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how much would a new build depreciate in the first year

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  • how much would a new build depreciate in the first year

    Since I'm looking for homes, I've been coming up with a ton of questions, but not a ton of answers (at least few that are straight forward). I recently looked at a new build (custom build for exactness) that would be considered expensive for the size. For a reason unknown to me at this point, the owner built the home this year and is now moving to another state. According the agent at this open house, the owner was the builder of the house and a local builder.

    So, even though it was built this year, since it's been lived in does that depreciate the value of the home (much like driving a new car off the lot). All I can find about depreciation is in regards to rental properties and that it's about 3.8%/year.

    Any insight to this would be appreciated. Thanks

  • #2
    Isnt real estate supposed to appreciate every year?

    Aka I have no clue

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    • #3
      I believe the value of residential property is depreciated over 27.5 years, for tax purposes. The land is generally not included in this calculation.

      If you are asking if you can put an offer with the corresponding time frame's depreciation, it doesn't work that way. Generally, cars depreciated and home values appreciate. You probably need to look at recent comps in the area.

      Maybe the current owner will be motivated to sell quickly since he's moving out of state. And you know if he built his own house he probably got into it for a great price, so he may have some flexibility unrelated to "depreciation".

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      • #4
        Comparable new build vs used tends to be about 15% more, dependent on local market conditions. But I wouldn't start with his price and deduct 15%. I'd do a search for comparable homes and make an offer from there. Remember his custom build is not yours - there are features he paid for that you may not want or want to pay for. That's the risk when you custom build.

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        • #5
          Thanks all. Ideally, the house will sit on the market for a couple months and naturally fall in price, and could be further negotiated down after that.

           

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          • #6
            It is worth what someone is willing to pay for it.
            If you can still build a custom home why would you pay the same price for a not custom home? In my neighborhood the new homes are going for 350k but the secondary market is around 300k.

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            • #7
              Not sure if there is a right answer here.  there is a house across the street that was brand new but nobody liked it.  So it sat until it fell in price.  Then there is the house 2 streets over that made a killing after 6 months because they built a house that everyone else wanted to build except they didn't have to suffer through the year from ************************ to build it.

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              • #8




                Comparable new build vs used tends to be about 15% more, dependent on local market conditions. But I wouldn’t start with his price and deduct 15%. I’d do a search for comparable homes and make an offer from there. Remember his custom build is not yours – there are features he paid for that you may not want or want to pay for. That’s the risk when you custom build.
                Click to expand...


                This ^^^

                When I researched this a few years ago, I learned that new homes usually sell at a 14% premium to comparable "used" homes.

                However, the price the last owner paid is irrelevant here. You need to do market research to learn the selling price of comparable homes. That's what you'll need to pay, more or less.

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                • #9
                  A lot depends on whether there is still buildable land near the house.  A new house built on the site of a tear-down or on a long-vacant lot in a fully built-up, desirable neighborhood will depreciate less than one which is only a short drive away from soon-to-be-developed vacant land.  After all, why buy a nearly-new house when you can build exactly what you want a mere five minutes' drive away?

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                  • #10
                    The problem with purchasing houses that have just been built is that people usually want to sell them for what they paid for them to break even or make a profit.   I've seen new houses linger on the market for years because the owners or builders priced them way too high because I'm sure that's what it cost for them to build it or they want to make a profit on their labor.   There is a lot of variability in building a home, you can get a good price on labor with carpentry or get ripped off, you can buy appliances at whole sale prices or on sale or pay the sticker price plus a mark up, your builder/general contractor can take a large cut or a small cut, etc.   A few of my neighbors are home builders, I think that the industry can be very profitable as most homes are sold for much more then the land, material and labor costs.  The profit in home building probably comes from knowing the right subcontractors that don't rip you off and do a decent job.   Anyways, I agree with what others have been saying, just compare the price based upon market comparables, there probably is a slight premium for the appliances and everything being new, but not as much as what some people seem to try to want to get for their new home.

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                    • #11
                      The price of a home (or any real estate) is broken into two things.  The land and the improvements (the building).  The land is the only thing that typically appreciates.  The improvements are subject to entropy and depreciate over their functional life.  Depreciation of real estate is mostly linear.  There are drop offs once major cap ex / maintenance items are due like roof replacement, etc.

                      As this appears to be a one off custom home, the seller is going to tell you what his construction costs were and argue from there.  Realistically, this is the only way to determine the value of his home as there are no real comparables in the rental or sales market.  BUT, as mentioned before, if this custom house has no real added value to you or to the rest of the market, it really doesn't matter what he paid.   If you can buy a lot nearby and build a perfectly good house to the market's liking for 30% less, then the seller is out of luck.  It may be tough to get him to understand that.

                      If you like the house and you think you're the only bidder.  Make your offer.  Let it be known your timeframe and let him decide.  There is a reason a lot of these one off homes sit on the market.  It usually has a lot to do with the delusions of the owner.

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                      • #12
                        The seller is the builder and has also built other homes in the area (one of the people looking at the open house at the time was a retiree who was looking to downsize in the same neighborhood, the builder built her home 10 or so years ago... it was hard to tell if she was planted there or was just an oversharer). It's selling at about $180/sq ft, which is overvalued for the local resale market (about 95-105/sq ft), but a little lower than a custom build (200-250/sq ft). People who have lived here prior to 2010 say that 250/sq ft custom build for the area is way overvalued. You'll basically be lucky to recoup cost, especially at 600k (I have colleagues that'll lose over a million because of overbuilding a custom build).

                        We'll probably just keep in in the back pocket and let the market forces dictate the price. Homes over 400k tend to sit for a while. Also, our lease isn't up until June, so we have time. As with everything, as long as you don't HAVE to buy something, it makes it easier to walk away.

                         

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                        • #13


                          The seller is the builder and has also built other homes in the area
                          Click to expand...


                          This not uncommon in "true" custom home neighborhoods. Builder builds a "spec home" and lives in it for awhile. The timing of "completion" provides a big chunk of property tax relief (under construction vs occupied) for a large portion of a year.

                          We had three builders living in the "spec houses" the built, which one I got to know. It is similar to the owner of an auto dealership driving cars for 3 months max. New car all the time and they unload them as "demos". Probably some hit expected but no where near the dropoff of an arms length customer.  You probably have a well built house. His own crews handle any sprucing up that needs to be done. Moving out of the area? Only if he is moving on. Builders also have deals with realtors regarding commissions.

                          Price? All current market driven. He may be actually asking more than he would have asked originally. It is a used house. Buyer beware as if it was an individual. Look at the age and comps. Do not compare it to a "new custom build", it's not. By the way, you can lowball a bid and he just might take it. To him, it is "inventory" with debt or capital tied up. Builders can be "highly motivated seller's".

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                          • #14





                            The seller is the builder and has also built other homes in the area 
                            Click to expand…


                            This not uncommon in “true” custom home neighborhoods. Builder builds a “spec home” and lives in it for awhile. The timing of “completion” provides a big chunk of property tax relief (under construction vs occupied) for a large portion of a year.

                            We had three builders living in the “spec houses” the built, which one I got to know. It is similar to the owner of an auto dealership driving cars for 3 months max. New car all the time and they unload them as “demos”. Probably some hit expected but no where near the dropoff of an arms length customer.  You probably have a well built house. His own crews handle any sprucing up that needs to be done. Moving out of the area? Only if he is moving on. Builders also have deals with realtors regarding commissions.

                            Price? All current market driven. He may be actually asking more than he would have asked originally. It is a used house. Buyer beware as if it was an individual. Look at the age and comps. Do not compare it to a “new custom build”, it’s not. By the way, you can lowball a bid and he just might take it. To him, it is “inventory” with debt or capital tied up. Builders can be “highly motivated seller’s”.
                            Click to expand...


                            Agree with this being a common tactic of builders. We recently bought a townhome directly from the builder in a planned townhome development within our city. Our lead project manager has done this frequently - live in a home for only a few years and then move to the next one. I couldn't imaging doing this many moves with a family, and I presume his children go to private schools so that they aren't changing school districts every few years.

                             

                            Additionally agree with the appreciation/depreciation being more to do with land/location. I'm not too concerned with rapid depreciation off our place given that we bought in an already established neighborhood with lots of shops, restaurants, etc. where currently the only way for anything new to come in other than the rest of our development is through tearing down existing houses (common in our area). There's also a ton of land nearby that is actively being developed that the area. I'd be concerned about depreciation in some of the more "developing" neighborhoods where you are hoping the reported plans are going to come to fruition.

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                            • #15


                              There’s also a ton of land nearby that is actively being developed that the area. I’d be concerned about depreciation in some of the more “developing” neighborhoods where you are hoping the reported plans are going to come to fruition.
                              Click to expand...


                              Developing neighborhoods often are constrained by "phase 2, .. through phase 12" depending on the area.

                              Highly developed areas have another danger. This is not the "suburbs" but the urban areas. The value of the land is more important than the building. Population density starts coming into play. Thus, "townhouses", luxury apartments, and "high rises" can become economically more viable than single family housing. It is extremely difficult to fight zoning and deed restriction changes in the types of commercial and residential properties that begin to evolve.

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