Luxury Real Estate Pricing Benchmarks
We all know that luxury homes can be difficult to price. Luxury homes can be unique, different and one of a kind. Using pricing benchmarks can make it a little easier. A benchmark is a baseline derived from an element of comparison. Using a baseline affords us a method to compare a luxury property to an element of the market.
An element could be front feet on the water whether it be ocean, lake or river. We can talk about acreage, square footage of living space or percentages of assessment. That’s one of my favorites because a lot of buyers put credence in assessed valuation. Here’s an example: You have a house that sold for a million one that was assessed for a million. That means it sold for 110% of assessment. If you look at a collection of luxury sales compared to their assessed valuation in a given area, you can establish a benchmark for an area such as the 110% just mentioned.
Another benchmark is the cost to replace or reproduce a particular property. Before we go too far, it is important to understand the difference between replacing and reproducing a property.
For example, if you crack up a brand new car and the body shop provides you with another car that has four doors, four tires and leather seats, they replaced the utility or usability of your car. You will get from point B to point A, but it’s not a reproduction of your new car.
Reproduction on the other hand, is an exact replica of your new car prior to the crash. Every detail, finish and feature is the same as you had before. Similarly, reproduction of a house would include every luxury item whether its platinum faucets or decking that was recovered from the Titanic. Everything is exactly the same. Reproduction cost is higher than replacement cost.
The question with reproduction cost is “would you”? If you were starting over from scratch, would you use the same design? Would you use those same exotic materials or would you do things a little bit differently? So when using reproduction costs as your benchmark you need to be careful and ask youself if a typical luxury buyer would want the exotic features found in the property you are pricing.
When you’re estimating the range of prices to advise a seller of an offering price of their luxury home, reproduction costs typically will set the high-limit of value. The only exception to this would be if there is something with the land that’s unusual or scarce like enormous acreage or a rare promontory on an exclusive gated island. In that case someone may pay more than reproduction cost because the location is irreplaceable. In most cases, however, reproduction cost can establish a baseline to which you add potential emotional component. In most cases, it’s rare for a high-end property to sell for more than reproduction cost.
One last thought about pricing and benchmarks: Never use averages to arrive at a price range for a listing. You are a luxury real estate professional. A computer can average. You can teach animals in the zoo to do averages. You can talk about average price per foot or average assessment ratios, but you never average other prices to arrive at one for your listing.
The word that describes what the luxury real estate expert does is reconcile. You reconcile the data available to you to recommend a price range based upon your experience and knowledge. This is a subtle but important point.
As always I look forward to your questions. Send them to me at jack@jackcotton.com. Don’t forget that if you bought my book you have a 20 minute one on one phone consultation. Fill out the form, fax it to me, and we’ll schedule our time.
Until next time, make it a great week!
