By KRISTI BAILEY
There is no arguing that navigating today’s real estate market is complicated. So, it’s easy to see why buyers and sellers are always looking for solutions that make things less complicated. Especially when a property value is the issue.
A popular concept that is overused and frequently misunderstood is price per square foot. All you have to is take the price of a home, divide it by the property’s square footage, and easy peasy you have a benchmark for property value comparisons.
Yes, it’s easy. Yes, it’s fast. Yes, it can be useful about the general value in a specific area, but that is about the extent of its worth. Still, it continues to hold almost mystic sway in real estate discussions. The truth of the matter is the actual value of a property is more complicated than a simple formula that uses only two variables.
Here’s a quick example of just how the type of construction and a few other factors renders price square foot an unqualified data point when comparing property values.
There four basic categories in home construction: economy, standard, custom, and luxury. They are as different as the names imply.
House A and B have the same square footage, the number of bedrooms and bathrooms. The price per square foot should be a good common dominator – right? Wrong.
House A was built on an economy standard. It was constructed for buyers who wanted to spend as little as possible. The builder was careful to use materials that keep costs down. All the materials met code but were more often not of the highest quality. The doors are typically hollow, cabinets, other fixtures, and appliances are also in the economy class. The roof is nine years old, and the home is on a busy street.
House B is a custom-built home. Cabinets are custom. The flooring is hardwood. It’s the type home where you find higher-quality appliances, better windows, solid doors, and higher-end plumbing fixtures. House B also has a two-year-old roof is sits at the back of a cul-de-sac on a quiet street.
Running the two variable price per square foot function gives you a number for each home. But those numbers have about a much in common for a value comparison as a grape and a watermelon.
And then there are things like comparing a home on a big lot to one on a smaller lot will skew the price per square foot. Below grade square footage is worth less than above-grade space. Your appraiser will vouch for that. The list goes on and on.
One example of when price per square foot is a reliable value yardstick is a neighborhood than includes fewer homes, developed by one builder who similarly built each home using the same materials and amenities in each home. Price per square foot is a good yardstick because everything is the same.
One of the most complicated parts of a professional REALTOR’S® job is determining a property’s value. When it comes to setting a pricing strategy for a new listing, it is often as much an art as a science. Because the process involves research in public and private databases, math, street-level market knowledge, and attentiveness to local market conditions that ebb and flow by the day, you need a professional to help you determine that value. Call a local REALTOR® to find out the value of your home.
NETAR is the voice for real estate in Northeast Tennessee. It’s the largest trade association in Northeast Tennessee, Southwest Virginia region representing over 1,200 members and 100 affiliates involved in all aspects of the residential and commercial real estate industries.
2020 NETAR President