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theblenny said: You may have issues selling it in the future. A potential buyer for that partictular neighborhood may expect/demand a superior home if that is what the neighborhood consists. The builder may have been mistaken by building a smaller/less quality of home without thinking of the highest and best use of the property dictated by the surrounding properties. That house may also bring down the values of the superior homes since the h&bu was not used prior to construction. Additionaly, the lot, regardless of TOTAL size, could restrict the h&bu due to frontage available and local building codes that require setback.It is not like the builder put a trailer in a subdivision with high end houses. Judging by the facts presented in the OP, the house that he is considering is in no way inferior to the more expensive houses in the subdivision. It is simply a smaller house, which comes with a lower price. In general, I'd be very surprised to see any new subdivision out there, and especially an upscale one, in which a builder would put an inferior house (as in inferior finishes, etc...) next to the more expensive ones.

As I mentioned above, in this situation it is a real estate axiom that the least expensive house in a subdivision will have some of the highest rates of appreciation that you can hope for, while the most expensive house in a subdivision will have some of the lowest rates of appreciation out there.

Now, I do completely agree with the concern about the viability of a builder but that is a separate question. In other words, if the builder ends up being forced to dramatically slash prices on the remaining inventory to unload it or ends up going out of business, the attractiveness of the subdivision and its property values will plummet. That is always a risk inherent in purchasing a brand new house in a partially completed subdivision, and the risk is that much greater in this economy. The risk, however, is the same regardless of whether you are buying the least expensive house in the subdivision or not.

geo123 said: It is not like the builder put a trailer in a subdivision with high end houses. Judging by the facts presented in the OP, the house that he is considering is in no way inferior to the more expensive houses in the subdivision. It is simply a smaller house, which comes with a lower price. In general, I'd be very surprised to see any new subdivision out there, and especially an upscale one, in which a builder would put an inferior house (as in inferior finishes, etc...) next to the more expensive ones.

Didn't call the op's home a trailer. It's like putting an Audi in a BMW lot. Trying to sell the Audi will be harder in a BMW lot than an AUDI lot. I am looking to by a BMW, not an AUDI. You will have better exposure, the correct buyer and the highest price for the AUDI in an AUDI lot than an AUDI in a BMW lot.

Again it goes back to highest and best use. If the op's neighborhood consists of $450-$500k homes (pretending all things are equal since we only know 5% of the story) and a lot smack in the middle had a $350k home built, is that going to produce the most money and best use for the lot? Would you pay a premium for the smallest house in the neighborhood or buy the exact same cookie cutter (if it existed) home in another similar styled home neighborhood down the road for a discount? Once more, too many variables (schools, taxes, crime etc) to give an exact answer.

Could it be the $500k homes have a 100' frontage giving the opportunity for more square footage and the $350k home only has a 50' frontage? Could the home be the spec home? Too many things to guess.

theblenny said: Didn't call the op's home a trailer. It's like putting an Audi in a BMW lot. Trying to sell the Audi will be harder in a BMW lot than an AUDI lot. I am looking to by a BMW, not an AUDI. You will have better exposure, the correct buyer and the highest price for the AUDI in an AUDI lot than an AUDI in a BMW lot.Sure, except the analogy doesn't work for houses. One of the reasons that an Audi would sell better at an Audi dealer is because dealerships can't afford to advertise their entire inventories, so that a buyer looking for an Audi would be less likely to go to a BMW dealer than an Audi dealer. This is very different from the way that houses are marketed and purchased.

Again it goes back to highest and best use. If the op's neighborhood consists of $450-$500k homes (pretending all things are equal since we only know 5% of the story) and a lot smack in the middle had a $350k home built, is that going to produce the most money and best use for the lot?This isn't the question and has absolutely nothing to do with future resale values, which is what we are discussing here. The fact that a builder might have been able to get more money by building a larger house on this lot does not in any way cause the smaller house that has actually been built to suffer as long as it otherwise fits into the overall scheme of the subdivision.

By definition, every subdivision will have the smallest and lowest priced house and the largest and the highest priced one and, with everything else being equal, the smallest and least expensive house's appreciation will always be greater than that of the largest and most expensive one's.

Would you pay a premium for the smallest house in the neighborhood or buy the exact same cookie cutter (if it existed) home in another similar styled home neighborhood down the road for a discount?As I posted above, if you want to maximize resale value and/or obtain the maximum return on future renovations or improvements, the answer to your question is an unequivocal yes. If, however, the goal is to maximize how much house you are getting for your money with the understanding that its appreciation will be a lot lower as will the return that you will get on future renovations or improvements, then purchasing the most expensive house in the subdivision is the way to go.

This is a very, very, very basic real estate question and there isn't a whole lot to argue about. There is a clear and objective answer to the OP's specific question. Some of the other considerations that have been introduced, such as the viability of the builder, taxes, schools, etc... are all relevant and extremely important but they do not affect the answer to the question about the benefits and the drawbacks of purchasing the smallest and the lowest priced house in a subdivision.

theblenny said: geo123 said: It is not like the builder put a trailer in a subdivision with high end houses. Judging by the facts presented in the OP, the house that he is considering is in no way inferior to the more expensive houses in the subdivision. It is simply a smaller house, which comes with a lower price. In general, I'd be very surprised to see any new subdivision out there, and especially an upscale one, in which a builder would put an inferior house (as in inferior finishes, etc...) next to the more expensive ones.

Didn't call the op's home a trailer. It's like putting an Audi in a BMW lot. Trying to sell the Audi will be harder in a BMW lot than an AUDI lot. I am looking to by a BMW, not an AUDI. You will have better exposure, the correct buyer and the highest price for the AUDI in an AUDI lot than an AUDI in a BMW lot.

Again it goes back to highest and best use. If the op's neighborhood consists of $450-$500k homes (pretending all things are equal since we only know 5% of the story) and a lot smack in the middle had a $350k home built, is that going to produce the most money and best use for the lot? Would you pay a premium for the smallest house in the neighborhood or buy the exact same cookie cutter (if it existed) home in another similar styled home neighborhood down the road for a discount? Once more, too many variables (schools, taxes, crime etc) to give an exact answer.

Could it be the $500k homes have a 100' frontage giving the opportunity for more square footage and the $350k home only has a 50' frontage? Could the home be the spec home? Too many things to guess.
Just a comment on the analogy, it's probably more like neighbors have a BMW 7 series and the OP is buying a BMW 5 or 3 series. It should still have most features of the 7 series (houses built the same way), the trunk size may be exactly the same (lot size), but instead of a 5-seater, it's only a 4-seater with smaller leg room (5 BR vs 4 BR).

Bad analogy, gosh you are right. Houses don't have tires. I didn't know that... *multipe slaps on the forhead* stupid, stupid, stupid.

Q. Should the op buy the lowest price home in the neighborhood?

A. If you like the home and it fits you then buy it.

Do not expect a great return because of the location of the home. A very, very, very basic concept of real estate is highest and best use. Putting a $350k home in a neighborhood of $500k homes is a perfect example. Why did the builder do that? Did it make the other 99 homeowners happy they have a 'shack' (not really a shack buy you get my drift) next door or down the street? Is there no deed restriction or zoning that would prevent a non conforming house to be built? Could the builder not physically put a similar home on the property due to ______? When you had the opportunity to build a home in a neighborhood of $500k homes, why only build $350k home knowing that the principal of conformity (another very, very, very basic real estate concept) would come into play?

Just some friendly debate to get my post count up.

What development are you looking at in Austin? You may also want to check here to see if any locals have opinions about the area.

here

Given a choice in having the most expensive house in a cheap neighborhood or having a cheapest house in an expensive neighborhood, I would buy the cheap house.

My understanding is real estate is all about location, location, location. You have a high end location at a low end cost. Go for it.

theblenny said: Do not expect a great return because of the location of the home. A very, very, very basic concept of real estate is highest and best use.No disrespect, but it sounds like you've learned some terminology without learning how to properly apply it. If you are a developer starting out with the clean slate and are trying to decide whether to build $500K upscale houses, $100K townhouses, apartments or warehouses, then you need to know what the land's highest and best use it so you can make the most money. Likewise, for appraisal purposes, if you are appraising a falling apart commercial warehouse located on a prime piece of land, you have to note that the highest and best use for the property might be a high end residential development.

The concept of the highest and best use has absolutely no applicability, however, to the OP's question.

Putting a $350k home in a neighborhood of $500k homes is a perfect example. Why did the builder do that?There are NUMEROUS valid business reasons for this and it is done all the time. None of the reasons have anything whatsoever to do with the OP's question, however. Once again, as long as the house fits into the overall scheme of the subdivision, from a re-sale standpoint it will enjoy far greater rate of appreciation than the most expensive house in the subdivision but the OP can get more house for the money by sacrificing future appreciation and return on future renovations/improvements and purchasing the most expensive house in a cheaper subdivision. This is about as axiomatic as it gets.

If you study home appreciation, the cheapest home in the neighborhood almost always appreciates at a greater rate than the more expensive one. This is even applicable to homes where one cannot add/expand its living areas. Over time, the price differential paid in the beginning between the cheapest and the most expensive narrows. This narrowing of this differential is even more pronounced if the issue is NOT size related, but trim, amenities, level of finish.

Its always the best deal.

In our neighborhood and compared to the value X of our house, prices range from .70X to 3X. The apparent disparity does not seem to be an issue for anyone.

On our street, the variation is only about 20%.

Go one block over in one direction and you get into the 3X range.

Go a block the other direction and it's .70X.

Financially, the conventional wisdom is that the cheaper houses in a neighborhood are the best investments.

However, there is more to life than investment success (and this is from a ex investment professor). The broader social science literature shows people seek status
and don't like to be at the bottom of the totem pole.

You (and perhaps more importantly your wife and children) are likely to perceive them selves as lower status living in such a neighborhood. She may feel she did not get the best husband if he cannot support her in the style of others in the neighborhood. Children often feel unhappy if they lack what the others have. I suspect you would be happier elsewhere.(even if eventually poorer).

Buying a cheap house in a good neighborhood is best if you lack children and have an established social network elsewhere. You may even derive prestige from your address.

However, if new or with children, research shows (and experience confirms) social networks are often built around the children and the school they attend. You met others folks through the children and their activities (scouts, sport leagues, parties, etc.). Once you have driven them somewhere, it doesn't pay to go home for a short time, so you stay around and chat. If less prosperous you will be a little less high status (and worse perceived that way by your wife, whose social life is even more likely to be built around the moms of the kids in the neighborhood).

ProfessorEd said: ...people seek status and don't like to be at the bottom of the totem pole......which is really where the vast majority of us are, in the big picture.

ProfessorEd, I don't think you should paint such broad (social) strokes in trying to apply a general study to an individual situation, especially to one for which you've a scant amount of information. And "cheap" isn't the same thing as "least expensive." It's not like they'd be living in a shanty among mansions.

You don't have enough information about OP and his family or the subdivision to know if the factors you mention are pertinent or significant.

ETA: For example, OP has stated that the asking price for the house he's considering is $350K. Some larger homes in the neighborhood have sold for $500K+, and others in the $450K range. We aren't talking about a huge price discrepancy, IMO. And if the homes are all of a similar build quality and have similar amenities (except perhaps for number of rooms), then I don't see a problem.

In RE there are the two concepts of principle of progression and principle of regression.

Principle of progression - Smaller/cheaper houses located near bigger nicer homes tend to have their values brought up by those nicer homes.

Principle of regression - Bigger/More expensive houses located near smaller/older homes tend have their values brought down by those lesser valued homes.

For homes you are going to live in, First and foremost the question is if the payment is affordable for you and your family long term, then does the home fit the parameters (size, location, schools, etc), at the last should you worry about the investment value of the property.

People looking at properties as investments have to look at a market where there is 5% rates, FTHB tax credit and incredible stimulus being directly applied to housing. If you were a long term investor you have to balance inflation risks against higher long term rates which will bring down the price of homes.

patch96 said: If you study home appreciation, the cheapest home in the neighborhood almost always appreciates at a greater rate than the more expensive one. This is even applicable to homes where one cannot add/expand its living areas.

Its always the best deal.


this sounds like excellent advice in general, but I have to agree with the people who have asked about the rest of the unbuilt sites in the subdivision. sure, this house might be the smallest house at the minute, but odds are the rest of the to-be-built houses are also going to be smaller, which would make this less significant, right? Not an expert by any means, it just seems like a likely scenario considering the way houses are selling at the minute.

I think the whole "keeping up with the Jonses" thing shouldn't be discounted, either. not just in terms of potentially spending more money in order to keep up, but also levels of happiness. lots of studies have shown that people are happiest when they are among the more affluent in their neighborhood (among other things), rather than the least, as a lot of happiness/contentment is relative. not necessarily a financial consideration, but it could be worth thinking about and talking to your family about.

Deleted

UPDATE: We did put an offer on the house and are waiting to hear their response. In terms of the vacant lots, the project consists of 116 plots. There is a phase 1 and phase 2. There are four remaining plots available in phase 1 where all existing houses are worth 500K+. We put an offer for a smaller house on one of those plots in phase 1 for around 350K. Phase 2 will likely have a lot more of these types of "smaller" houses.

I appreciate everyone's input on the scenario. While we won't necessarily be the least expensive house in the entire development, we should be one of the least expensive houses in one section of the development.



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