Using Resales As Market Comps?
When looking at a potential project and conducting the market analysis, the best market comps tend to be from other new home projects in the near vicinity, with similar attributes. If you can find comps with similar lot size and square footage, the analysis can be a bit more straight forward and negates the possible need to look closely at the resales in the area. But new home comps may not always be directly applicable, which often seems the case in the infill markets. As a result, you may need to look a bit more closely at the resale market to understand potential home prices.
Especially in the infill markets with older housing stock, analyzing the resales can be a bit tricky and requires some creative analysis. Many times, trying to use resales as comps for new homes can end up being a comparison of apples versus oranges. First, I will tend to use an online site like Zillow or Redfin and I make sure to focus heavily on the “Sold” homes. If you look at active listings, the home prices can tend to be a bit high and not reflect the actual closing prices in the market. I rarely look at the estimated values generated by these online websites.
In my initial queries, I will set filters to see if any comps are showing up where the homes were built in the last 5 years. If none, you can keep going back 10, 15, or 20 years until you find some comps. I think the newer the homes, the more likely that the lot size, square footage, and features will match up better with what you are thinking of building. The older the homes, the more likelihood you have the apples and oranges.
In these instances where the resales are homes that are 30 years and older, the floorplans, square footage, and lot size tend not to match up as well. As example, suppose you think the market makes sense for 2,000 sf homes on 3,000 sf lots. But you find that many of the comps are 1,400 sf single-story homes on 7,500 sf lots – built in the 1950’s. Or you might find 2,200 sf homes on 6,500 sf lots, built in the 1970’s. The challenge is trying to determine what your new home prices might be when these older resale comps just don’t line up. In these cases, having some good work experience or a competent market consultant is very valuable. I think in many cases that a builder will underestimate what the market will pay for a new, small lot home.
One last comment has to do with the good news and bad news. The bad news is that you may not have new home comps to help with your analysis. The good news is that you may not have new home comps, meaning that your new home project could have little competition once you’re up and running in the marketplace.
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