How To Use Price Per Square Foot In Real Estate
Perhaps the most common mistake I see made by real estate agents and homeowners alike when conjuring an asking price for a home is the over-reliance on the price per square foot measurement.
There are many factors that are used by "the market" to determine the value of a home, so relying simply on one means that you are dismissing the others, and they might hold the key to a home's actual value.
Today, we explain the use of price per square foot and examine several reasons why it should not dominate the home valuation process.
How Do You Calculate Price Per Square Feet
There are at least two methods of determining the price per square foot of a home for the purpose of determining its value in the market. You merely divide the price by the total square footage of the home or you divide the price by the total heated and cooled square footage of the home. The latter is the method that most real estate agents and appraisers use.
So measuring is rather simple, and that is why there are so many home valuation tools on the internet. Websites (like Zillow) know the price and the square footage of most recent home sales, so they come up with an average for a neighborhood and then apply it to every home in that neighborhood.
For example, say your neighborhood has an average home price of $350,000 and an average home size of 2,000 square feet, then your neighborhood has an average value of $175 per square feet. Now if you have a home that is 1,800 square feet, then many real estate agents and online valuation tools will tell you that your home is worth (1800x175)= $315,000.
Unfortunately, this simple method is almost always wrong.
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Price Per Square Foot Does Not Determine Home Values
Here's the bottom line on home valuations. If all things are equal, the price per square foot is an accurate way to value homes. Of course, when have all things been equal between two homes? Have they been maintained the same? Are they the exact same size and layout? How about equipment and roof conditions? Updates? Renovations?
All these factors impact a home's market value, and that is why we don't merely use an appraisal, we must conduct a market valuation with an active, experienced real estate agent to determine the current market value of a home to be sold.
Here are some examples to help you understand why price per square foot can be misleading:
You and your neighbor have similar lots, no pools or views. Homes were built at the same time and are nearly identical inside with the following exceptions:
- You recently renovated your home, your neighbor's home is in good but original condition - If we were to rely on price per square foot alone, then the property condition would not be a component of market value. Do you think buyers care about the condition of a home? Sure, and the condition of certain features of a home impact value far more so than do other features, and that is where field experience is so important.
- You just added a pool - A swimming pool adds no square footage to a home, so does that mean it adds no value either? In a recent blog post, I demonstrated that swimming pools add nearly $40,000 dollars to the value of an average home in Tallahassee.
- Your home is 200 square feet larger than your neighbor - You and your neighbor have very similar homes, yet your home is 200 square feet larger. An ignorant agent or appraiser might merely say that yours is worth (200 x average ppsft) more than your neighbor's, but that would be wrong. With the homes being so similar, both have one kitchen and one yard and one master bathroom and one roof that are very similar. But when we consider the costs of those versus the size of the home, they are more costly on the smaller home than they are on the larger home, thus the price per square foot of the larger home will be lower than the price per square foot of the smaller home. The (price) of the larger home will be greater than the (price) of the smaller home, but not proportionately so as the high-cost items of each are the same. It is for this reason that larger homes typically have a lower price per square foot value than do smaller homes, as the expensive components of the home are spread about (divided) by a larger denominator.
Video Explains Price Per Square Foot
The subject of using price per square foot for home valuations is not new nor is it better understood by homeowners today than it has been in the past. I produced the following short FAQ video in 2011 regarding the use of price per square foot calculations when determining home values and it is still accurate today.
If you would like a real, accurate home valuation, tell us a little about your home and we'll tell you what you can expect to get for it in today's real estate market. We will do it right, not simply relying on the average price per square foot in your neighborhood.
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