Real estate investors should know exactly how common their type of home is in their market area. To answer this question, investors have to start by identifying and understanding the differentiating characteristics of the total inventory of existing area homes. Then they should pick a characteristic to study. For example, how many homes are 10 years old versus 50 years old? What percentage are colonials versus ranches? How many are at least 2,500 square feet or 5,000 square feet or more? What percentage of condos in the market area are apartment style or townhouse style? How many one bedroom condos exist versus those with two bedrooms?
Many buyers and sellers start their home search or home sale in a vacuum of information. They start looking at homes and marketing homes before they put their entire effort in context. The typical buyer and seller are focused on active and sold homes in a particular geographic area, style and price range. Yet, they often don’t know how their total inventory of homes breaks down by specific characteristics.
Each type of home in a given market area and price range can be more or less rare. Given that buyers and sellers are limited to a finite inventory, it makes sense to know what the total inventory and potential active inventory of homes is. For example, in an established older town that has been developed for some time, most homes will be older. Perform a simple exercise and determine what percentage of homes are old, somewhat old or new. In Stamford, Conn., based on five years of Consolidated Multiple Listing Service data, 54 percent of sold homes were more than 50 years old and 81 of sold homes were more than 30 years old.
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Newer and gut-renovated homes in this area are less likely to depreciate, even in a slow market. The supply in Stamford has not exceeded demand for a long time, but this may not be the case for newer homes in newer towns and neighborhoods. In this particular market, age is a differentiating characteristic. AÂ 10-year-old house is relatively rare; just one in 10 homes are that new. In another market area, a beach front house, or a house with a deck or pool might be the rare find.
The same exercise can be done in regard to any characteristic that differentiates homes in a given market area, such as style of home, types of renovations and features, including two- versus one-car garages. For example, colonials comprise about 50 percent of the total inventory of Stamford, and most have similar layouts. When negotiating a price in this context, the buyer has the advantage. Unless the specific colonial has truly unique updates, another similar colonial is likely to be available for sale at the same time, or in the near future.
This type of analysis should always impact listing prices and buyer negotiations. If another home with similar qualities is likely to come up for sale, the buyer’s negotiation tactics should be more aggressive. If a buyer is making an offer on a home that is rare in the neighborhood that they desire, they should consider paying a premium or making their starting offer strong.
The key point is that the makeup of both current and potential available inventory can be just as important as home features and sold comparables when determining the likely sales price. For example, in Stamford, builders have not built one bedroom condos for a long time, so the inventory of one bedroom condos is low. This has caused a steady and consistent appreciation for even the oldest one bedroom condos. In contrast, there has not been a similar appreciation in older two bedroom condos. This is primarily because new construction for two bedroom condos has been increasing every year for about five years.
For real estate investors, knowing how unique or common the home they want or have is should be an important factor in buying and pricing. Anything that is in short supply is likely to have a relatively high demand and high price, even in a slow market. The supply and demand analysis should go beyond the number of total homes available versus a prior year. It should isolate the characteristics that truly differentiate homes from others in their market area. Then investors can determine how common or rare their home is now, and how common or rare it could be in the future. Investors should aim for a rare home and hedge their risk in a slower market or downturn.
