New construction and the smell of a new car

Do you like the smell of a new car? I do. While I would never put one of those “new car smell” air fresheners in an old car, there is something exciting about driving a brand new car off the lot that nobody else has driven before.

As new construction has been starting to take off again in the Sacramento area, I’ve been getting questions from home owners and real estate agents about using new construction sales for “comps” in appraisal reports. Can appraisers use brand new houses for comparison when appraising homes that are 4 or 5 years old, but literally right next door?

Owner: The new construction two blocks away is by the same builder.
Me: That’s great to know. Thank you.
Owner: These houses are just the same as ours, but they’re even selling without rear landscaping or built-in pools, which makes ours superior.
Me: Would you pay the same amount for a used car as you would a new car?

New construction sale vs all other sales in neighborhood

A real-life example of new vs. old: The 3200 square foot “new construction sale” above at $400,000 sold significantly above other sales that were built by the same builder just a few year prior. In my research I selected sales from a wide square footage range as well as a larger market area well beyond the immediate streets built by this builder. As you can see, there are always some sales in the entire market area that compete at the higher end of the market for various reasons, but even those have not touched the same level of this newly constructed house. There was one other sale at $400,000, but I didn’t include it since it sold directly from the builder (not on MLS). From the looks of it, all other similar-sized sales in the immediate neighborhood sold about 20% less than the newly constructed sale. However, it’s important to consider that the new sale may have superior updates and some of the older sales were distressed and therefore sold at discounted levels.

This is only one example, but in this neighborhood in Elk Grove it’s an important value issue. In short, there is almost always a price premium for new homes. Just as buyers pay more for brand new cars, we see the same thing in real estate. Appraisers can definitely use brand new sales as comps, but if the subject property is older in age, there is probably going to be a downward value adjustment given.

NOTE: Every market is different. There are surely reasons why new construction sometimes won’t sell above other sales. That’s why I said there is “almost” always a price premium. For example, we might see buyers in classic neighborhoods pay more for homes with era elements instead of a cookie-cutter new tract houses.

Question: How else are new homes and new cars similar?

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  1. says

    Very good points made and very well written advice Ryan!

    I deal with this on occasion and when I do, I get the argument from locals that the quality of new construction is inferior to my 8 year old home’s quality buit pre-Hurricane Katrina…and that’s true! Since Hurricane Katrina, we had the embarrassing KB Homes open up office in our market and those homes are vastly inferior in quality to local normal quality. KB Homes lasted about 2 years in our market because locals recognized the gap in quality. And then DR Horton opened shop here, which is better than KB Homes but still inferior to the level normally built by the Capital Area Region Home Builder’s Association. Local new economy homes might sell for $96/sf meaning you can built a lot more home versus the $136/sf to $150/sf average builders charge.

    It’s a tough question to answer and 1 can only look to market interaction for the answer. Buyers like shiny new homes and don’t always consider “quality” in new homes. Following your new car example, in my market it would be the difference of buying a new flagship Mercedes or new Hyundai Genesis. Both are pretty awesome cars, just different quality levels.

    Locally, I’ve been told the best business to be in for the next 20 years is the Home Repair business because our local model now is probably 80/20, meaning 80% of new homes sold are built by economy builders. And, that’s what locals can afford now after the meltdown. I never believed that $136/sf to $250/sf for new homes was ultimately sustainable in the new economic paradigm in a broad sense.

    • says

      Thank you Bill for such a thoughful comment. How interesting to consider your market post-Katrina with KB vs other homes. I think you bring up a great point of how important quality is. I thik my posts assumes a similar quality, though I’m not sure I really brought that across. In the neighborhood I am thinking of above, the homes are very similar overall. If anything, builders include more “upgrades” now as a part of the standard package to allure buyers. This was particularly evident during the really difficult days after the boom. Whereas buyers would pay more for rear landscaping and granite countertops as “upgrades,” builders began to install features as such in every house to help inventory move. I would guess the more the economy comes back, the less “upgrades” will see for “free”.

      I’m glad you know your local market.

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