Steve Cook

Understanding Appreciation
by Steve Cook

For the last few years, most places in the country have been experiencing tremendous appreciation in the values of real estate. For the longest time I talked about how my house went up in value and, daily, I hear many others talk about how their homes have appreciated in value. Well, I have news for you, houses do not appreciate in value. Yes, you heard me correctly. Houses do not appreciate in value. You probably think I'm crazy, but let me explain. At the moment, I happen to live in one of the hottest real estate markets in the entire country. While there are many people out there clamoring for deals, I'm passing on deals. While others think the market is drying up, I'm still finding more then I want to deal with. How can this be, you ask?

The difference between myself and many other investors is that I understand appreciation. I realize that houses do not go up in value. It is the land that the home is sitting on that appreciates, not the house itself. The house itself actually goes down in value. It will maintain value if you keep it up, but otherwise it goes down in value and it costs money to maintain. So in a hot market, I'm looking for land. I don't care if there is a house on it or not, I'm looking for land. Land in good areas is like gold. A home will have a piece of land that someone will want. That person may or may not keep the house, but the land is the desired asset. Because land appreciates, it is a desired commodity in a hot market.

Here is an example of how appreciation of lands far outpaces the appreciation of a home:

A home in a $400,000 neighborhood that is appreciating at 10% per year goes up in value $40,000 per year. The lot next door may be worth $120,000, but in a year it also goes up $40,000, or 33% appreciation. Hence, the increase in value is due to the land, not the house which doesn't go up in value. It costs the same to build a home whether you pay $120,000 or $160,000 for the lot. Of course there may be some changes in the cost of lumber and materials, but this doesn't have much of an effect on the value of the home. The bottom line - the house on the property is always worth the same. You can replace it for essentially the same amount as you can two years from now. It's the land that goes up in value.

Once you understand this you will begin to look at deals differently. You'll see the small unattractive two bedroom rancher in a great neighborhood for the land that it sits on. You'll see the home with an extra lot beside it as two deals. You'll see vacant lots as gold mines and, yes, people go after land in hot markets like the gold rush of 1949.

Why does land appreciate? It's a matter of supply and demand. The areas of the country which are experiencing the highest rates of appreciation are for the most part saturated. There is very little land left to be developed and the populations are growing. In some cases there is no land left and smaller cheaper homes carry a premium because of the land they're sitting on. If you can pay market value for the "home," you may actually be getting a "land" bargain. So when you pursue homes in very hot markets, sometimes you just have to look at the small home for what it can become. Don't pull comps for the home as it is, but for what it could be. A two bedroom rancher may be worth $350,000 on its best day, but a new four bedroom, 2.5 bath, colonial may be worth $700,000. If you could buy the two bedroom ranch for $300,000 or full market value, the land beneath may be worth more when you consider the new home that could be built on it.

So I encourage you all to open your eyes, understand appreciation, and look at deals in a different light.

Steve Cook
Since 1998 Steve Cook has flipped many hundreds of houses as an active Baltimore-area real estate investor. Steve's unique specialty is the "flipping homes 1-2 punch", a proven system of real estate investing that powerfully combines wholesaling and rehabbing houses. Steve Cook is dedicated to helping others succeed through understanding and aggressively applying his time-tested, step-by-step approach to flipping real estate.

Copyright Notice
Copyright 2002-2020 All Rights Reserved. Published with Permission of Author. No part of this publication may be copied or reprinted
without the express written permission of the Author and/or

Back to Top

Free Newsletter

Article Options
Printer Friendly Page
Send This to Friend

Author's Articles
A Good Contractor
Advice For New Investors
Being Broke: Career-Ending Or Creative Opportunity?
Breeding Bird Dogs
Building the Ultimate Wholesale Buyer's List
Finding and Filling Your Niche!
Finding and Working With A Good Real Estate Agent
Fix-And-Flip Tips: Avoiding Crumbling Contractor Communications
Flipping Houses Ethics: What's Your Name Worth
Getting Around The Non-assignability Clause!
Getting Started in Real Estate Investing
Getting Wholesale Buyers In The Home
Hot Market House Flipping: Can You Still Find Deals?
How Should I Adjust For Changing Markets?
Investing in Hot Markets
Is Flipping Homes Illegal?
Marketing - The Weekend Bandit
Money In Mold
Negotiating A Sales Contract On Your Finished Rehab
Negotiating Like a Pro
Nine Steps to Quick Cash: The Anatomy of a Wholesale Flip
No Money Down Real Estate Investing: Is It For Real?
Overcoming Fear (Beginning With A Vision)
Overcoming The "No Money" Pre-Offer Jitters
Part 1 - What Exactly is a Hard Money Lender Anyway?
Part 2 - Finding Hard Money Lenders
Part 3 - Profiting from your Hard Money Lenders
Pre-Qualification Letters: Why Do I Need Them, How Do I Get One, and What Should It Say?
Prehabbing for Big Cash in Hot Markets
Proper Handling of Contractors
Quality Deals
Real Estate Day Trading
Rehabbing a House From Start to Finish
Should I Quit My Day Job?
Starting your Real Estate Investing Career the Right Way
Success Strategy - Aim For The Low Hanging Fruit Part 1
Success Strategy - Aim For The Low Hanging Fruit Part 2
Success Trap-Why Investors Give Up On What's Working?
The Art of Conversing With Team Members
The Gut Rehab
The Only Contingency You Will Ever Need
Understanding Appreciation
What is a Fixer Upper?