I get asked this question all the time. “What do you do for comps when a home is only one year old? Can you compare it to brand new homes from the builder?” Here are a few things on my mind.
Builders vs you: It’s important to step back and understand that builders are able to let buyers customize features in a house, and that’s a big deal. This is one of the alluring things about buying a new home, and it’s not something a typical seller is going to do. Thus right away a builder has more power than an owner in the resale market.
Fading premium: Just as buyers tend to pay a price premium for a brand new car, the same thing happens in real estate. And just like a car begins to depreciate when it’s driven off the lot, the same thing happens with a home. When you’ve lived in a home, it’s no longer 100% brand new, so it may not command that same price premium in the market.
The market doesn’t care about your rear landscaping: I often hear, “But my home is better than the brand new ones because I put in rear landscaping. The builder models don’t have a rear yard.” That may be true, but the market might not care about that. The premium a buyer is willing to pay for a brand new house could still likely outweigh your rear landscaping (assuming we’re talking about standard landscaping).
Credits & incentives: Let’s remember builders can offer credits and incentives to close deals and keep prices high. When a market starts to soften especially, we have to ask what concessions are being included to continue to boost prices higher. This is key to understand because if brand new homes have padded prices, they probably aren’t ideal examples of what the market is really willing to pay. Here’s the better question. What would the market pay without all the concessions?
Resale homes rule: In an ideal world we want to find other homes that are one or two years old. Is there any price difference between the new models and resale homes not sold by the builder? That’s the big question and I realize it could be a fat chance we’re going to find something. But don’t be afraid to look through multiple years of sales too. Even if you have an older sale from a few years ago you can compare it to other newer ones at the time. How much of a price difference was there if any? Did the new ones still sell for more? Don’t forget to look to other competitive new developments in town too. You might get some insight there when it comes to brand new vs newer homes.
Keep an eye on the new stuff: I’m not saying to ignore new sales altogether or even to not use them. We should keep an eye on them for sure. Let’s just be cautious about flippantly choosing three brand new sales from the builder and calling it a day without really thinking through whether there is a price difference between brand new vs newer. If I was appraising in this situation I would hope to find at least one resale home somewhere, but I’d also be fine using brand new homes as comps too (but they might need an adjustment down).
The market: Keep in mind there are situations where the market may have gone up, but if the owner also lost some value due to a fading new construction premium, it’s possible the home might not sell for more than it was purchased for.
I hope this was helpful or interesting.
Questions: Which point resonates with you most? What did I miss? Any stories to share?
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When I’m appraising in new subdivisions I often see MLS sales with 0 days on market that builders enter for comps or record keeping. This type of comp is the same as getting a settlement statement and info on a house directly from the builder in my opinion. Builder “to be built” home sales can be helpful, but I’m not going to put all of my weighting into them. I like to use sales that have had market exposure. Just because someone made massive upgrades and purchased the house doesn’t mean that another buyer would pay the same amount. I also try to get settlement statements on MLS builder sales. Often the limited service listing realtor doesn’t enter in the information correctly. I have seen numerous times where not only are the concessions incorrect, but the sale price is incorrect. Thanks for bringing up this topic. I think it’s reckless to use three comps that didn’t have market exposure and call it a day.
Thanks Slade. I appreciate your thoughts and I like the word “reckless” you used. Yep.
It really is difficult at times to get accurate information from builders. Personally I don’t like doing tract home appraisals (on the purchase side) for subdivision builders for this reason. I am at the builder’s mercy for information and I always wonder if I’m being given accurate information or not. Am I being told everything about the property? Are the concessions and credits accurate?
On a side note I find it can be tricky with some builder sales that make it on the MLS because it seems some builders just throw them on there and don’t pay much attention to them. If that’s the case, it’s really hard to rely on the information as accurate because the listing is basically only technically there. In my area it seems most new sales are not listed on MLS unfortunately.
These builder homes with zero days on market are very similar in definition to custom built homes, and don’t qualify as an open sale according to the certifications required on the Fannie Mae form. In Utah, the State Board has said that an appraiser should not rely on these sales for value, only as supporting value. And the appraiser could face punishment from the Board if these builder sales are all you relied on for value.
Thanks Allen. I appreciate your take. I’ve heard a few appraisers chime in about this. Definitely something to pay attention to.
Great post Ryan! I appreciate your practical and comprehensive discussion on this topic. It can be a little tricky. Keep up the great blogging!
Thanks so much Jamie. Hope you’re well lately.
Doing good! It’s been very busy, but good!
In my area, demand for new housing is extremely high and the supply is limited to the lack of avaliable vacant lots. Builders/Developers are opening new sections and the lots are divided up between 2-3 builders. As an example, there were 30 lots give approval in a S/D last week. All 30 lots had contracts for new homes the day they were released by the County. The builders have 3-4 plans that they keep as Models and are “exposing” their product in this manor. I consider this “exposure” to meet the definition of market value. Your thoughts?
That’s wild. My market has a huge need for more units, but demand is nowhere near that aggressive in most areas where new construction is happening. It sounds like these have some exposure. I wouldn’t think of these as non-market sales if this is how it works in your market.
The Army is moving the Cyber Command from Fort Belvoir and Fort Mead, MD to Fort Gordon, GA. All of this is happening from 2017-2021 +++. 4-5,000 people plus families. Also, the NSA built a HUGE building at Fort Gordon and has been staffing it for 2 years and it is not near completely staffed according to rumors. Naturally the NSA does not give out employment numbers……… Also, the State of GA has dedicated funds to the Cyber Center of Excellence at Augusta University. TWO buildings ($45-50 million each) have been competed in the last 3 years to house start ups, research, and education in advanced Cyber. We are busy…..
That’s great Pierce. Thanks for sharing. I’m always fascinated to hear what’s happening in other markets. Who is coming? And who is going? Those are two questions I continually ask. In my area it’s Bay Area buyers coming into the market. In fact, there are 27,000 Bay Area residents moving to the Sacramento region every year (though not all of them buy). And of course California is losing more people than its gaining, so there’s lots of people leaving too…
This is something I have struggled with recently. Some sales by the builder may not have been exposed to the market sufficiently. If a buyer puts a contract on a spec. home right after construction begins and then “overbuilds” the home the final price may not truly reflect market value. It may turn out that 9 out of 10 buyers would not pay as much and the sale ends up being more of a custom-built home due to the upgrades. Another thing is that it wasn’t exposed to the market to get other buyers reaction. If it was exposed then the price may have been lower.
Thanks Tom. I hear you on that. Would this property really have sold at that level had it been exposed to the open market? That’s a huge question.