I want to show you how to compare buying an existing home to building a home in the Sequim or Port Angeles areas. As you look at existing homes, there are several ways to determine what a reasonable fair market value (FMV) would be. First, you can look at comparable sales. You’ll have to do a careful analysis here, because you must differentiate the location and features of a home to arrive at an accurate FMV of your subject property. Second, you can look at the Clallam County tax assessment of the property. The tax assessor has been known to miss the FMV, and that can be by an under assessment or an over assessment. But I have been surprised at how often the assessor’s automated software seems to be improving its accuracy of late. Third, you can do a cost replacement analysis, and I’ll show you how to use these numbers when you’re considering drafting an offer on a home.
Buying an Existing Home or Building a Home
Each of these three approaches is an estimate of FMV. In a healthy market, all three would theoretically be the same number, give or take a few thousand dollars. In a recession, the cost approach or replacement value will typically be higher than the other two. That’s where we are now. The value of being able to do a quick calculation on the cost approach is that it tells you immediately if the current listing price is way out of line. I’ll demonstrate how to do these calculations.
Comparing Building a Home to Buying an Existing Home
The most accurate way to arrive at FMV is by looking at true comparable sales. This is what appraisals are all about, and banks lend on the values of comparable sales. But if you’re looking at existing homes, and you’re wondering if the listing price is reasonable, you can use a cost approach and you’ll know in a matter of three minutes. Knowing the approximate cost of building a home is very informative. Here’s how you do that.
If the home is a medium custom level home with partial hardwood floors and partial tile floors, with a medium custom kitchen, good quality construction, and medium quality fixtures and appliances, the cost of building a home in the Sequim and Port Angeles areas is about $125.00 per square foot. Then add the cost of the lot. If you have a water view lot, the cost will depend on how great a water view, but if you have an average lot with some view of mountains and perhaps a small view of the Strait, you could easily be talking $80,000 for the lot. A nice water view is $200,000, and a beachfront lot can be $400,000. More acreage in a nice area without expensive views, such as a five acre lot can easily be $150,000.
Another cost of building a home is site excavation and the installation of utilities. This will vary with the topography and slope of the site, but if it is a medium lot, you can add $25,000 for site preparation and excavation. If you’re looking at a steep slope, obviously that would be much higher.
Let’s take an example. Suppose you’re looking at a 2,000 square foot home on a nice medium lot, and let’s say the home is currently listed at $375,000. It was listed at $395,000, so you’re thinking maybe the price reduction is now a good price, but you’re from out of town, and you’re not sure. Is $375,000 a good price or not? Where would you start if you want to make an offer?
The reason we go through our own analysis is because we don’t care what the seller or the listing agent says the house is worth. Never assume they got it right. We will do our own analysis to determine what FMV is, and from that number we can decide what a reasonable offer would be. Let’s say we’ve looked at several similar homes, and they were priced in the $330,000 to $360,000 range. We might decide our subject home is right in the middle, or $345,000. Then we would look at the tax assessment, and let’s say that value for this home is $335,000. Then we would run a quick cost analysis to see what it would cost to buy the lot today and the cost of building a home that would be substantially similar.
The Cost of Building a Home
At $125 per square foot, a 2,000 sq.ft. home would cost $250,000. Add $80,000 for the lot plus $25,000 for site preparation and installation of utilities and you have a total of $355,000. But the market is generally below the cost of replacement by some percentage, and for some homes that is 10% to 30% less. There are too many variables to be able to calculate exactly how much less, but the main point is that a home in this recession is certainly not worth more than the cost of replacement. It is almost certainly worth less. So we know it’s worth less than $355,000.
The house is listed at $375,000, but you and I will not be fooled. The comparables tell us the house is worth $345,000. The assessor says it’s worth $335,000. Our cost replacement is $355,000. After further discussion, further analysis of features that the comparables do and do not have, and further discussion about the lot and the views, we might determine that the house is probably worth about $340,000.
This becomes your bench mark in deciding how much to offer and how that relates to the listing price and the cost of building a home. We don’t care that it is listed for $375,000. We care that careful analysis using multiple value approaches tells us the home is worth approximately $340,000. Then we discuss a strategy for the offering price and the negotiations. You can see how estimating the cost of building a home is useful in this context.
The variables here, particularly the value of the lot, will obviously have a significant impact on your numbers, but local experience can help you come up with accurate numbers on the lot. This approach has proven very useful for over 100 of my clients over the past five years. Knowing the cost of building a home is very useful for buyers.
Last Updated on October 30, 2020 by Chuck Marunde
