Are You Investing In Real Estate or Spending?

Real Estate Investment: Are you investing in Real Estate or Spending?

Your probable answer might be… investing when it comes to Real Estate purchase whether it is land or improvement thereon. However, in my experience as Real Estate Broker for over seven years, I realized that there are people who are actually spending in Real Estate rather than investing . How is this? It is because something is wrong with their decision making. In most cases, they build homes that suit their specific desires to a point that it may be very difficult for them to sell it at the right price in the future.

A good example is a client of mine who lives in the province of Dalaguete, about 80 kilometers from the City of Cebu. He is a foreigner who sought my help to sell his house and lot because he wanted his investment back after serious trouble with her Filipina wife who is a native of the place. He said he invested 15 million pesos for the house alone and so he wants to sell it for 17 million including the 1,000 square meter lot and all furnishings. Years rolled by and no one appeared interested. When the waiting reached the point of impatience, he dropped the price a million after another until he was willing to let it go for 10 million pesos including the land and all furnishings. He said that he had amicable settlement with his wife to split the proceeds 50/50 and by then, he will go back to his homeland . I was informed that the property was sold but I did not care to ask how much. Most probably it was below 10 Million pesos after some negotiations. The foreigner actually lost about 7 million excluding all furnishings.

The loss is attributed to his failure to consider the fundamentals of real estate. More specifically, the foreigner erred in two major principles of Real Estate as follows:

1. Principle of conformity. The idea that a house will more likely appreciate in value if its size, age, condition and style are similar to, or conform to, other houses in the neighborhood.
The province of Dalaguete is very far off the city of Cebu and the neighboring houses in the area are dominated by small houses. Deciding to build a house worth 15 million will no longer become an investment as it is extremely difficult to find somebody willing to buy it at a higher price in the future, or even at the same price “no profit, no loss”

2. Principle of regression states that a property of higher quality in a neighborhood of properties of lower quality seeks the value level of the properties of lower quality.

Therefore no matter how beautiful is the house and no matter how it is made of very high quality materials, it will still seek the lower quality values of the neighborhood. These are the two fundamentals of real estate that the foreigner failed to consider. It is obvious that the foreigner in this case, only thinks about what he likes and poured all his hard earned savings into what he wants his house to be. So, he was not investing in real estate, rather he was spending and eventually lost a huge amount.

This serves as a lesson to all prospect buyers / investors of properties: DON’T BUILD JUST BECAUSE YOU LIKE IT, YOU BUILD BECAUSE YOU LIKE IT AND IN A WAY OTHERS WILL LIKE IT TOO AND WILLING TO BUY IT MUCH HIGHER SOON.

More specifically, in building your home, you may want a big kitchen, or a big balcony, or a huge garden or a very spacious backyard ; just be aware that this has impact on the total cost, and so if you are not on the high-end residential development, perhaps you might settle for the average size so you can easily sell the house in the future.

In short, have the RIGHT BALANCE. Even if at the point of building, you have no plans of selling, who knows that you want to dispose of it someday like upgrading to a better one or downgrading because the children have grown up to form their own families. And don’t forget to consider the principles of real estate. If you are not familiar with these principles, consult a Real Estate Practitioner.