What do we do with a brand new house in an old neighborhood? Can it sell for more? How much more? I’ve been asked several times about this lately, so I wanted to pitch in some thoughts. Anything to add?
Some things I would do and consider when valuing a new home:
1) Immediate neighborhood: In an ideal world I’ll find a few recent examples of brand new homes on nearby streets. But if not I would search through years worth of sales in the immediate neighborhood for something that was newer in age. Even if I found older sales from years ago, my goal would be to compare these brand new homes with other similar-sized older homes at the time. How much of a percentage price difference was there if any?
2) Surrounding market area: If there are no sales in the immediate neighborhood I’d search competitive areas in the surrounding market. Did buyers pay a price premium in other places? Remember, it might be easy to cherry pick “comps” from brand new subdivisions or infill projects, but that’s not really the same thing as being totally surrounded by older homes, right?
3) New development: Next I’d take a look at the premium for new construction in the surrounding local market. For example, two weeks ago someone asked me how to value a brand new home in an older part of West Sacramento. I recommended points 1 and 2, but also said it would be wise to look in the newer portions of West Sacramento to see what brand new homes are selling for compared to homes that are just 2-3 years old in the same development. The premium we see in the new subdivisions might not correlate perfectly with an older neighborhood, but it’s still data. For instance, imagine we found there was a 10% price premium for brand new homes in the new area. At the least that might help us decide not to apply a 20% price premium in the older neighborhood we’re working in. Know what I’m saying?
4) Price ceiling: It’s possible of course to build something magnificent that might sell for big money in some parts of town, but we cannot forget the reality of price ceilings. In other words, there is probably a price limit buyers are willing to pay in an area before moving on elsewhere. Where is that ceiling? That’s worth asking and researching.
5) The wrong one & modern homes: Just because something is brand new does not mean it’s going to fetch top dollar. If it’s the wrong type of house for the neighborhood, buyers might actually pay less for the property. It’s like when someone builds a plain earth-tone stucco tract home in a classic area with Tudors and Bungalows. Despite being new it might actually sell with a price discount if it doesn’t have any hint of era charm for the neighborhood. On the other hand there are modern homes popping up all over Sacramento and beyond that seem to defy this idea. These homes definitely don’t blend into the neighborhood at all in terms of design, but they’re still fetching high prices. Keep in mind though modern homes tend to carry wide appeal, so they are often able to break the mold of the neighborhood and still command a price premium because of their style. In short, modern homes are not vibeless tract homes, so it’s not really the same thing.
6) Other: What else would you add to this conversation?
I hope this was interesting or helpful.
Tips for talking with appraisers [WEBINAR]: This week I recorded a 20-minute webinar for real estate agents on tips for talking with appraisers. Check it out here (or below). Thanks Tina Mitchell for the invite to do this.
Questions: Anything else to add? What’s #6? What have you done when valuing that brand new home in an old area? I’d love to hear your take.
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You are an appraisal treasure! Fantastic post and something I will definitely keep in mind. I have used some of your ideas profitably in my reports. The “2-3 datasets scatter plot” has been a true keeper! I have been able to show in a compelling visual way that some areas simply outperform others. Taking point pairs is easy and you can do a quick comparison to drill down into the data. Invaluable.
Thanks Abdur. That means a lot. I appreciate it very much, and it makes my day to hear.
Great article Ryan! I was one of the agent’s who asked you about this, so I’m happy to get an answer. Ultimately, it always comes back to doing the research. Sometimes you get lucky and you find the perfect model match comp with the same features directly next door. Other times you got to dig a little to find the answer.
P.S. Great video too!
That’s right Wes. Thanks for asking. Please keep doing so. 🙂
Yeah, it would be nice if there was a quick way to find value, but sometimes we have to take a multi-pronged approach. You are definitely correct about research, though we have to of course think through what questions to ask and how to find the answers. The reality is I might do each step above and find out a little bit of information from each step before putting the puzzle together. In an ideal world I would do step 1 and leave it at that, but there is sometimes so much more research. It’s always interesting….
Nice list Ryan. A new home in an old neighborhood is always hard and it means the appraiser is going to have to do their homework to get it right.
Thanks Gary. So true. It’s not going to be easy. If only there was a simple formula to follow….. or maybe a website to click and give us an instant value. 🙂
I guess Mr. Kristensen should be an expert, in his location most sales are new homes in old neighborhoods – most neighborhood are old!! And Portland has drawn a ring around the existing city to preserve ag land, similar to Davis. My grandaughter recently bought a home in Portland, built in 1958 and was one of the newest ones available!!
Thanks Truett. I always appreciate your take. Portland is a funky place. The vibe up there in some places reminds me quite a bit of Midtown Sacramento.
You bring up some great points Ryan. Something I have found is that agents may not be aware of the fact that you can go outside of the immediate neighborhood. While it would be best to stay within the immediate subdivision if there are sales available this may not be possible. When this is the case it is ok to look for comps in more distant locations as long as it is a competitive market area and buyers would also consider homes in these areas. Your point about pulling new sales from new subdivisions is well taken because that would probably reflect the upper end of the range. Getting the blend of older and newer homes is critical in this situation. Keep up the great work, Ryan.
Solid comment. Thank you Tom. Sometimes it’s easy to get locked into the idea we can only stay in the immediate subdivision and/or look at the past 90 days alone. I actually just posted a graph on Twitter yesterday that reminds me of this conversation. A friend was asking me how to value a property that backs a nature area when there are few sales. I graphed these sales to show they definitely tend to sell at the top of the market. In this case I would be paying close attention to older sales to help understand what the market is willing to pay for the location. But I might also look beyond the neighborhood to some competitive areas that trend at the same level. https://twitter.com/SacAppraiser/status/895028452834689024
Great tips, and wonderful blog – thanks Ryan!
Thanks Matt. Very cool of you to say. I appreciate it.
Like they said in the old days, it is an art as well as a science. Some days more science, some days more art. Some days the numbers cruncher is plan stumped.
So true. Thanks Scott. It’s never just about the numbers either. What is behind the numbers? What is motivating buyers? Why is the market moving or not? And sometimes the market does surprising things…
Hey Ryan!
Really appreciate the time and effort you have invested in this article. Thanks for sharing!