Do you adjust for "new" vs. "used"?

[Doug DeMars]

Notwithstanding overall condition, do you adjust the subject or comparable for the simple reason that it is "new"?

If not, why not?

If you do adjust, by how much and what triggers your adjustment? How do you generally rationalize the degree of adjustments and method(s) employed?

 

[Terrel L. Shields]

New = zero depreciation
N > 0 = some depreciation

What's difficult about that? I don't see any magic cloak that "new" provides to add or devalue it. Now if your question is, "I'm an uninformed buyer who falls in love with a new house being touted by the builder as some upscale cookie cutting marvel and I pay him a premium because I am stupid and am shocked, yes, shocked to discover 2 years later that the resale value of my house has reverted to the mean of similar houses and I need to bring cash to closing..." Well, that's a different story.

In a truly competitive market new houses will not sell above the RCN + land value + a reasonable entrepreneurial incentive. And that incentive is not captured until the first sale of the property. So if you paid too much, that portion of the EI will disappear at that moment.

 

[Doug DeMars]

Yawn...

Only 10 views and no comments yet (oops! 1 comment from Terrel). I guess this is not that "exciting" of a topic. I'm just trying to get a feel for how my colleagues approach this consideration.

FTR, I often adjust for this consideration. If not, I'll make note that there's often a premium paid by buyers for this scenario. I think the most I've ever adjusted is about 10% of the general price-range of the subject's market value. Usually, it's about 5%. And yes...there are plenty of times I don't make the "new" adjustment.

 

[hastalavista]

Ok, Doug.. I voted! . I usually see it a price-difference, and often (not always, like you), I'll make an adjustment.

Terrel provides the logical rationale (so easy, a caveman can understand it) for explaining the adjustment.

Also, we as appraisers typically consider "like for like" (equal quality/condition, equally a substitute). A new home buyer does have some degree of minor customization of the home. This isn't present in a pre-existing home. Yes, the new home buyer pays for the upgrades, but they'll get to select their upgrades (rather than accepting something that most of us would consider an equal substitute). There is, I think, a qualitative impact on price due to this ability. It is intangible, mostly emotional, but real nonetheless in many cases. And it does disappear as soon as the new occupant takes possession.

If I can identify 90% of all value influences that explain a property's market value, I think I'm doing well.
If I can identify 95% of all value influences that explain a property's market value, I think I'm doing great.
I can easily accept a "new house premium" for reasons that are real yet unquantifiable as part of the last 5% I cannot identify.

 

[Joe Flacco]

I just go where the data takes me with this. In large new subdivisions where builders have new homes move-in-ready I usually do see a difference in price with existing 1 or 2 year old homes. But many times the data suggests there is no difference in price. In the city "like-new" is often equal to new.

 

[Randolph Kinney]

New built detached SFR tract homes here are sold without landscaping in the rear. Often, the front landscaping is minimal; grass and a few bushes and trees.

Homes in the same development a year old have completed landscaping and added hardscape as well. This cost money and can be reflected in the resale value.

The premiums charged by the builder for upgrades and lot premiums often evaporate on resale.

Some buyers buy the standard builder package for flooring, appliances, etc. and then upgrade them after they move in and add landscaping and hardscape. They do this to minimize the property tax which is based upon the selling price and not including same in a 30 year mortgage payment.

 

[Doug DeMars]

So if you paid too much, that portion of the EI will disappear at that moment.

This is what I'm talking about. How can we reasonably extract this portion of the EI?

I just got the lucky task of appraising the model home for its purchase. Of interest, the development has 6 different floor-plans. The smallest of the plans is being phased out because (per the sales office staff) it doesn't pencil out and bring enough profit to the developer. The remaining 5 plans will continue to be marketed and sold for the foreseeable future. The "next smallest" floor-plan is about 25% larger than the one being phased out.

And you guessed it...I'm appraising the model being phased out. Upgrades out the waazoo. Way overimproved for the market. I appraised the last 2 homes that sold of the floor-plan this past summer for their purchase near the 380K price point. The model is in contract for...wait for it...490K.

I was able to at least squeeze out of the sales office the down-payment being made by the buyers (over 60% of the contract price). It gets even better with a $10K credit for closing costs in the price. Well...that credit is the first item on the chopping block! :icon_mrgreen:

I already know that I'm not matching the contract...heck no. There's simply no evidence to support it beyond the harebrained acceptance by the buyers for an unlisted/atypically marketed model home. I just need to decide where to opine my value...somewhere above the most recent model match sales and below stratosphere.m2:

 

[Terrel L. Shields]

That's an interesting tax point. I thought about building a house with dark windows so the assessor couldn't peak in tricking the interior out, then making the outside a plain box, with rusty metal roofing and rusty used metal siding or rolled asphalt like you used to see 50 years ago. might build an outhouse behind with a half moon cut in the door and hide my AC unit inside ..but our assessor knows me and Bear Chaney might be a mite suspect that I was up to something

Our market is pretty competitive and land is readily available. It's pretty much a straight line for sales prices from "New" to 30 years old as the chart below shows. If one presumes a 60 yr. total life, then the actual age = the effective age on the sampling (overall) as the 50% mark would be roughly 1983. You can see that of the 5 2013 sales, only one is to the right of the trend line, which suggests either the builder got some premium or there were upgrades to the house ... all were from $94/SF to $107/Sf.

This sampling was from a relatively stable area from Bentonville where WalMart HDQ is the lynch pin of the economy and has been stable for years. I used only 1800 - 2200 SF houses with 2 car garages, no basements, and no remodeling.

 

[Doug DeMars]

The premiums charged by the builder for upgrades and lot premiums often evaporate on resale.

Yep. If there was ever a classic "cost does not equal value" scenario...this is a great example. Or how about "price does not equal value".

It cracks me up when I see lot "premiums" paid by buyers at $50K or $75K in a price range of only 350K to 500K. Often the more credible adjustments for a lot variance are a fraction of what the builder/developer pulls out of thin air.