How do you value a new home in an old neighborhood? Here are six things I keep at the forefront of my mind when approaching this situation and choosing comps. What else would you add? I’d love to hear your take in the comments.
- Premium: There is usually a premium for new construction. Just as buyers pay more for that new car smell, buyers will typically pay more for a home that has never been lived in.
- Fading Premium: However, the premium for new construction fades VERY quickly. This is important to keep in mind because any premium paid when the house was built a few years ago may not exist in today’s resale market.
- Infill Location: If the newer home is part of an infill project, it might have a bad location since the best locations were probably already built out. Moreover, infill projects tend to have tiny lots compared to larger ones found with older properties.
- Quality: Sometimes newer homes may not have the same quality as older homes, which reminds us new is not always more valuable. Other times though new homes are far superior to the surrounding area.
- Conformity: Does the property fit in with the neighborhood in terms of design and size? Or does it stand out in a bad way? The principle of conformity is a very relevant dynamic in real estate, and whether a property fits in the neighborhood or not can impact its value.
- Neighborhood Acceptance: Sometimes neighborhoods go through a period of change where it becomes more acceptable for older homes to be torn down and newer bigger ones rebuilt (East Sacramento). Other times it is not common or acceptable, so a new home might look like a sore thumb.
When valuing a newer home next to older ones, it’s easy to automatically assume it’s worth more. Yet we have to ask, how does the market see this new property? Is the market willing to pay more for this or not? What are buyers looking for in the neighborhood? The proof is in the data, so often times we need to dig deep for comparable sales. It might even be helpful to search through the past several years of sales to find something else that was new. What was comparable to the new property at the time of its sale? Did it sell with any premium? Or did it sell right on par with other older homes? Be careful of course when interpreting new construction comps since sometimes newly constructed homes are loaded with concessions and credits, which can inflate the price.
Questions: What’s number 7? Any other thoughts or insight?
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Timely post Ryan. I had an agent contact me with with issues in getting new construction appraised in a neighborhood where there had not been any construction in the last several years due to the downturn in the market. This is a upper scale neighborhood that has good demand. He was concerned that the new construction would be compared to the existing homes which were around 10 years old. I told him that while these sales should be looked at and considered, other competitive areas that had some recent new construction should also be looked at to get an overall picture of the market. Thanks for reminding us of things we need to consider when estimating value in this situation.
Thanks Tom. It sounds like you provided your agent friend with some good advice. Nice job. I agree about researching new construction in competitive areas too. On a similar note, it’s not a good idea to cherry pick a newly constructed sale from a subdivision of brand new homes. After all, the market might respond differently to a “newbie” in an older area rather than an entire subdivision of new homes.
That is a thorough list of things to remember when valuing a new home in an established area. Thanks Ryan. A buildable single family lot in my 70s neighborhood just got split off from another home. It will be interesting to see what the builder decides to put in that spot. Our location is quite desirable in terms of access to other things and great schools. However, this lot has issues with drainage, is on a busy corner at the entrance to the development, and is smaller than most lots. It is my guess that with inventory quite low now, the builder will overbuild the site and it will sell quickly. However, if that is done, this lot will forever be difficult to sell in a down market.
Thanks Gary. What an interesting situation. You are probably right about how it’s going to play out. Your example underscores one of the points above how a newly constructed home in an older area probably has a bad location. It’s so true. Yet sometimes fixers are bought in choice locations, and then completely remodeled or rebuilt. It’s common in portions of Sacramento to see owners strip down a house to the foundation and fireplace. Thus it’s technically a “remodel” in the eyes of some, but we all know besides the foundation and fireplace it’s brand new.
Very informative tips here! I definitely agree with conformity being an issue – on the one hand, new homes in old neighborhoods can be the talk of the town… or stick out like a sore thumb. Thanks for sharing!
Thanks Jordan. Very true on new homes being the “talk of the town”. It all depends on the location, market, quality of homes, etc… There are so many factors. The new homes in the photo above are actually an infill project in my area called Curtis Park Village. There is quite a bit of buzz about them, though there are strong opinions on both sides regarding their existence.
Hello Ryan,
Perfect timing on your post. I’m about to list two new build homes in Rio Linda. And you know RL – we have such a mix of properties – large parcels with agricultural uses, tract homes, mobile homes next to the tract homes, ay ay ay! What a mix! Just south of RL (2 miles) there is a new build development and I have at least 16 sales within the past year to draw from. and I’ll be able to use the points from this post, as I’m pricing. Thanks!
That’s great, Lori. I’m so glad it was helpful to you. It’s fantastic that you have the data too. It would be much more challenging if you had the very first new build in the midst of an ocean of oldies.
Incredible…… Thank you for clarity on this. Especially the “fading” of the increased value over time. I run into 20-year old “infill” that is 10 years newer than the homes around it, but the Seller wants a “premium” because his is “newer” than the homes around his, but still 20 years old. Your article really helps to explain this dynamic, and others that are sometimes hard for owners to understand. Thank you for quality content and great writing once again!
Hi Joss. Thank you so much for the kind words. New houses are just like new cars. As soon as you drive them off the lot so to speak, they lose value. That’s not easy to stomach, but it’s true. We see this in new subdivisions too when we compare houses that are two years old with brand new ones. The 2-year old models are expected to be selling at a premium (on par with the brand new houses), and it is sometimes difficult for home owners to stomach why their 1-2 year-old home is not competing at the same price level. I imagine that’s not always easy to explain as an agent either.
Great article, thx for sharing. I’m curious on what’s your opinion on planned unit developments, where the builders tend to increase the price slightly for each new releases even for the exact same models. Any ideals the best way to deal with these for new appraisers?
Hi Jane. Thanks for reaching out. Builders love to raise prices. That’s for sure. In reality, if the surrounding market is increasing in value, the price increase can simply reflect the market, which means they might make perfect sense. So if we see one model that had a base price of $304,900, and now it has a base price of $309,900, maybe that makes reasonable sense when we look at the entire market and/or the regional market. I understand how it can seem entirely fishy, but if older neighborhoods are showing appreciation, it may be a reasonable leap to consider newer ones are showing appreciation too. However, the tricky part is that builders can easily change their base price to make it seem like prices are increasing, but at the same time they begin to offer more incentives, “free” upgrades, or credits back to the buyer in order to keep their prices at the same level of recent sales or higher. Thus the overall prices in the development may show an increase or even be the same as they were in recent time, but if the new sales / listings are padded with extra concessions, we have to wonder if the market has actually softened. Unfortunately it’s not easy getting accurate information from some builders since they basically control the information. For new appraisers I would simply say to get as much information on the sales in the development as you can (and find some outside the development also). Find out the base price, upgrades, lot premiums, and any incentives offered too. Seeing the base price move up can be justified if the market is increasing or showing a seasonal uptick, but just be careful to really know if the prices are being padded with other things such as “free” upgrades or money back to the buyer. Would the subject property have been able to get into contract at $420,000 if the builder didn’t give $10,000 in free upgrades, pay $10,000 of the buyer’s closing costs, and throw in some other free stuff? Most of all, if we start to see all the comps padded with so many freebies, we have to ask if those comps would have sold at the same price with all the free stuff. We don’t adjust for any concessions given for the subject property, but we might adjust if concessions in the comps ended up inflating the purchase price for that comp (see this article –> https://sacramentoappraisalblog.com/2014/12/01/why-do-appraisers-ask-real-estate-agents-about-concessions/). If anyone has additional points or questions, let’s chat.
Thank you for such detailed answer. Really great points.
I am so grateful to have found this article and comments. I am trying desperately to help a client market their home in a very depressed area of a small town. A tree fell on her original home and destroyed the house. The insurance company had a home built to match the square footage of the original. Now she lives in a GORGEOUS, high end finished ranch in a very old and distressed area. The build cost the insurance company $50,000 more than I can justify marketing it at. She needs to use the proceeds to purchase another property (wanting to move out of town) but can’t get a mortgage. I have spent MANY hours comparing and coming up with a clear reasoning of my price point that we are considering. Any suggestions above what has been mentioned would be appreciated. I started with the value of the lot by comparing that first, then I worked with new builds, subtracted to lot difference and worked with the typical comparisons such as beds, baths, sunroom etc.
Hi Cathy. Thanks for the comment and kind words. This is a tricky situation because an old home was totally rehabbed because of damage from a tree. Thus it’s not necessarily like a brand new home in a small infill subdivision. In some regards I think you’re going to have to put the home on the market and test the market to see what will happen. You can get ideas about value, and you ought to strive for that, but ultimately the market will tell you.
This may be a situation where the cost to build far exceeds the contribution to value. I think sometimes owners get stuck on the cost and expect the resale market to pay for the cost, but they have to realize cost does not translate to value in all cases. I actually wrote about this recently. https://sacramentoappraisalblog.com/2018/05/02/the-myth-of-dollar-for-dollar-in-real-estate/
The thing we have to remember is buyers are buying the neighborhood, and if it’s a depressed area, buyers may not be willing to look past the location when making a purchase. I would be very hesitant to compare brand new homes in a new tract subdivision with a property that was rebuilt for insurance reasons in a depressed area. Though I would be very open to trying to find evidence in the market that buyers really would pay more.
I recommend talking with local appraisers, being in tune with prices in competitive areas, and trying to find other similar situations to justify value. I like to keep in mind that if a buyer spent $50,000 more for this house, what could the buyer purchase instead in a different area? Buyers will think this way and keep prices in mind. At some point there is a price ceiling for this area, so at some point buyers will resist paying much more for a depressed area if they can buy a better location for the same price. Know what I’m saying?
Best wishes.
Thank you and yes, I completely understand. The Seller is not expecting anywhere near the build cost. I did give the property zero land value and deducted the lot cost from other new builds. This situation has never happened in this small town. Tricky. Thank you for your article and great advice as well as quickly responding!
No problem. It’s not easy to value properties like this. I hope things work out well for your client. Keep me posted if you have any other questions. Take care.
This is so generous of you! Thank you!