The nicest house, in the worst neighborhood.
Throughout the Richmond area, there are areas that are experiencing high levels of demolition and rebuilding and renovation. What does that mean for the first house being renovated... or the last house?
The principle of conformity states "that maximum value is realized when a reasonable degree of architectural homogeneity exists and land uses are compatible. This principle implies reasonable similarity, not monotonous uniformity, tends to create and maintain value." To put it simply, a 4,000sf home in an area of mainly 1,200sf homes, will not see as high a value as it would if it were built in an area of 3,000-5,000sf homes.
What about condition and quality? In many of these areas of Richmond (Church Hill, Highland Park, Fulton Hill, etc) homes are undergoing high levels of renovation that in some cases are indistinguishable to the average home buyer from new construction. What happens to the first home in an area that undergoes such a renovation? Consider the picture above. The Richmond area has numerous attached Rowhomes, but the principle applies (to a slightly lesser degree) to detached homes as well. How much less would you/your client pay because the house on the right is attached? Would you pay more for the home on the right because it's attached to the home on the left? Which effect would be higher?
- The buyer of the home on the left has no warranty of the home on the right ever getting better. If it's that bad, it may get worse.
- The buyer of the home on the right has the benefit of knowing that the neighbor is currently keeping the home in good repair. Even if the property was left alone for a decade with little to no repair, it would still be externally more appealing than the home on the right.
These thought experiments can inform our thinking in areas that are undergoing high degrees of renovation. The first homes in an area that is still dated and suffering from a lack of ongoing maintenance will return less of a return than those later - however - if the renovation trend continues, property values will likely go up, and the cost of purchase will go up.
Before speculating on real estate investment, the investor must understand not only the micro trend of the immediate neighborhood, but also the macro market of the area, and the residential (single-family and multi-family trends), commercial (what type of work is nearby, what amenities are available), social (is the population increasing/decreasing, what is happening to median incomes, what is the rating of the school district) development of the area. These issues will help inform the investor of what areas may be the next "hot" market.