Some proverbs offer sage counsel. A bird in the hand is worth two in the bush. Cleanliness is next to godliness. Even a broken watch is right twice a day. Luck is what happens when preparation meets opportunity. These are wise words to live by. But one saying that needs to have its proverbial status revoked is the well-known real estate adage, “Buy the worst house in the best neighborhood.”
Proponents of this strategy contend that buying a bad house in a good neighborhood is a surefire investment. The higher value of the surrounding homes, the argument goes, will elevate even the worst home’s value. A great neighborhood is like a rising tide: It will lift the price of all the houses in it.
This advice has been offered, exaggerated, and accepted for decades.
As far back as the late 1970s, newspapers have profiled investors who cite their worst-house-in-the-best-neighborhood strategy as the guiding principle of the real estate game. In 1987, a Chicago Tribune article, entitled “Buy the Worst House on the Street,” asked readers, “Would you spend $1 to make $2?”
Even British artist David Hockney shared his opinion on the matter: “Always live in the ugliest house on the street—then you don’t have to look at it.”
But are they right? Is buying the worst house in the best neighborhood a wise investment or is this strategy a real estate myth?
If the adage were true, the bottom 10% of houses would need to perform better than the more expensive homes in their neighborhood. Faster appreciation would indicate that buying the cheapest house in the best neighborhood is a strategy that really does pays off.
Instead, we found that only rarely does the bottom 10% outperform the top 90% of houses in a ZIP code. On average, these bottom-tier homes do neither better nor worse than the others.
Looking at those numbers, we might have concluded that buying a neighborhood’s worst home is therefore a neutral investment strategy—a myth, but not a harmful one. It doesn’t maximize returns. But it doesn’t cost buyers either.
Then, however, we dug a little deeper—and we saw that buying the worst house in the best neighborhood can actually backfire. That’s because the more affluent a neighborhood is, relative to its greater metropolitan area, the worse the homes in its bottom 10% tend to perform.
In short, the nicer the neighborhood, the bigger the myth!