When I was in real estate school, one of the concepts we discussed in great depth was the very real way that neighborhoods grow and die — how real estate is more like a living thing than a simple concept. Instead of a straightforward life cycle, neighborhoods go through growth, decline, decay and rebirth as part of their natural state of being. Some areas decline for a long time — maybe the major employer in the area relocated, making the area less desirable for new inhabitants — others rise and fall like the tide. An aging population, for example, allows maintenance to slip and suddenly most of the houses in the area are in poor shape. It happens.
And this is where the idea of gentrification comes in. I know it’s kind of a dirty word right now, but it’s as much a natural part of the real estate market as housing bubbles and appreciation. Unfortunately, it’s a bit of a logical conclusion under the current system we live in. As poorer people let their homes fall into decay, either because they’re renting and have no real control, or because they simply can’t afford to keep up with repairs, the decay cycle begins. Neighborhood values begin to slump and eventually, the area becomes one of those places people don’t want to go. Somehow, at some point, someone with the money to invest in these properties will buy them and fix them up again and people start moving back into them.
The controversy with this practice right now is that some neighborhoods that were traditionally known to be important to a certain ethnic group or race are being taken over by another with more money and sway with the city. In cities like Philadelphia, the effects of gentrification are serious — those homes that aren’t gentrified are still being swept up in the success of the neighborhood restoration and their taxes are then raised exponentially. Even homeowners who own their homes outright may not be able to keep up with these rapidly rising taxes due to the surge in property values, which is sort of the crux of the problem.
So You Want to Buy In a Gentrifying Area
Despite the obvious problems with buying in a gentrifying area, there are enormous benefits to the individual homeowner who takes on this challenge. But, actually buying a house in a gentrifying area can be a major challenge of its own for a number of reasons. These are the major hurdles you’re going to have to overcome as a first or returning home buyer (this does not necessarily apply to commercial buyers, so if that’s you, email me for advice):
Your house will have too high of a price for the neighborhood. Mortgage companies are fickle about loaning on homes that won’t appraise based on nearby homes. With a home that has been substantially remodeled and obviously should have experienced an upswing in value, this can be overcome by using comparables in similar neighborhoods that are already at their maximum value, but your appraiser and banker have to understand the complexities that are happening in your new neighborhood and how to handle them. Your best bet to overcome this issue is to have a significant down payment, if we’re being honest with one another.
Your house will need too many repairs for your loan type. Similar to the first problem, buying a home that hasn’t been fixed up yet, but promises to be worth a substantial amount more once certain repairs are made, can be tricky. Many loan types won’t accept this situation, so don’t go into it blindly. If your plan is to buy a home needing work in a gentrifying area, look for a forgiving loan like a conventional or an FHA 203(k). Another route to go if you have professional construction experience is to secure a construction loan for purchase and repairs, then refinance into the loan product of your choice. Just keep in mind that you won’t qualify for any first time home buyer benefits if you go this route.
The estimated taxes will exceed your approved payment. In areas where the value is obviously increasing in a predictable way, your bank may do something a little tricky with your tax estimation — and it could be quite high. If they’ve seen other areas of the city gentrify and know there’s a predictable response from the city government, the bank may do their best to create a worst case scenario for your tax estimation to ensure your payment stays within the bounds of the loan. This can severely limit your ability to borrow, so keep it in mind and let your banker know if your plan is to buy in a gentrifying area. The taxes may be low today, but they will be high tomorrow. Plan on it, even if your bank doesn’t.
You won’t be able to find someone to insure your home. So, let’s talk about the elephant in the room. It’s time. I know about half of you will write me dirty emails, but it has to be said to thoroughly cover this subject — insuring a home in an gentrifying area can be tricky. Why? Well, there’s the obvious: crime. Many gentrifying areas have recently been high crime neighborhoods, even if the crime problem is under control now. Insurance agencies go back a while to predict future patterns, so it takes time for an area that’s been tagged as a high crime area to go back to a sort of affordable insurance zone. Like with high taxes, be prepared for high insurance rates for a while and definitely shop around.
But there’s also problem number two. If you buy a house that’s already been fixed up, you’re probably ok, but most people are buying in these areas in order to save money and be able to afford the right home. Those homes are the big problem. They may have old wiring or improperly installed furnaces or any number of red flags that make insurance companies scream and run the other direction. So, you’ve kind of got a problem from that angle. A home inspection is absolutely vital for these properties. Be prepared to ask for insurance-related repairs or to make them immediately — some companies will allow you a 30 day grace period to get updates made. American Family was good to allow us this exception on an electrical update.
So, if you have the time, energy, patience and some money laying around, buying in a gentrifying area can be awesome. It can be a great way to stretch your real estate dollar and get a great return on your investment, but if you can’t be patient enough to handle each of these problems one at a time, step away and find a different solution to your price range issues.
The Bottom Line: Gentrification is a Mixed Bag for Buyers and Neighborhoods
I don’t want to paint gentrification as a miracle solution for your pricing problems — it’s not. In fact, you may experience some serious problems if the old neighborhood is still pushing back against the new inhabitants. You may find yourself in a neighborhood that’s not real neighborly, or in a neighborhood where there’s still a lot of decaying and abandoned buildings around you. Gentrification isn’t a pretty process, even if we forget about the tax and insurance ramifications.
Would I do it if my other option was to buy a home that was priced way outside my comfort zone? I absolutely would. But I’d do it with my eyes open. Understand the culture of the neighborhood you’re going into, try to fit into it rather than trying to change it. Become a part of that community that’s already there, don’t try to bring in a new one. Gentrification is one of those tricky things that can rob a neighborhood of its unique and beautiful soul, don’t be a part of that. Just get along with your neighbors on their terms and try to be a part of the solution to one of gentrification worst problems: pushing out an existing and established cultural or racial group.