(Rental, not buying. If we were buying it would be different.)
Maybe I should ask which should WE go for? We're a family of 5: 2 adults, 3 kids aged between 9 - 15. DH and I both work a couple of days a week at home.
House 1: Stunning house in great location but absolutely tiny.
4 bedrooms, kitchen, dining room, sitting room, bathroom all on one level. That's it. No study, no second living space, no laundry room, nothing. It's like a little doll's house. But beautiful and right where we need to be.
House 2: Nice house, good size, I like it and we'd be comfortable. It's not a horrible location either - near some nice parks, shops, beach. But it's not where we need to be. Would make DH's commute quite long. Teenagers would probably need a lift to school (at the moment they bus or walk). Miles from friends. My 5 minute walk to work would become a 20 minute drive.
House 3: Bit of a shitty house but big enough and where we need to be. Crappy old kitchen. 20 yr old bathrooms.
(Or, I suppose, House 4: A nice house, big enough, in our location, but over budget).