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By June Fletcher, The Wall Street Journal Online

RISMEDIA, Oct. 29, 2007-Question: My wife and I live in Silicon Valley, and we’re looking to trade up to a single-family home from our condo. In terms of future capital appreciation, is it better to purchase a newer, larger home on a tiny lot (3,000 square feet and under) or is it better to buy an older, smaller home with a larger lot (8,000 square feet-plus) with room to expand? Most new homes in the Valley are built on very small lots.– Tony Lee, San Jose, Calif.

Tony: Remember that old song, “Give me land, lots of land in the country that I love?”
There’s a reason the cowboys sang it.

From the standpoint of flexibility, it usually makes sense to go for the most land you can get. And that’s doubly true in Silicon Valley, where lots are scarce and vacant land suitable for building often sells for more than $1 million an acre. Older homes can be remodeled and expanded; but that’s not really a possibility if you have a dinky lot.

“You can change the size of the house, but you can never change the size of the land,” says Don Orason, a San Jose real-estate agent.

But when it comes to appreciation, there’s no real difference. Orason pulled up statistics for two homes in the 95148 ZIP code that recently sold: Both with four bedrooms, two and one-half baths and about 1,900 square feet. The first, 3430 Chemin De Riviere Drive, is 7 years old and sits on a 3,484-square-foot lot. It sold in July 2004 for $721,000 and again in August of this year for $863,000 — a 20% price gain. The second residence, 3710 Slopeview Drive, is 25 years old and has a 10,018-square-foot lot. In July 2004 it sold for $720,000, and it sold for $870,000 in June of this year. That’s another 20% gain.

Lot size shouldn’t be the sole or even a major factor in deciding which home you should buy — unless, of course, you want a big backyard for pets and/or kids. Instead, look at the quality of school districts (important for resale value, even if you don’t have children), views, convenience to shops and work and neighborhood amenities. These things aren’t easy to quantify and compare, but they matter a lot to your future happiness.

So do your feelings about remodeling: Does the thought of living in the chaos of an older home during remodeling make you want to tear out your eyeballs? Then a newer home on a smaller lot may be the better choice for you.

I’ve said it before: Don’t think of your house primarily as an investment. Think of it as your home. Find a neighborhood that fits, a house you love, and a fixed-rate mortgage you can afford — and forget about trying to game the market. If you’re happy where you are, you are far more likely to stay there awhile — which is, of course, the best way to maximize your investment.

— June Fletcher is a staff reporter at The Wall Street Journal and the author of “House Poor” (Harper Collins, 2005).

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