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Well, I try to be pretty positive on this Forum, since I think NY State, and upstate NY in particular, get a lot of one-sided, overly negative complaints. But I do see some downsides to Waterloo. I've looked at it pretty closely on our last four trips to upstate NY (we're going to relocate there and have been doing a lot of town-hunting).
It seems a bit run-down. While it has some lovely older homes (which we much prefer), much of the housing does have that needs a-coat-of-paint/some-repairs/some-cleaning-up/that-could-be-beautiful-again-if look.
The downtown, while it has a few nice-looking shops, has a similar left-behind look and feel. Doubtless the mall on the edge of town has bled that downtown pretty dry--the fate of so many small-town downtowns across the country.
There's a fairly large factory in the middle of town, on what looks like part of an old canal, that, frankly, smells. I think it's a cosmetics company. Whatever it makes, it emits quite an acrid, chemical-y odor.
While the people we met there were friendly, my wife and I did notice a distinct "We endure" quality throughout the town. As if everyone felt that the town had seen its better days and was just getting by, hanging on, making do.
And while crime isn't too bad in Waterloo (the City-data.com site seems to misstate the national average against which it measures Waterloo's crime rate), it does show up as having 16 registered sex offenders, for a pretty-bad resident-to-sex-offender ratio of 320 to 1. It seems to me that if you're going to live in a small town, one of the things you should expect is it to have low crime, so you can really enjoy that almost-unique small town feeling of safety. I'm not sure if Waterloo offers this as much as it should, judging by the stats, which, again, may be at least partly in error. Either way, it's a concern.
Again, these are generalizations, and I may be quite wrong about the less obvious things here. But I do think you have some better choices close nearby.
While Seneca Falls' downtown, like so many American small/medium-sized towns' downtowns, needs a shot of commercial rebirth, Seneca Falls is, overall, a much more cheerful and, I think, vibrant place. It has a lot of historical importance and appeal, a microscopic crime rate, and considerably more options among beautiful old housing. Also, while Waterloo is nicely situated between the top of two lovely Finger Lakes, Seneca Falls is closer to one, and has an interesting perch aside a river. Upstate NY is famous for its civic-mindedness and many festivals and communal events, but I'd bet that Seneca Falls offers much more of this than does Waterloo. Seneca Falls just has a stronger civic tradition.
Geneva would, I think, be another better option. It too has a downtown commerical district that needs more reinvigorating, but it also has a deep history, civic events, and civic mindedness. Geneva also has two colleges, which routinely offer a lot of cultural opportunities and economic stability, especially in a small city like this. And it has a tremendous variety of housing options among its many stately neighborhoods. It's also preserved many of its most important and historic downtown buildings, such as the old opera house and its many beautiful churches. And it's right atop a Finger Lake. A pretty busy road (Rt. 20) separates the city proper from the lake front, but red lights let you even walk there, and there's a nice park and beaches awaiting. It's hard to beat making a family ritual out of a long stroll along the lakefront.
I can't comment on the school systems, but I would bet that Seneca Falls' and Geneva's schools have more resources and perform better than Waterloo's. If you do some searches on this Forum into schools' performances, you'll find places to go to check out and compare these.
One important thing to keep in mind is that anywhere in the Finger Lakes/Central NY area you'll have a lot of beauty and things to do very close by, for you and your family. There's great boating, swimming, fishing, hiking, camping, hunting, antiquing, history, parks, quaint towns, larger cities, museums, libraries, good food, etc., all within a fairly short drive in any direction. And people know how to enjoy the winters, with lots of ice-skating, sledding, hockey, and simple playing the snow available. So even if you were to choose Waterloo, and it did have the shortcomings I think it does have, the variety in the region would at least partly offset that. I'd rather be in a mediocre town in the Finger Lakes region than a great town in an area that's otherwise barren or monotonous.
On that note, you may want to look into the smaller towns and hamlets around this area. Many of them are very quaint and remarkably safe and civil. Your kids probably wouldn't feel too isolated there, either, since there are always other towns and houses with kids a short drive away, and the kids will make friends at school, etc. In general, the Finger Lakes area is a great place to raise kids since it offers so many of the old-fashioned, this-is-how-kids-ought-to-be-able-to-grow-up things that so much of over-"developed" and crime-ridden America now lacks.
Best of luck and hope you'll post your choice and experiences on the Forum!
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