99% of my posts here are designed to help Realtors grow a better, more profitable business. This post is no different. However, unlike most of my posts, this one is just as applicable to the real estate consumer as it is to the real estate practitioner. Why? Because I hope it will dispel one of the most prevalent mistakes in real estate: the fallacy of price per square foot. Despite its prevailing use in valuing property by both Realtors and consumers, and its marketing appeal by certain builders…
The truth is that price per square foot is garbage and means almost nothing.
But how can it be garbage if everyone uses it, you ask? Let’s take a look, first of all, at the simple mathematics of why it is garbage and then we’ll examine why there is no practical application of the price per square foot measurement that, at the end of the day, matters. (One quick caveat: this post is not really applicable on commercial properties.)
The Simple Math
Price per square foot doesn’t hold up under the microscope of scrutiny because of simple mathematics. Whether you are selling a home and trying to figure out a sales price, buying a home and trying to see what kind of value you’re getting, or using price per square foot as a marketing technique, you are wrong. Here’s why. In an average community there is a wide range of home size, shape, and features. To take a real simple look at this, consider the following:
- A one-story home costs more to build than a two-story home. As such, the price per foot on a two-story will be less than that of a one-story.
- A smaller home will have a higher price per foot than a larger home. If a garage door costs $1000, you have fewer square feet to spread that cost over on a smaller home. Thus, the higher price per foot is natural.
- What about upgrades, renovations, pools, etc.? An upgraded or recently renovated home should have a higher price per foot than a home that does not. How many dollars per foot does a pool cost?
- A builder marketing themselves by price per foot is full of shit and you should run away. I can build a Lincoln Log home for a remarkably low price per foot, but would you want to live in it? The only world where this kind of marketing works is a world where every single builder built the exact same home with the exact same construction techniques on the exact same piece of land and the exact same features. Then price per foot would not only be applicable, but also, once again, completely useless because it’s the same thing for everyone. So, until communism sets in with the builders, price per foot is absolute nonsense.
So, based on that, taking a look at the price per square foot of a neighborhood and applying it to a single property is necessarily going to result in an incorrect value. If you’re the smallest home in the neighborhood, the value you get by using this method is almost certainly going to be low. On the other hand, if you’re the largest home in the neighborhood, you’ll be priced to high. How, then, do you correctly value a home? We’ll get to that.
The Practical Application
Ok, I admit that this is a bit of a fake news subheading. There is no real practical application of price per square foot for one reason and one reason only. Appraisers don’t use price per square foot to value residential properties. That’s really it. You can come up with whatever convoluted price per foot you want to come up with, but if you are selling a home that will be financed or buying a home using financing, it doesn’t matter what you came up with because the appraiser determining the value of that property doesn’t care and isn’t going to use it as a factor in determining the value. Don’t believe me, pick up the phone and call your lender or an appraiser. The really simple, ugly truth is that price per square foot is useless because the appraiser valuing the home isn’t going to use it to decide the value and the appraiser’s value is what gets you to the closing table. End of story.
How, then, do you value a home you want to buy or sell? Well, if the last paragraph didn’t answer that, you use the same method as an appraiser. Appraisers look at comparable properties to value a subject property. It’s really that simple. You don’t see an appraiser using five 2,000 square foot, single-story homes to come up with a value for a 3,000 square foot, two-story home. That should be pretty common sense. Yet, time and time again I see and hear people upset with a “bad” appraisal because the price per foot doesn’t make sense. You’re right, it doesn’t make sense. Now, let’s look at comparable properties and see where the disconnect was. That makes sense.
And now for the industry-serving portion of tonight’s programming. Who can help you come up with a correct valuation? A knowledgeable Realtor, that’s who. Not a Zestimate, not a community newsletter where someone gives a range of prices and you do some math, not a builder claiming that they build three dollars a foot cheaper than their competition, and for damn sure not by looking at what your neighbor sold their home for and saying that your home is nicer and bigger. A knowledgeable Realtor will pull comparable, recent, sold data for you and put together an accurate market analysis. Ignore the price per foot fallacy, get a good valuation of your property, then buy or sell and get to the closing table without an appraisal mess to deal with.