What Is Real Estate Progression?
October 17, 2022
If you're investing in real estate, consider looking in areas where real estate progression occurs. In other words, invest in areas where the homes are likely to increase, even if the subject property isn't anything special.
A home's value comes down to the location and the homes surrounding it. So choose the neighborhood just as carefully as you choose a home to take advantage of house increases and a great return on your investment.
What Is Real Estate Progression?
The Real estate progression meaning is that real estate appreciates based on what it's surrounded by just as much as what the subject home has. So, for example, you could have the smallest, most modest house in the area, but if there are more expensive homes around it, the value of your home naturally increases.
The key is to buy a home in an up-and-coming neighborhood to take advantage of increased demand and higher-valued properties.
What Is the Importance of the Principle of Progression?
The principle of progression is important because it determines the future value of your home, even if it's significantly smaller or larger than other properties in the area.
Buying a smaller home in an up-and-coming area is better than buying a large one in an area with smaller or more rundown homes. But, while you might look 'better' than the other homes, you won't get the same value if homes of greater value don't surround your home.
Real Estate Property Values
Real estate property values change often. They increase and decrease based on supply and demand and other economic factors. Most people invest in real estate to earn money, not lose it. Whether you're buying an owner-occupied or investment property, you want it to be worth more than when you bought it, so the principle of progression plays an important role.
Principle of Progression
The principle of progression refers to a situation where you have a smaller or more modest home than other homes. However, your home is positively affected by its location and is worth more in the higher-value neighborhood than it would be if it were among homes like it.
Let's say you have a 50-year-old home with very few updates. As a result, it's not as modern as it could be and is in average condition. However, the homes around your 50-year-old home are newer, more modern, and larger.
This home would be worth more in an area with larger, more modern homes than in an area with homes of average or below-average value.
Principle of Regression
What is regression in real estate? Real estate regression is the larger issue real estate investors should consider. This happens when you buy a better property than the homes around it. This often happens in areas where older homes are completely renovated, or new homes are built on vacant land among older, lower-value properties.
It can also happen if you do too many high-end renovations on a home that isn't in line with neighboring properties. Performing too many upgrades may not provide you with the return on investment you'd hoped because the homes in the same neighborhood don't have the same amenities, so the value isn't supported.
Principle of Conformity
The conformity principle refers to the similarity of properties in an area. Similar properties tend to provide a better environment. They are aesthetically pleasing, have the same function, and complement one another.
Buying a home unlike the others in the area may be a bad investment, especially if the neighboring properties aren't nearly as valuable as the home you're building, buying, or renovating.
Example of Progression in Real Estate
Progression in real estate can happen in many situations, but here's a simple example of how a property increases in value based on the property valuation of surrounding homes.
You will find a dated home located in a high-end luxury subdivision. You buy the home despite it not looking like anything in the neighborhood. Since land is a limited resource, the home is a hot commodity. You can buy it for a price much lower than the local values, and if you keep as much of the existing structure as possible, you'll save even more money.
Because the home is located in a desirable area where property values are much higher than the subject property's value, the property increases in value, giving you an even greater return on your investment.
The Real Estate Cycle
It's important to understand that no matter where you buy a home, the real estate cycle has four stages. On average, the real estate market cycles every 18 years, but many market factors affect how long it takes.
Knowing the phase of the real estate housing cycle the market is in before you buy a home can help you determine if real estate progression will apply.
As the economic market recovers from its latest issues, the real estate market enters recovery. This is when real estate investors can snag properties at low prices, and enjoy the ride up as we head into the next phase, expansion. Conversely, if you invest in a property surrounded by high property values, you may have an even greater return on your investment.
Everyone knows when the real estate market is in expansion. Unemployment drops, builders build again, and more buyers enter the market. Real estate prices start increasing, and it becomes more competitive to buy a house.
3. Hyper Supply
During the expansion phase, builders build too much, and demand slows down. Suddenly inventory is abundant, and many sellers want to back out of their investments. It's usually best to stick with your investment and ride out the rest of the cycle. If you invested in an area where the principle of progression applies, you'd still see a good return on your investment.
A recession is inevitable, but it doesn't mean anyone has to bail out of the real estate market. On the contrary, those who stick it out can benefit from the higher values as the economy improves and the cycle starts over.
Real Estate Progression vs. Regression
As you look at real estate investments, it's important to determine if the property would be subject to the principle of progression or regression.
Don't assume that buying a 'nice house' will always increase in value. The property's value depends on the surrounding homes. If you're buying a beautiful home amongst less valuable homes, you won't get the higher values you hoped. Instead, you'll be subject to real estate regression and may not have the return on your investment that you hoped.
Progression Real Estate FAQs
What Is the Path of Progress?
You'll often hear about the "path of progress" when researching the principle of progression. This refers to the process of valuable neighboring communities or positive infrastructure developments to not only increase the value of your home or community but often lead to job growth.
Factors contributing to progress include higher access to public transportation, government projects, and business growth.
What Is the Principle of Change in Real Estate?
The principle of change in real estate is the underlying philosophy that guides all decisions made in the industry. It dictates that any action taken today should be done with an eye toward how it will affect the future of the industry and communities. This principle is what drives developers to build new projects that will improve the quality of life for future generations, and it is what motivates real estate professionals to stay current on the latest trends and technologies.
Are Property Improvements Always a Good Idea for Increasing Your Home's Value?
Property improvements are not always a good idea for increasing your home’s value. Sometimes, the improved property may not actually add any value to your home. In other cases, the added value may be less than the cost of the improvement itself. It is important to do your research before making any major changes to your home. You should speak with a real estate agent or other housing expert to get an idea of what changes are most likely to add value to your home and in what areas these improvements will be most beneficial.
What Is Property Obsolescence?
Property obsolescence is the gradual deterioration of a property's value due to changes in its physical condition, functional utility, or economic desirability. Over time, all properties will experience some degree of obsolescence. However, the rate and degree to which a property becomes obsolete can vary greatly depending on a number of factors.
The Bottom Line
Understanding real estate progression is essential when you invest in real estate. You can apply the principle by buying lower-value properties surrounded by higher-valued properties and getting a better investment return.
Work closely with your real estate agent to determine the best area to use the progression principle and make the most out of your investment.
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