Trying to cash in, a home investor wonders how he can "catch the value" of a neighboring teardown that has been replaced by a million-dollar home.

Dear Blanche: I happened to stumble upon your website pursuant to a recent engine search. I see that your an acclaimed real estate professional with a strong command of your professionalism. I would like to ask you about the topic of "tear down properties' and the initial negative effects they present to current homeowners in New Seabury.

I happen to own a property built in 1973, a little 3/2 ranch considered in excellent condition. I thought I was making a good investment back in 2003 when I purchased the home, i.e., it sat in an excellent location, the lot was flat and very private, and the house needed some minor updating mainly TLC.

I have been living in the home on and off, for the past 3 years. I returned back to the Cape from San Diego in anticipation that I would sell the home this fall. However, when I saw the market start to decline, I decided to wait it out. Anyway, back to why I am writing you. There is a house directly across the street from me that was in about the same age as mine, horrible floor plan with 3 bedrooms down and a loft over a kitchen. However it sat directly on the fairway of the golf course. The house sold for $430,000 back in 2004 and within 6 months it was torn down. Today a home probably valued at 1.3 million sits on this same property and here I am directly on the other side of the street and I am unable to catch the value of that property because it has not been resold.

My question is how can an appraiser not consider that if a home sold for $430,000 years ago and was torn down does that not establish that the land in of itself was purchased for in essence $430,000? I understand that every property has a portion of value in land and structure but when a house is torn down within 6 months does that not speak to the condition of the property to begin with?

-- Impatient Homeowner

Realty Times responds:

Dear Impatient Homeowner: The three most important factors that impact home sales are price, condition and location. The condition of the property was certainly priced into your neighbor's home when it sold. Now you have a new comparable -- anyone can ascertain for themselves that the neighborhood is upgrading.

That poses a mixed blessing for you. The good news is that your home is now facing a million-dollar home instead of a teardown. The bad news is if other homes in the area start to sell for "lot value," then your home will not appreciate any more than lot value regardless of its condition. However, lot value can change pretty fast when homes are being upgraded to triple their original value. Your best hope is that your home appraised for more when you purchased it because it was in better condition than surrounding homes and that lot value continues to appreciate because of your location near a golf course. However, when homes start to be torn down, condition seems to be less important to buyers because their intention is to build new. They really don't want to attach themselves to features of a house that's headed for demolition.

Was your neighbor's home torn down because of its functional obsolescence or because the neighborhood is changing? In other words, are the other homes on the street like yours or poorly designed like the fairway home? Is this the only teardown/rebuild on your street?

In any case, you are still left with three choices -- improve, hold or sell. If you decide to improve, you must bring the house up to the standards that buyers would like to own. If they're going to face a million-dollar home, you'll have to go the luxury route and add granite counters, stainless appliances, etc. If you decide to hold, you could try living in the home for a period of two years so you can sell it without having to pay capital gains on any profit you make. That will surely offset any loss from home values deteriorating over the short term. Or you can sell for market value, whatever that is today.

Find out more about the market by discussing your situation with a knowledgeable Realtor. A smart Realtor can show you comparables and supply better insight because he or she has been inside the homes that will impact your pricing. They've seen what is selling, whether improvements are recouped, and how buyers are reacting to the neighborhood and its homes.

If you've owned the home since 2003, you are likely to make a tidy profit no matter which way you go.

The question is are you being reasonable about what kind of gains you can actually capture on this home? Keep in mind, housing has beaten inflation since 1968 by only one or two percentage points. The last five years have seen a 50 percent increase in the price of homes, or 10 percent a year on average. Inflation has been held in check to under three percentage points until recently. That's an unusually high return for housing, so a return to the mean is not unexpected. If you cash out, that only means that you will reinvest somewhere else, but where?

What will you do if you sell this house? Buy another? Move back to San Diego? The California Association of Realtors has just announced that affordability, particularly for first-time homebuyers, is at an all-time low. That means that whatever you sell your house for, you can expect to pay more if you rebuy in San Diego. The good news is that housing has slowed, and now might be the time to go back, if that is what you want.

And that's why buying and selling homes for profit isn't as simple as it looks, because you always will face the question of where do you go from here? Before you make any decision on whether to improve, hold or sell, you need to decide what your personal goals are, including where you want to live.

Published: December 11, 2006

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