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?
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) House in Tracy: Zillow high by 9.2%
Will websites like Zillow replace real estate appraisers some day? Personally, I’m not so concerned because: 1) These websites are not very accurate and therefore probably not a good source for making legal or lending decisions. 2) Lenders and other users of appraisal services need to use real humans who can do a professional and accurate job – and humans carry E&O insurance (ding, ding, ding). The bottom line is that it all comes down to money. Lenders probably can’t sue an online “machine” for messing up their value, but they can sue a human.