Price per square foot is a concept in real estate which is easy to
understand and just as easy to misuse. The formula is pretty simple: To
determine price per square foot, you take a price, such as sale price of a
home, and divide it by the square footage of the property.
Price per square foot is useful in looking at broad market
comparisons, such as comparing one entire metro area to another, or looking at
an area’s average change over time. It is not, however, terribly accurate in
figuring out the value of your home.
Why? Well, price per square foot fails to take into account the
most important factors when pricing a home.
First and foremost, it makes assumptions about the home’s
amenities. We all know the quality of materials used in home construction and
the condition of the home’s appliances and other features can have a dramatic
impact on the value of a home. A kitchen with Italian marble surfaces versus
one with pressboard countertops will have completely different values. Price
per square foot in a given neighborhood will blend these homes together and
produce an average.
Second, price per square foot assumes locations are identical, but
in almost any metro area there are up-and-coming neighborhoods as well as
neighborhoods in decline. Price per square foot near an abandoned industrial
zone will vary considerably from one near a well-established downtown district
with a great walkability score.
Third, even the simple methodology of calculating price per square
foot can be influenced by how the total number of square feet has been
calculated. If one has a garage converted into a mother-in-law, and another
home doesn’t, which square footage is valid? And what about home or lot size?
Sometimes above or below-grade lots can influence the price per square foot as
well.
Price per square foot is more useful in commercial situations
where there is tremendous uniformity in the design, construction, and location,
but as a tool for assessing your home’s market value, it’s flat out dangerous.
Want a real estimation of your home’s value in its current
condition and location? I’d be happy to help. Get in touch today, and I’ll show
you what goes into determining the optimal price for your home. ScatesRealtyInvestments.com
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