Comps versus replacement cost when a market gives you three sales in two years

Question

A 7,800 square foot lake-adjacent house is a useful case for this problem. Within four miles and two years there might be only three arguably comparable closings, one a family transfer, one a teardown, one a genuinely finished house with a guest structure. That's not a comp set, that's an anecdote, and appraisers and buyers routinely land in different worlds because of it. Operators who come from the construction side tend to build the number up from cost: what a finished square foot runs for at that quality tier in that labor market, what failed systems cost to replace, and what a buyer can pay and still hold a margin. The weakness is that cost has no ceiling. Replacement cost says what it takes to build the house. It says nothing about whether anyone in that county wants an 8,000 foot house at all, and at the top end the ceiling is set by taste, not by math. The pure comp approach at least anchors to real dollars somebody actually paid, but with only three sales the extrapolation is doing heavy lifting, and in states that don't publish sale prices, part of that extrapolation is guesswork. A third approach skips self-valuation altogether: identify the two or three most likely end buyers, ask what they'd pay, and work backward to an offer from there. On the largest, thinnest-comp estates, the buyer-anchored approach tends to be the most reliable check on either of the other two.

tashaford30 · Answer

The third option is the one that makes the most sense, and it is also the one to be most nervous about, because it turns the whole deal into a relationship with two or three people. If both of them pass, the number disappears with them. What the situation calls for, girder, is a written scope from someone who is not the buyer before any number goes to the seller. Cost has no ceiling, as you said. That is true of the house. It is not true of the specific repairs, and those can be bounded.

priya_n21 · Answer

A question the thread has not asked yet: if there are only three sales in two years, how long does the eventual buyer expect to sit on it? That holding time has to be inside your number somewhere, and it is not in either of the methods you described.

jessreyes12 · Answer

Marlow's question is the one I'd have been embarrassed to ask and it's better than mine.

The part I don't follow, girder, is the cost approach at the top end. If I build a house for 400 a foot in a market where finished houses trade at 320, then cost told me a number nobody will pay and I've talked myself into an offer that only works if I'm the last buyer. Doesn't the comp set, thin as it is, at least catch that? Three sales is terrible but it's a real constraint. Cost feels like a constraint and isn't one.

I'd probably use the buyer conversations to set the ceiling and the repair scope to set the floor, and if those two cross, walk.

Comps versus replacement cost when a market gives you three sales in two years

3 replies