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Why Buy A New Construction Home: Price Appreciation - Interview with an Appraiser

Dena Kouremetis
A veteran of the homebuilding industry, Dena Kouremetis is the foremost real estate columnist specializing in new home issues, trends, products and designs. Her columns appear in the New York Post as well as other newspapers throughout the U.S.

No one has a crystal ball when it comes to investing, whether it is the purchase of stock, fine art, or classic cars. This is also true with the purchase of a home. But how does buying a new home spell a good investment? And how can you take all the steps necessary to try to make a new home a better investment from the start?

Helen Smotherman of Sacramento, CA-based HIS Appraisals is a 25-year veteran in appraising both new and resale homes, but said she would love to retire just on appraisals for new construction. In a recent interview, she graciously offered her views.

A Metamorphosis of Sorts

Homes experience a life of their own, from infancy to maturity, says Smotherman. Oftentimes, the greatest appreciation takes place within the first seven years of ownership, but in light of the recent economic boom, it can be as few as three years or so. “You tend not to lose money on a new home purchase,” said Smotherman. “As with other investments, sometimes the longer you sit on it, the more valuable it gets.” Exceptions even to that rule are happening in areas like the ones in which she appraises. “There are several hot spots right now in the Sacramento area where a house can appraise for $50,000 more than the original purchase price in less than a year!”

Hedging your Bets

When asked how to ensure the best appreciation as early as possible, she said, “The most important thing to remember with a new home purchase when you are thinking of either selling or refinancing is to get the things done to it to make it look finished as soon as you can,” she said, “especially landscaping.” Other things new home owners can do (if not done through the builder while the house is under construction) is to add their own upgrades as quickly as possible, such as replacing vinyl floors with tile in kitchen and bathroom areas, since these are the places where improvements pay off the best.

“What’s great about new homes is that the buyers themselves are establishing value because of the sheer numbers in which they are buying,” said Smotherman. “Sometimes a homebuilder will assign me to an entire project they are building on behalf of their preferred or in-house lender. In that case I will receive not only the floor plans in advance, but also a sales contract addendums, showing how each individual buyer has ordered up their new home. Because of the sheer numbers, it’s rare that a house is not appraised for whatever a buyer is paying for it.”

The upgrade game, according to Smotherman, has changed greatly over the past decade. “People aren’t waiting until their third or even their second move-up home to add the luxuries these days,” she said. “Upgrades for production (tract) homes can be anywhere from zero to $150,000-plus.” Higher upgrade figures that used to be reserved for the occasional custom-built home are now di rigueurin even modestly-sized homes, she acknowledged.

Upgrades in the Appraisal World

“Actually most upgrades in new homes can be given full value,” said Smotherman. “The things that are tougher to appraise for full value are the extremely personal choices people make when having their homes built.” For instance, she added, a swimming pool will get only about 50% of what a new home buyer may have spent on it because in many areas a pool is desired by about the same number of homebuyers in a resale mode as those who consider it an unnecessary responsibility.

Extremely high-tech additions for networking computers, whole-house entertainment systems and sophisticated security systems should probably be purchased primarily for their value to original new homebuyers themselves, and not necessarily for resale value, said Smotherman, since a subsequent buyer of the home may not be as interested or excited about them.

In terms of decorating, Smotherman agrees that extremely individual tastes in style and color, (no matter how costly it was to match an entire house to a certain shade of lime green) may also not receive full value.

The Chicken or the Egg?

Homebuilders try to choose up-and-coming areas, attempting to “see into the future” for their homebuyers. Now becoming more and more common across the U.S. master-planning entire communities, showcasing homes by several different builders, but also including open space, parks, school sites, hiking and biking trails, or security amenities usually fares well for the appreciation of new homes. For the same reasons you were attracted to that aspect of your new home purchase, others will follow suit.

It is sometimes because of the creation of new home areas that streets get widened, utility infrastructures get attention, small businesses crop up and schools are built. The influx of new property taxes and the need to fill the demand of the new residents can have a tremendous affect on value in a given area. It is sometimes amazing how an area can be totally transformed because a builder or group of builders decided to “take a chance” on a new home community.

Is a New Home Purchase Right for You?

If you are considering the purchase of a new home, try to take all of these elements into account when making your final decision. Even though no one can predict the future, many a financial expert has maintained that a real estate purchase, especially a new home, can be one of the best investments you’ll ever make.