Evaluating Neighborhoods When Home Buying

Location, location and location - it is the first rule of real estate that we all learn. While we have all had this rule hammered into our collective psyche, another rule is arising in this current dismal real estate market - the look twice rule.

The path to success in real estate can be put simply. Your goal should be to buy in as expensive a neighborhood as you can afford, even if it means buying the dump on the block. You can then fix up el dumpo and reap the gains as your home value appreciates along with the neighborhood.

Many people have mistakenly applied this theory. Instead of buying in the most expensive neighborhood they can afford, they've bought into the most expensive neighborhood the bank would lend them money for. As we are unfortunately seeing now, banks were giving out far more money then they should have been and it is really coming back to haunt the real estate market and general economy.

Regardless, the strategy still works as long as you can objectively evaluate what you can afford. Another factor has arisen, however, that you have to consider given the current temped market. Specifically, assumptions about particular neighborhoods may not be as reliable as they used to be.

Every area has good and bad neighborhoods as well as ones somewhere in between. Once established, these areas tend to pretty much stay within their designated category. That is until this real estate market. The financing of homes in an area now must be considered when determining whether it is a good market or not.

What if a neighborhood went into foreclosure? Sounds like a crazy notion, right? Well, not necessarily. Many communities were built all at once in the last five years and sold in mass using low down payment, teaser interest rate loans. These newer neighborhoods look nice, are...new, and have great amenities. There is only one problem - they may be flooded with homes for sale and foreclosures.

Foreclosures can be a killer for a new community. Communities only rise in value when the homes are filled and there is a demand to get into the area. If homes are sitting empty, values will drop like a rock. If enough homes go into foreclosure, the community may pick up a reputation among real estate agents as a poor location to buy in. If this occurs, the game is over. The community might eventually recover, but it is going to take much longer than any other section of the real estate market. In short, that makes it a horrible investment.

Don't believe this could really happen? It is and I can prove it. What coffee shop is open on just about every corner of the nation? Starbucks. The company has recently announced it is closing 600 plus stores. A majority of these are in communities that were being built out when the real estate market turned bad. The communities are empty or only partially sold and there simply aren't enough people to support the Starbucks.

If Starbucks is leaving, you know it must be bad. Is this the kind of location you really want to move into?

Raynor James writes about issues faced by FSBO buyers for FSBOAmerica.org where you view homes across the country from your computer for free.

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