Great Home, Questionable Investment

Posted on 05/28/08 11:07 PM

I came across a good example of a “Great Home, But A Questionable Investment”. It’s a 2-level, 2,000+ sq.ft penthouse loft, 3 full baths, boasting phenomenal 270 degree views, a great floor-plan and truly exceptional design touches. This is the kind of place that would deserve to feature prominently in the Architectural Digest or Metropolitan Home. It’s that good.

At just under $900k, it’s is actually priced pretty well – as far as city center condos with that kind of sq. footage, design and quality are concerned. You’d be hard pressed to get this kind of a combination in any city center location.

So what’s the catch? The neighborhood. This stunning home is located in the Lloyd Center District, and while that in itself is not a bad thing, there is something to be said about general price levels in the neighborhood…especially in a down market. In the past 12 months not a single home sold (in this neighborhood) above $550k. In fact, the median sales price is around $200k, the vast majority of condos currently list for $220k-$250k.

From an investment point of view these circumstances create three problems:

  1. Appreciation: A property’s value is influenced by the surrounding homes. A high-end home in a neighborhood of vanilla-condos will usually sell for less than the same home would sell for if it was located in a neighborhood of similar homes i.e. the appreciation on the best home in a neighborhood is always going to be dragged down by the structures around it.
  2. Value creation: Typically remodeling adds to the value of a home. However, the downward pressure on appreciation severely impacts the equation. It may in fact cut into your equity. Why? If you do a $50,000 remodel, you may see a $10,000 gain for your $50,000 cost. You just lost $40,000.
  3. Re-Sale: Buyers have an easier time paying a seller’s price if the price can be supported by comparable sales from the surrounding neighborhood. But, without comparable sales to justify the higher price, buyers will be reluctant to buy. Even if the home does sell for the seller’s price, it might not appraise for the purchase price and this could blow the sale.

All said, this home wouldn’t necessarily be a bad investment, but the price would certainly need to reflect the substantial risk element…if this isn’t going to be your long-term home.