Every geographical location carries its own upper limit for real estate values. The actual home you buy is really not as important as the homes all around it. This means that your decision to purchase a particular property must be dictated by the features of the subject home and the value of neighboring homes.
The value of surrounding properties affect the following:
THE PRICE YOU PAY… A prudent investor does not pay more for a property than surrounding homes allow. Every neighborhood has a limit. You don’t want to own the most expensive home in an area. This is because adjoining homes will detract from the value of your home. If you pay the highest price ever paid in an area, it will be extremely difficult to make a fair profit when it comes time to sell.
THE IMPROVEMENTS YOU MAKE… Because every neighborhood has a maximum value, you have to be careful when making improvements or additions to your home. Don’t invest so much money that it suddenly becomes the most expensive home in the area. This will come back to haunt you. It is always wiser to make improvements that add to the enjoyment of your home, but leave your total investment in the property lower than surrounding properties. This strategy permits you to sell sometime in the future in such a manner that your buyer will feel that he or she had made a good investment.
YOUR SELLING PRICE… As the saying goes, “Your house will bring what the market will bear.” The market only will bear what your neighborhood value dictates. Whenever a buyer makes an offer, it is usually prepared after evaluating the selling price of recent sales in your area. This market comparison method is heavily used today. Most buyers will feel very uncomfortable paying a price for your home that cannot be supported by factual sales information of surrounding homes. Even if the potential buyer agrees with your price, a formal appraisal is required by the bank if the sale is subject to financing. Like 17th century author John Donne wrote, “No man is an island.” The same goes for real estate. No home is an island. It derives its value from its own unique features and recent trends in the immediate area.
ADVICE: To be sure you are buying or selling in accordance with recent market realities, consult a seasoned Realtor who has sold homes in your area and follow their recommendation.