgomery Founder and President of the The Real Estate Appraisal Group. He has been a real estate professional since 1998. He’s been a broker, and investor and now serves as an appraiser. He currently works as an appraiser, doing real estate appraisals in Washington D.C., Southern Maryland, and Northern Virginia.
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