Potential, potential, potential
Today, Sam Schneiderman, Broker-owner of Greater Boston Home Team explains the difference between "potential, potential, potential" and "location, location, location."
Think about it. A listing for a great property in a top location will boast about its location. On the other hand, a dump in a great location will also boast about its location. The difference is that the listing for the dump will also promote its potential. So which is more important, location or potential?
Potential is defined (by Merriam-Webster) as something that has possibilities or is capable of development into actuality.
A good location has probably already reached close to its full potential. Therefore, a good house in a good location is probably worth the premium price. On the other hand, is a dump worth in a great location worth a premium?
Last Friday, Rona blog about “best and highest use” which is a variation on the appraisal term “highest and best use”. The highest and best use of a property is the best legally permissive use that is physically possible, financially feasible, and maximally productive (by returning the highest financial return to the developer.)
Let's talk turkey. There was a home recently listed in Newton that was a cosmetically dated, well-maintained, ranch style home in an area where similar houses had been torn down and replaced with larger, upscale homes, at triple the value. The neighborhood was hot, and developers were swarming. On paper the lot looked like it would fit a larger property, but in reality the slope at the back of the lot would have been costly to cure, so a smaller house would have to be built to be economically feasible on the lot. Level lots sold from 550-600k. In the end, there were offers from builders and wanna-be homeowners, with the highest offers from those who want to live in the house. If it required an immediate kitchen, and/or baths, the builders might've won out. But that was not the case.
If the lot was in a two family zoning district and two attached townhouses could fit on the lot, that would have been the highest and best use. Developers would've paid more.
Another type of potential is locational. For example, some Somerville neighborhoods have become hot because improved public transportation is scheduled within the foreseeable future. Some people buy into neighborhoods because new schools are being built. There can be any number of reasons why people buy into a neighborhood that looks like it might have a brighter future.
What if anything is potential worth to you?
The bottom line is: what's in it for you?
Which is more important to you: location or potential?
Are you an investor/speculator or do you just want a roof over your head with no risk?
Do you want to invest in potential and work to get it or sit back and hope it comes to fruition around you?
What kind of potential would you pay for and what kind of potential would you run from?
When it comes down to dollars and cents, how much of a premium, if any, would you really pay for potential?
