In your quest to choose the best property for your budget, it is recommended that you arm yourself with an important principle in real estate: THE PRINCIPLE OF DECREASING RENTALS.
Let me explain this in common parplance: OVER IMPROVEMENT and UNDER IMPROVEMENT in real estate to be avoided as much as possible.
Excessive Upgrade – An upgrade that is not suitable for the site it is placed on due to excessive size or cost.
Upgrading – An upgrade that is not suitable for the site it is placed on due to poor size or cost.
Based on years of experience, and knowledge of numerous successful real estate developments, the general rule of thumb is 30% of the value of the lot and 70% of the value of the house, more or less. So, for example, if you have a 50-square-meter lot destined for low-cost housing valued at about P300,000 and you build a house worth 700,000, that would be fine. Suppose you want to further improve the house so that it is worth 1 million, that is still fine, but keep in mind that there is a principle in real estate which is THE PRINCIPLE OF DECREASING RENTALS. Which means that the improvement that can generate profit will be only up to a certain level, beyond that level, it will become a loss. Assuming further that you want to add a third floor of your 2 story house with the same lot value and maybe the total value of the house becomes 3 million pesos, this could be an excessive improvement as the ratio between the value of the lot and the house is now distorted. The owner who improves too much may not realize it while still living in the house, but when it comes time to sell the property forever due to changing situations in the family, he cannot sell it for a profit.
For example, a homeowner in Dalaguete Cebu asked me to sell his house with a 2,000 square meter lot for 15 million. And the reason for the sale is that he separated from his wife and wants 50% of the property. He said the lot would be free because only P15 million is the cost of the house. It is such a big and beautiful house and in fact when a house like this is built today, 15 million pesos would not be enough. But for a rural area like Dalaguete Cebu, the lot is very cheap and they built a house as large as 15 million worth. After years of offering the property, no one bought it even for a 10 million offer. He spent so much on such a big house thinking only about how he would be happy with his home, and when the conditions in his life changed and he no longer needed it, he realized that it cannot be sold for a profit. This is an example of EXCESSIVE IMPROVEMENT in the real estate sector. Lost several million due to EXCESSIVE IMPROVEMENT.
Even some subdivision developers fall into the OVER-UPGRADE trap. For example, developers developed low-cost subdivisions or a higher level approaching the middle end classification, putting in a nice pool and a clubhouse. Eventually the owners were unable to maintain the pool and it turned into a pond. During rainy days, frogs can be seen swimming in the pool. The subdivision is located in the inner part of Mactan Cebu. The owners of this development are unable to sell their property for a good profit due to the lack of maintenance of the subdivision plus the fact that the cost of buying the house is high due to the cost of excessive improvement by the developer. Another example is a developer who developed a residential subdivision in Talamban Cebu City consisting of approximately 50 townhouses with prices ranging from 5.5 million to 6.5 million. In fact, the quality of the materials used and the design are very good. However, they did not consider that the barangay road connecting the subdivision to the main road was too narrow and nothing can be done about it. It is still a two-way street, but it is narrow, just under 4 meters wide. They were lost in considering that prospective residents who have that budget of 5.5 million to 6.5 million will not feel comfortable walking that narrow path to an interior location, no matter how good the house is. No more upgrade for such an inferior place caused by narrow road. Outcome? Of the 50 ready-to-move houses, only about 5 were sold. The rest are still waiting for buyers even though the houses are already built.
On the other hand, a buyer or owner should also be aware that there is also UNDER IMPROVEMENT, an improvement that is not suitable for the site it is placed on due to poor size or cost. This can also cause losses in real estate investment.
For example, a homeowner called me to sell his property in Córdoba with a land area of 1,300 square meters. He built a 150 square meter bungalow at the rear of the lot, leaving more than 1,000 square meters of the lot as the front of his house. The husband is a foreigner married to a Filipina, but after years of living together, they quarreled and decided to separate and sell their property for a 50/50 share. The wife wants to sell the house and the lot for 7.5 million pesos because it is the real market value of the property. I agree with the wife’s argument that the house and lot are valued at 7.5 million, but the property has been on the market for 3 years and there are no buyers. Why? It is for LOW IMPROVEMENT. Prospective buyers like the house, but the 1,300-square-foot lot area is too much for them, making the property beyond their budget. They could have added townhouses to the front of the 1,000 square meter lot for profit, but given their situation, they are unable to undertake such a plan due to their conflicts. All they want is a quick sale and immediate profit sharing. Unfortunately, it is still a waiting time for them, as they could not even agree on the final price. The husband wants to sacrifice himself by selling it for 5 million but the wife insists on 7.5 million. As for how they approach this conflict, it will be a legal case. But that’s another story to tell.
Author:
Manuel Jr. Arengo
Real Estate Broker License No. 0007808
15 years of experience in the real estate sector