Price per square ft is tricky home value territory
There’s no argument 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 difficult. This is especially true when a property value is an issue.
A popular concept that’s overused and frequently misunderstood is price per square foot. All you have to do is take the price of a home, divide it by the property’s square footage, and you have a benchmark for property value comparisons.
Yes, it can be useful for the general value of real estate in a specific area. But’s that 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 are four basic categories in home construction: economy, standard, custom, and luxury. They are as different as the names imply.
For example, 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?
House A was built on an economy standard. The builder was careful to use materials that kept costs down. All materials met code but were more often not of the greatest 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 likely custom. The flooring is probably 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.
Using the two variable price per square foot function gives you a number for each home. But those numbers have about as 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 a big house on a smaller lot that will skew the price per square foot. And below-grade square footage is worth less than above-grade space. Your appraiser will vouch for that. The list goes on and on.
But there is one example of when the price per square foot is a reliable value yardstick. The best example is a neighborhood than includes fewer homes, developed by one builder who built each home in a similar manner 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 comes up with a property’s value is the issue. And when it comes to setting a pricing strategy for a new listing, it’s 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.
NETAR is the voice for real estate in Northeast Tennessee. It is the largest trade association in the Northeast Tennessee, Southwest Virginia region, representing over 1,600+ members and 100+ business partners involved in all aspects of the residential and commercial real estate industries. Weekly market reports and information for both consumers and members are available on the NETAR website at https://netar.us