Is my home a teardown?

Is my Home a Teardown?

After "How's the real estate market?", the two most frequently asked questions are "Is my home a teardown?" and "Should I sell directly to a builder?" So, let's go ahead and look at the teardown market - we'll focus on Lexington, but this applies to many other towns also.

In order to answer this question let's take a look at some important components:

1. How's the real estate market? Spoiler alert - the real estate market, in almost all Greater Boston towns, is HOT!
2. Selling off-market to a builder.
   
3. Will builders compete with home buyers?
   
4. MA Properties "Buyer or Builder" program

Lexington Real Estate Market

In our recently published Lexington Market Review we commented that as the year progressed it became clearer what the longer-term impact of COVID was, and what its effect would be on the housing market. Downsizers, many of whom had been staying in their homes to take advantage of price appreciation, decided to sell. Existing homeowners, who historically would have remained in their home, re-evaluated their home needs and chose to either renovate or move to a home that better met their changed requirements. First time home buyers entered the housing market in numbers that we have not seen in the past. Foreign buyers, now able to travel to the US, entered the market in increasing numbers.
This meant that we saw an increased number of buyers chasing a relatively large, but not large enough, inventory of homes on the market.

One of the strongest indicators of demand is the ratio of the sales price to the list price. If a home comes on the market for $1M and sells for $1M, then this is a sale price to list price ratio of 100%. An average ratio of 100% or more, means that on average, there was competition resulting in buyers competing to buy the home and paying over the asking price to do so. After dropping to an average of 96% during the housing crash, this ratio increased to 100% in 2013 and this continued largely unchanged into 2020. 2021 saw a dramatic increase in this indicator to 106% sale price to list price ratio. This high value is indicative of intense competition for homes that come on the market and a very strong seller’s market.

Even with a large number of homes for sale, increased demand meant that we saw a 14% increase in average prices which equates to approximately a 10% increase in “real” price appreciation.

In conclusion, the statistics are showing what we see 'on the ground' - we have never seen a stronger sellers market than we are seeing now.

Selling Off-Market to a Builder

Many homeowners have been approached by builders and agents touting the benefits of selling direct to a builder. The benefits stated are that there is no real estate commission, take only what you want and leave the rest for the builder to dispose of, staying in the home for a period of time and many other components that are advantageous to the seller. 

The challenge with this is that the price a builder is willing to pay is often not a competitive price to what could be obtained on the open market. 

We looked at the average new construction sales price and the average off-market teardown price (for the same home) for the last 8 years. It closely matches the rule-of-thumb (rule of thirds). Based on the projected new construction sale price, a builder budgets a third to purchase the teardown (acquisition cost), a third for build costs, and a third for profit.

Although when you look closely at 2021 data - teardown prices reduced while new construction prices increased dramatically. In fact, the average home price jumped 14% in 2021 - except with the off-market teardowns the priced actually REDUCED!

Why is this? If I was to speculate then I would assume that given the dramatic increases in building materials during 2020 and 2021, along with increases in sub contractor costs, that the builders are trying to offset some of these 'hidden' costs by keeping their acquisition costs lower. The large majority of teardowns are sold off-market which pulls the average price down, as the builders are able to offer the sellers less than they need to, in the non-competitive market of a direct off-market sale. 

Again, our strong recommendation is that if you consider your home a teardown, bring it on the market and the builders will compete for it. The data supports this recommendation.

Will builders compete with home buyers?

If a seller is contemplating selling off-market to a builder, then this question needs to be raised. 

Would the final sale price be higher selling off-market to the first builder who came along, or would the final sale price be higher if you put the home on the market and let the builders compete with home buyers to buy the home? The simple answer is a resounding 'NO'. The highest price would be obtained by coming on the market and letting the builders and buyers compete to buy the home.

It comes down to basic ratios. These ratios give the same result whether you're talking about off market sales, or 'Coming Soon' sales, or 'whisper sales'. Let's say that 10% of the people who see the home fall in love with the home, and want to buy it. Lets say that 10 people see the home as an off market, or Coming Soon or whisper sale, then that is only 1 buyer. But, using the same ratios, if 100 people see the home because its on the market, then you have 10 people who want to buy the home - the price goes up.

But to show this in practical terms. Here's a couple of homes that came on the open market, and sold, in 2021. Homebuyers and builders competed for the home, and in these two examples, they were bought by builders. 7 Blueberry Lane sold for 41% over the asking price - that's $418,500 over what the home was listed at! 15 Phinney Road sold for 21% over asking. These are just two examples. This is what happens when the builders compete with each other, and with homebuyers. It all comes down to who wants the home/land badly enough.

MA Properties "Buyer or Builder" Program

Clearly there is a lot to think about when wondering if your home is a teardown - 1) should you sell directly to a builder, or 2) should you bring the home on the market. To provide as much information at this juncture to enable a smart decision to be made, MA Properties developed the "Buyer or Builder" program. With this program we provide both a detailed market analysis of what a buyer would pay for your home, and a ballpark offer from 2 local reputable builders.

With having this additional information on the difference with what a buyer and a builder would pay, it allows the seller to determine the pros and cons of each method, and what works, logistically and financially, for the seller. Its all about having accurate information to be able to determine which is the right approach.

So, if you are wondering whether your home is a teardown, then please reach out to us - we'll explain all the options, give you the data and help you make the right decision and (and this is the important one) maximize your sale price (not the builder's profit)!