In your quest to choose the best property for your budget, it is advisable to arm yourself with an important principle in real estate: THE PRINCIPLE OF DIMINISHING RETURNS.
Let me explain this in plain language: OVER IMPROVEMENT and UNDER IMPROVEMENT in real estate, which should be avoided as much as possible.
Over-Enhancement – An enhancement that is not suitable for the site it is placed on due to excessive size or cost
Under Improvement – An improvement that is not suitable for the site in which it is placed due to insufficient size or cost.
Based on years of experience and with knowledge of many successful property developments, the rule of thumb is 30% of the land value and 70% of the house value, more or less. So, for example, if you have a 50m² plot of land for low-cost housing valued at around P300,000 and you are building a house worth P700,000, that would be fine. Suppose you want to improve the house further to make it worth 1 million, that’s still fine, but just know that there is a principle in real estate which is THE PRINCIPLE OF DIMINISHING RETURNS. Which means that the improvement that can lead to a profit will only be up to a certain level, beyond that level it will become a loss. Further assuming that you want to add a third story to your 2 story house with the same land value and maybe the total value of the house would become 3 million pesos, this could be an improvement as the ratio of the land and house value is now distorted. The improving owner may not realize it while he is still living in the house, but when the time comes he has to sell the property for good due to changing circumstances in the family, he cannot sell it for profit.
For example, a landlord from Dalaguete Cebu asked me to sell his house with 2000 square meter land for 15 million. And the reason for the sale is that he separated from his wife and wants 50% ownership. He said the lot would be free because 15 million pesos alone is the cost of the house. It is such a big and beautiful house and indeed, when you build a house like that today, 15 million pesos would not be enough. But for a rural area like Dalaguete Cebu, the land is very cheap and he built a house as big as 15 million. After years of offering the property, no one bought it even for an offer of 10 million. He spent so much on such a big house thinking only of how happy he would be with his house, and when his living conditions changed and he no longer needed the house, he then realized that it could not be sold for a profit. This is an example of OVER IMPROVEMENT in real estate. He lost several millions due to EXCESSIVE IMPROVEMENT.
Even some housing estate developers fall into the trap of OVER-UPGRADE. For example, developers have developed low-cost or higher-level housing estates approaching the intermediate classification, putting in place a nice swimming pool and a clubhouse. Eventually the owners were unable to maintain the pool and it became a pond. During rainy days you can see frogs swimming on the pool. The housing estate is located in the inner part of Mactan Cebu. The owners of this development cannot sell their property with a good profit due to the lack of maintenance of the development and the fact that the cost of buying the house is high due to the cost of the improvement by the developer. Another example is a developer who developed a residential development in Talamban Cebu City consisting of around 50 townhouses with prices ranging from 5.5 million to 6.5 million. Indeed, the quality of the materials used and the design are very good. However, they failed to consider that the barangay road that connects the housing estate to the main road was too narrow and nothing can be done about it. It’s still a two way street but it’s narrow something less than 4 meters wide. They forgot to consider that potential residents of the place who have this 5.5-6.5 million budget will not feel comfortable going through this very narrow road to an inland location no matter how good of the House. It’s an improvement for such an inferior location caused by a narrow road. Result? Out of 50 homes ready for occupancy, only about 5 have been sold. Everything else is still waiting for buyers although houses are already being built.
On the other hand, a buyer or owner should also be aware that there is also such a thing as UNDER IMPROVEMENT, an improvement that is not suitable for the site in which it is placed due to size or cost. insufficient. It can also lead to losses in real estate investing.
For example, an owner called me to sell his property in Cordoba with an area of ​​1,300 square meters. He built a 150 m² bungalow at the back of the land, leaving more than 1,000 square meters of land as the front of his house. The husband is a foreigner married in Filipina but after years of living together they had a falling out and decided to split up and sell their property for a 50/50 split. The woman wants to sell the house and the land for 7.5 million pesos because that is the real market value of the property. I agree with the wife’s assertion that the house and land are indeed valued at 7.5 million, but the property has been on the market for 3 years now and no takers. For what? This is because of UNDER IMPROVEMENT. Potential buyers love the house, but the land area at 1,300 square meters is too much for them, making the property beyond their budget. They could have added townhouses to the frontage of the 1,000 square meter land for a profit, but given their situation, they cannot undertake such a plan due to their conflicts. All they want is a quick sale and to share the proceeds immediately. Unfortunately, it’s still waiting time for them because they couldn’t even agree with 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 matter. But that’s another story to tell.
Author:
Manuel Jr. Arengo
Real estate broker license number 0007808
15 years of experience in real estate