Comps or replacement cost: valuing an estate when the market gave you three sales in two years

Question

I priced a 7,800 square foot lake-adjacent house last month and the appraiser's world and mine didn't touch. Within four miles and two years there were three arguably comparable closings, one of them 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.

I came off the construction side, so I tend to build the number up from cost. I know what a finished square foot runs for that quality tier in that labor market, I know what the failed systems cost to replace, and I can back into what a buyer can pay and still make a margin. The problem is that cost has no ceiling. Replacement cost tells you what it takes to build the house. It tells you 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 three sales you're extrapolating hard, and in states that don't publish sale prices you're partly guessing at what those numbers even were.

Third option is that you don't value it yourself, you find your two or three most likely end buyers and ask what they'd pay, then work backward to your offer.

How are people actually doing this on the big ones?

tashaford30 · Answer

The third option is the one that makes sense to me and it's also the one I'd be most nervous about, because it turns the whole deal into a relationship with two or three people. If both of them pass you don't have a number anymore, you have nothing.

What I'd want, girder, is a written scope from someone who isn't the buyer before I ever gave a number to the seller. You said cost has no ceiling. That's true of the house. It isn't true of the specific repairs, and those you can bound.

priya_n21 · Answer

Naive question from someone who is never going to touch one of these: if there are only three sales in two years, how long does the eventual buyer expect to sit on it? Because that holding time has to be inside your number somewhere, and it isn't 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 or replacement cost: valuing an estate when the market gave you three sales in two years

3 replies