Cost of Admission to a Neighborhood

I’ve been using the phrase, “cost of admission to the neighborhood” for the last couple of weeks as we have two listings that have the smallest square footage for their respective areas. Really what were talking about is that the land value has a higher ratio when comparing a small house to a big house on a similar sized lot.

If the land value under the house is $100,000 and the house is 1000 square feet, there is $100/SQFT attributed to the average cost per SQFT of the house. If the neighbor’s house is on the same lot but 2000 SQFT, the land only contributes $50/SQFT to the cost per square foot of the house.

The result is that smaller houses look bad when looking at the “comps,” the other houses in the neighborhood that have recently sold or are on the market. You’re saying “well they’re not comparable then are they?” True but you’ve got to have something to compare to and using a 1000 SQFT home in NE is not going to comp a 1000 SQFT in Lake Oswego even if they are statistically built identically.

A house looks bad compared to the cost per square foot of other houses in the neighborhood may still be good value. You can’t just look at the numbers.

2 Comments on “Cost of Admission to a Neighborhood

  1. Finding the Perfect Neighborhood
    The neighborhood you choose can have a big impact on your lifestyle—safety, available amenities, and convenience all play their part.
    Make a list of the activities—movies, health club, church– you engage in regularly and stores you visit frequently. See how far you would have to travel from each neighborhood you’re considering to engaging in your most common activities.
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  2. Good points. As a lender, I have to look at additional issues relating to this. Lenders are loaning on the value of the land with a structure and not on the land. They don’t really like to see land values higher than structure value, especially in markets like ours.

    While there are a few areas of excpetion, most notable LO, it makes them nervous.

    A good explanation can often help, but if the values are far enough out of whack it would either require a larger downpayment to compensate for the difference or a more aggressive lender. This would carry a higher interest rate.

    Both of these scenarios would add to the “cost of admission”.

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