by Rick Reynolds
In real estate, “comparables” seem to rule initial home valuations as much as any other single factor. Similar size homes in the same or similar neighborhoods often serve as a benchmark before other, less tangible characteristics, like condition, craftsmanship, energy performance, indoor health, or charm, come into play. And while one house may attract legions of buyers, a so-called “comparable” house one or two doors down, may have languished on the market for years. Clearly, many factors are at work when we search for the perfect home.
So what becomes immediately apparent is that all houses are not created equal. They vary tremendously in both qualitative and subjective ways. And some houses have a je ne sais quoi: that certain, indefinable, often elusive quality that both pleases and charms.
However, with real estate agents, appraisers, and lending institutions, the commoditization of homes into “comparables” is deemed necessary to quickly establish a value-neutral baseline for buying, selling, taxation, and collateral. On the consumer side, online home browsers, with very different tastes, often self select at a distance using “comparables,” making the commoditization of homes even more prevalent. But how comparable are “comparables”?
Right off the bat, if “Location, Location, Location” are the first three rules of real estate, then existing homes may already have two strikes against them. First, unless the houses are exactly where we’d like them to be, they aren’t. And second, if they are ideally located, they’re not necessarily what we would have built. But either way, as new as existing houses may be, they aren’t. Depending on how well they were constructed and maintained, the train of time has left the station and down the track is the oncoming money train of home maintenance.
Also, not to mix metaphors, but when buying cars, no one would expect to pay the same for a given car with 100,000 miles on its odometer, as they would a brand new model—no matter how well it was maintained. But surprisingly, we often do the equivalent by expecting new houses to cost the same as older ones. That a new home and a new car are not the same as their used counterparts would seem self-evident. After all, both houses and cars have thousands of parts, and replacing all of them over time is not practical or even possible.
Indeed, sticking with the car metaphor, many of us at one time or another have been reluctant to rid ourselves of the old car because, over time, we’ve replaced every part we could think of. It’s like a new car, we tell ourselves. Alas, reality sets in. We discover parts failing that we never knew we had. And, aside from condition issues, in the interim, newer technologies supplanted older ones and performance had been optimized.
Regarding the last point, home performance in terms of heating and cooling has changed as radically as car mileage. Many houses and cars are vastly more energy efficient than they were a decade ago. That savings in energy expenditures further skews any market analysis using “comparables” that neglect to take performance into account.
So when it comes to house buying, the first three rules should be Location, Condition, and Performance. To get a truly incomparable home, all three qualities must be carefully considered.
Which brings us to cost-per-square-foot. All too often, a cost-per-square-foot analysis can result in a misleading number based on uncomparable “comparables.” When comparing new spec homes, new custom homes, and previously owned houses, the actual cost-per-square-foot figure must take into consideration what’s actually included.
In sum, we must ask ourselves, is the home on land we would have chosen? Is the style of home what we would have designed? Is the home a beautiful, healthy haven for us and our families? Is the home comfortable, energy efficient, and inexpensive to heat, cool and maintain? Is the home built to last and if so, is the home easily adaptable to our changing needs? Will the home require a lot of costly renovation? Will the home need extensive remediation to make it a healthy environment? And last but not least, does the home represent our values?
This doesn’t mean that existing houses—old or new—aren’t often the smartest choice. Sometimes, they clearly are. But what it does indicate is that existing homes are not comparable in a direct cost-per-sq/ft analysis with custom new homes. Because, when all the factors are considered, a home with a higher cost-per-square-foot initially, may well end up being the least costly on our health, well being, and finances.