New SFH construction valuation
Hi everyone,
My wife and I have been in the STR space for a while now and are looking to shift towards long-term rentals. The market in Sacramento is pretty competitive, so we've been thinking about purchasing infill lots to build new SFHs to add to our portfolio. I've done a ton of reading/research and have learned a lot of useful information, especially from many of the posts here on BP, so I'm grateful for the tons of knowledge made available within this community!
Our plan is to purchase an infill lot with cash and take a construction loan out for the build. The issue I'm running into with the lots I've found, and I've looked at several different areas within and surrounding Sacramento County, is that the numbers don't pencil out.
For example, this available lot at https://www.zillow.com/homedet... is listed for $159k. Accounting for $25k in building permits, school zone fees, etc, would already put it at $184k. We'd consider building a 1500 sqft home on the lot @ $250/sqft, so that would total out to $559K ($375k build budget + $184k purchase/permits). I ran some comps around the area and the average price per sqft on home sold within 12 months is $336/sqft (average price sold of selected homes was $405k). So taking that figure, the after build value estimation would be around the ball park of $504k, which would put us in the negative.
So my questions are: Am I approaching this wrong or are my figures off? Are new home/builds valued differently? Assuming the response may be that the lot is over priced; therefore, I would need the seller to reduce the selling price by 55k just to break even in this situation, but I dont see that happening. So would I need to resort to wholesellers to get a better deal on lots? Lastly, with rates being so high, would this even be a good time to explore this idea? Even when I'm looking at purchasing to rent LT, the area rents typically don't cover the mortgage expense.
Any insights is greatly appreciated and thank you in advance!
Good afternoon,
Hoping to be able to get in contact with someone who can share some insight. Thanks.
Hi Aidan, looks like this is an old post, but I would just say this - make sure your comps are as similar as possible in terms of year built, home size, beds/baths, lot size, school district. Sounds like the deal you are looking at isn't a deal, though. On to the next one :)
Quote from @Aidan Nguyen:
Hi everyone,
My wife and I have been in the STR space for a while now and are looking to shift towards long-term rentals. The market in Sacramento is pretty competitive, so we've been thinking about purchasing infill lots to build new SFHs to add to our portfolio. I've done a ton of reading/research and have learned a lot of useful information, especially from many of the posts here on BP, so I'm grateful for the tons of knowledge made available within this community!
Our plan is to purchase an infill lot with cash and take a construction loan out for the build. The issue I'm running into with the lots I've found, and I've looked at several different areas within and surrounding Sacramento County, is that the numbers don't pencil out.For example, this available lot at https://www.zillow.com/homedet... is listed for $159k. Accounting for $25k in building permits, school zone fees, etc, would already put it at $184k. We'd consider building a 1500 sqft home on the lot @ $250/sqft, so that would total out to $559K ($375k build budget + $184k purchase/permits). I ran some comps around the area and the average price per sqft on home sold within 12 months is $336/sqft (average price sold of selected homes was $405k). So taking that figure, the after build value estimation would be around the ball park of $504k, which would put us in the negative.
So my questions are: Am I approaching this wrong or are my figures off? Are new home/builds valued differently? Assuming the response may be that the lot is over priced; therefore, I would need the seller to reduce the selling price by 55k just to break even in this situation, but I dont see that happening. So would I need to resort to wholesellers to get a better deal on lots? Lastly, with rates being so high, would this even be a good time to explore this idea? Even when I'm looking at purchasing to rent LT, the area rents typically don't cover the mortgage expense.
Any insights is greatly appreciated and thank you in advance!
If the current numbers don't align, there are a few alternatives to consider:
a) Look for better-priced infill lots: Explore different neighborhoods or consult with wholesalers and brokers who might offer more attractive deals on suitable lots.
b) Consider existing properties: Assess the market for existing properties that can be renovated or converted into long-term rentals. This approach may offer better cost-effectiveness and potentially higher returns.
c) Revisit the rental market: Analyze rental rates and trends in various neighborhoods within and surrounding Sacramento. You may find areas where the rental income better aligns with your investment goals.
I'm a local broker and investor here in Sacramento. I've never constructed a new home but renovations and adaptive reuse are my new focus as of late. I also manage over 100 STR properties. Happy to consult if you haven't already connected with a local pro.
Quote from @Andrew Benton:
Hi Aidan, looks like this is an old post, but I would just say this - make sure your comps are as similar as possible in terms of year built, home size, beds/baths, lot size, school district. Sounds like the deal you are looking at isn't a deal, though. On to the next one :)
Hi Andrew,
Thank you for the feedback. I once spoke to local appraiser who told me that new builds doesn't get that much more favorable valuation when comparing to existing homes. The main driving factor when appraisals are done are comps sold within a 1-2 year span in its local market. I'm not entirely sure whether thats accurate or not, so I wanted to see if you had any insight on that. The other factors you mentioned, such as home size, bed/bath count, lot size, and school zone surely do have an impact on the appraisal value. Thanks for your help!
Quote from @Noah Laker:
Quote from @Aidan Nguyen:
Hi everyone,
My wife and I have been in the STR space for a while now and are looking to shift towards long-term rentals. The market in Sacramento is pretty competitive, so we've been thinking about purchasing infill lots to build new SFHs to add to our portfolio. I've done a ton of reading/research and have learned a lot of useful information, especially from many of the posts here on BP, so I'm grateful for the tons of knowledge made available within this community!
Our plan is to purchase an infill lot with cash and take a construction loan out for the build. The issue I'm running into with the lots I've found, and I've looked at several different areas within and surrounding Sacramento County, is that the numbers don't pencil out.For example, this available lot at https://www.zillow.com/homedet... is listed for $159k. Accounting for $25k in building permits, school zone fees, etc, would already put it at $184k. We'd consider building a 1500 sqft home on the lot @ $250/sqft, so that would total out to $559K ($375k build budget + $184k purchase/permits). I ran some comps around the area and the average price per sqft on home sold within 12 months is $336/sqft (average price sold of selected homes was $405k). So taking that figure, the after build value estimation would be around the ball park of $504k, which would put us in the negative.
So my questions are: Am I approaching this wrong or are my figures off? Are new home/builds valued differently? Assuming the response may be that the lot is over priced; therefore, I would need the seller to reduce the selling price by 55k just to break even in this situation, but I dont see that happening. So would I need to resort to wholesellers to get a better deal on lots? Lastly, with rates being so high, would this even be a good time to explore this idea? Even when I'm looking at purchasing to rent LT, the area rents typically don't cover the mortgage expense.
Any insights is greatly appreciated and thank you in advance!
If the current numbers don't align, there are a few alternatives to consider:
a) Look for better-priced infill lots: Explore different neighborhoods or consult with wholesalers and brokers who might offer more attractive deals on suitable lots.
b) Consider existing properties: Assess the market for existing properties that can be renovated or converted into long-term rentals. This approach may offer better cost-effectiveness and potentially higher returns.
c) Revisit the rental market: Analyze rental rates and trends in various neighborhoods within and surrounding Sacramento. You may find areas where the rental income better aligns with your investment goals.
I'm a local broker and investor here in Sacramento. I've never constructed a new home but renovations and adaptive reuse are my new focus as of late. I also manage over 100 STR properties. Happy to consult if you haven't already connected with a local pro.
Hey Noah,
Thanks for reaching out! Since we're fairly new to the real estate game, we don't have much connections with local wholesaler folks, so I'd love to connect and pick your brain a little if you're available!
Happy to connect any time. Feel free to DM me your contact info and I'll reach out. :)
Aidan, in every market I have been in, there is a premium price paid for new product. In some markets that new build premium is more and in others it is less.
I took a look at Sacramento and found a quick example. Here are two, 4bd 2ba homes that sold within 3 months of each other. $420K was paid for the 1,750 sqft home built in 1956. $572K was paid for the 1,859 sqft home built in 2022.
4 bd | 2 ba | 1,750 sqft
160 Santiago Ave, Sacramento, CA 95815
Sold: $420,000 | Sold on 05/18/22 | Year 1956
Link: https://www.zillow.com/homedet...
4 bd | 2 ba | 1,859 sqft
327 Jefferson Ave, Sacramento, CA 95833
Sold: $572,500 | Sold on 08/09/22 | Year: 2022