how to pick comps

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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Sometimes I get a stack of “comps” from real estate agents during my appraisal inspections when meeting the agent at the property. Are they good ones? Sometimes they are, but since many times they aren’t, I wanted to highlight some important questions that might be useful to Sacramento area agents (and anyone) when selecting sales to share with the appraiser. I hope this is helpful.

Here are five questions to ask yourself before giving comps to an appraiser:

Is the “comp” a replacement? Would buyers in the neighborhood market consider purchasing the “comps” instead of the subject property if the comps were still on the market? That’s really what “comparable” means. The sale should be similar enough that the buyer would have theoretically considered it as a replacement instead of the subject property. If the subject is a fixer, are the comps fixers? Do the comps have standard updates also or are they all remodeled?
Are your comps located in the same neighborhood? Keep the neighborhood boundaries in mind when selecting comps by asking yourself where else a buyer would shop for a similar property. It’s fine if there is a reason to use comps outside of the immediate neighborhood, but just make sure the neighborhood is really competitive to the subject neighborhood (not superior). Otherwise the sales really aren’t all that similar.
Are the sales of a somewhat similar size? It seems like I get “comps” from agents quite a bit that are incredibly different from the subject property in size. For example, if the subject is 1700 square feet, I wouldn’t be surprised to see sales around 2300 square feet show up in the stack of comps. This is fine of course if the market views these properties in a similar way or there is an extreme shortage of sales, but usually there’s a price premium for the extra living area. Does a buyer looking for a 1700 square foot house typically shop for a 2300 square foot house at the same time? Probably not in most cases.
Are the sales recent? If the appraisal is for a loan, most lenders want to see recent sales over the past 90 days. However, if there is a good reason to use older sales, the appraiser certainly isn’t bound to use sales only from the past quarter if they are indeed the best sales. Sometimes real estate agents will give “comps” that are 6-12 months old while ignoring more recent sales though, and that’s suspicious if there are solid recent sales.
What are your motives? I think it’s fine for real estate agents to share data for the sake of giving the appraiser insight into how they marketed the property. It’s great if the comps and commentary help answer the question as to which properties the agent used to market the listing. Ultimately agents want to advocate for the sales price, which is fine in the eyes of their clients, but at the same time agents can often say and do things that pressure the appraiser to “hit the number” – which is not fine. When advocacy for a client becomes coercion for the appraiser to meet a certain value, that’s not a good thing. That’s why it’s important to check motives and use language in a way that does not pressure for a higher value. Check out a previous post on talking to appraisers (things to say and not say) for helpful tips.