CREATING WEALTH IN THE NEW OLD HOME
Just about anyone who takes on a home mortgage has the expectation that wrapped in the liability of a monthly mortgage lies the potential for equity gain. That gain comes in two forms; first, as each month pays down a larger and larger portion of the original debt, equity is increased as represented by the differential between the original debt and the decreasing amount owed. The second form is the reasonable expectation that the value of the property continues to increase as a function of real estate inflation. The increase in property value is the most seductive, and quite often is the most lucrative, as it is essentially "free" money. But as many homeowners have painfully found out in the present subprime lending debacle, not only was there no "free" money (equity) to be had, in fact there was a decrease in the value of their property.
Building a new home has yet another aspect of equity creation which is often overlooked, but can be the most powerful equity booster out there. The value of a new home is often measured as a function of the materials and labor required to construct it, along with the cost of the property on which it sits. But in reality, the value of a new home is a subjective judgment of what buyers in the marketplace perceive its value to be. And herein lies the opportunity for equity growth that homeowners and entrepreneurs alike seek out as the holy grail of real estate investment.
The fact that we are talking about wealth that is created in other people's perception of value certainly makes this a dicey adventure, but there are axioms that when applied greatly diminish the risk and usually insure a positive (often a very positive) and immediate equity gain. Consider this scenario; Homeowner A and Homeowner B purchase side by side lots of the same type and value for $100,000. They both hire the same builder to build their houses and the builder uses $150,000 in materials and $100,000 in labor to construct each house. Upon completion each house is put up for sale, and homeowner A sells his house for $370,000, but homeowner B sells his for $450,000. Where did the extra value come from? It came from the perceived value of the buying public who saw something in Homeowner B's home that was not seen in Homeowner A's house, and that "something" is embodied in the aesthetic value of the house which is the primary driver of the marketplace's perceived value.
In the above hypothetical case, no extra money was spent creating aesthetic value, so how was it achieved? The wonderful thing about aesthetic value is that it doesn't have to cost more to create it. It costs about the same to design a bad plan as it does a good plan. Good scale and proportion are no more costly to achieve than bad scale and proportion. Pleasing colors cost no more than unattractive ones. And so how does a homeowner ensure that he is tapping into the aesthetic value component of equity?
Axiom number one is to design a style of home that already has a proven track record for appealing to the widest market segment. In this country that style is unmistakably traditional. Does that mean that other styles can't find enhanced aesthetic value? Of course not, but the risk increases when we experiment with designs that have a limited track record. What we are going for here is aesthetic value defined as "beauty". Simply put, a beautiful house has more value than a not so beautiful house. There are many styles of houses that might be described as beautiful, but remember, we're talking about hedging our bets on an investment. If our investment is enhanced by perceived beauty, and beauty is in the eye of the beholder, we want the largest number of beholders possible who will perceive our house as having enhanced aesthetic value and that group by far is in the traditional camp.
Now, we all know that what is described as "traditional" crosses a very wide spectrum, as evidenced by the many so called "colonials" made of vinyl and plastic and off the rack building products, that populate the vast lower end of the spectrum, and there is little room for equity enhancement in these homes. Which brings us to axiom number two; differentiate your home from the masses of traditional houses by adhering to rigid design principles of historic architecture that are based on classic design formulas developed over many centuries by architects and builders whose homes are revered for their enduring beauty . This requires a discipline and expertise most designers and builders are not capable of, but is what we do here at Connor Homes. Does this mean that a new home has to be a museum copy to successfully capture the aesthetic equity component we are looking for? Of course not. The secret to successfully designing and building a home for today's traditional home market lies in creating a modern floor plan that is in synch with a modern family lifestyle, while using traditional architectural principles that draw from the many historic styles that have a common architectural ancestry whose principles were first developed thousands of years ago by Greek and Roman architects. By adhering to this approach, we can be assured of tapping into the time honored building precepts that continue to define architectural "beauty".
Axiom number three is to use building materials for both the structure and the surface detailing that will allow the beauty of the home to last for generations, not decades (as is the case for most homes built today) because lasting beauty has lasting value. Interestingly, this means that most of the so-called maintenance free products sold for new homes should be avoided because their life cycle is woefully short to add lasting value. The same is true for the many engineered lumber products manufactured for structural use in homes. This means that homes for the most part should be built of natural materials like wood and stone. But what about the maintenance cost of natural materials, you ask? The truth is most "maintenance free" building materials don't live up to their promise as money savers as their short life cycle requires replacement, not maintenance, and when the cost of replacement is factored in, they are a poor value compared to natural materials. But more importantly, in the equation for aesthetic equity gain, natural materials will far outpace the pretenders every time.
Doesn't it cost more to build with natural materials in the first place? Yes, it does, but that cost can be offset by the savings to be had in the off site manufacturing that we do here at Connor Homes, both in the framing and the architectural details. Our company is so well versed in traditional design and in the execution of the architectural details associated with traditional design that we add significant equity value right up front. Some of this savings is transferred to the cost of better quality building materials and architectural details, but overall equity gain is greatly enhanced, as evidenced by our many customers who report that the appraised value of their completed home far surpasses the cost they have into it.
The fourth and final axiom for increased equity gain is to design a home whose layout allows the best and most enjoyable use of the home in the least possible size. While square footage is a measure of a homes size value, it is not a measure of its livability. A home with charming and easy-flow livability accomplished with reduced square footage is a sure-bet enhancer of equity value. Size is almost always the biggest driver of cost and so reducing the size offers a significant opportunity to increase equity value provided the buyer's perception of livability is not compromised. A homebuyer walking through a well laid out 2500 Square foot house compared to walking through a poorly laid out 3000 square foot house will quickly forget the additional square footage in favor of livability.
The opportunity to access this aesthetic value equity gain is really only available to the first owner of a new home, whether that owner be the developer, builder or homeowner. As was pointed out earlier, the materials and labor costs are a fixed value, but the creative genius responsible for the investment in beauty is the beneficiary of the resulting gain. This unique opportunity is a compelling argument for building a new home rather than buying one. Once the value of created beauty becomes a portion of the selling price, that value is forever carried from seller to seller. Being the first in that line of sellers is a select position to be in.
There are many reasons to build a new home, not the least of which is to surround ourselves and our families in a safe and beautiful living environment. But it also makes good practical sense to build a home that is best able to increase our net equity in our investment. When it is possible to realize both goals simultaneously, that is truly a winning formula.
Michael C Connor
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