Price Per Square Foot May be the Worst Way for an Agent to Price a Home

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When listing a home do you go by price per square foot?

Agents often ask me “what’s the price per square foot that homes are selling for in this neighborhood?” I know the question is coming but I still can’t stop myself from cringing because on its own, price per square foot doesn’t always give you the most accurate value. This article will discuss why and how agents should look at price per square foot when deciding the listed price for a home.

What does “price per square foot” actually mean?

Price per square foot is a unit of value often used when determining the overall value of a home. The calculation is made when you divide the sale price by the total living area. Therefore, a 1,000 square foot home listed at $100,000 is up for sale at $100 per square foot.

People then feel comfortable using the price per square foot of this house of $100 to figure out what the value of some other home might be. If they’re looking at a house that’s 1,500 square feet trying to figure out what its worth, they just multiply the total living area, which is 1,500 square feet by $100 and simply think the value of this larger home is $150,000.

You may wonder what could be wrong with figuring out what a home is worth by using price per square foot. We need to look closer at everything that makes up the price per square foot.

What does the price per square foot include?

A home’s price per square foot takes into account everything, including the condition the home is in, it’s features, any upgrades the home has undergone, the lot, as well as the location. Taking the house discussed above, let’s say it has undergone an extensive remodel, including a new kitchen, updated bathrooms and new flooring throughout. The selling price per square foot of this house takes all of this into consideration because the buyers certainly looked at the condition and all other aspects of the house before making their offer.

Okay, maybe there is another house located up the street from this one. The two homes have the same square footage and identical features, however this other house was not remodeled and has no upgrades. This house went for $80,000, which makes it $80 per square foot. The selling price reflected the dated interior.

While these two homes have the same floor plan and similar characteristics, one home had been remodeled and upgraded, which allowed the sellers to get $20,000 more for their home.

What is also true is that if you took the $80 per square foot number to determine the value of the house that had been remodeled, you would definitely get a value that would be less than its true value.

The full range of price per square foot arrived at when you’re analyzing a number of sales must be looked at, while considering which of the homes were most like the property you’re trying to value. This is just part of reconciling everything. 

The “Law of Diminishing Returns”

If you took economics you’re familiar with this term, and although you may have fallen asleep when your teacher lectured the class on this topic, it is certainly relevant to the subject at hand. The Law of Diminishing Returns tells us that as consumers keep buying the same thing, the unit price simply goes down.

If you’re comparing two homes, one that is 1,000 square feet and the other 2,000 square feet, but everything else is the same (except the larger house has bigger rooms), the house that’s 2,000 square feet will certainly sell for less when figured on the basis of price per square foot.

When determining the listing price or value of a home try to use slightly larger homes, ones that are smaller and homes that are about the same size. It’s always best to get a range of different prices per square feet, and then you can go about reconciling them.

If you don’t use bracketing for the sizes of the homes, you can easily overprice your listing when just using smaller sized homes as comps. The reason for this is because the price per square foot on smaller homes is always higher when everything else in the house is pretty much the same, except for the square footage.

No two homes are the same

No matter how much two houses look alike from the outside, no two are alike. Some have more bedrooms, differing levels of quality. This is why bracketing is so important when you’re selecting your comps. If this isn’t done right you can end up with the wrong valuation.

Other factors you will want to consider when determining the price per square foot would include number of bedrooms and baths in the home, the quality of the construction, landscaping and other outside improvements like a barn, storage buildings or swimming pool and patio.

Since the price per square foot on a home is determined by so many different factors it is vital that the comps used be close matches. When you have very similar homes, one being the home you’re trying to price and the others the sales prices recently sold homes; the price per square foot is a lot more relevant. But, when the homes are not as similar the price per square foot shouldn’t have as much weight. 

How do you determine value if not by price per square foot?

As I said before, price per square foot never should be considered by itself. It should be considered along with other indicators of value. If the home’s price per square foot leads you to value the home far above what other similar homes have been selling for or are listed at in the area, then it may not be reliable.

If you think that the price per square foot is not an accurate indication of the home’s value, then utilize other ways to determine the correct value. One method I know about involves qualitative analysis, which doesn’t even consider the homes price per square foot or adjusted amounts, but looks at the home’s features and the differences in quality between properties in determining a list price.

Another excellent solution for accurately pricing a home would be to hire a reputable professional appraiser to give you a pre-listing appraisal. This will provide you with a fair market value supported by many different factors that buyers find important and not just based on price per square foot.

When you get an appraisal before listing the property you lessen the likelihood of your deal falling apart in the end because the comps used by the appraiser will be very similar to those used in the mortgage appraisal. I invite you to pick up the phone and call me at Brandlin Appraisals for help with your pre-listing appraisal.

 

Please contact our office with any questions you may have or to schedule your appraisal appointment at 760-741-7699, brandlinappraisal@yahoo.com or use our contact page on our website.

Brandlin Appraisals Inc. specialize in helping people who need appraisals for estate purposes, divorce, date of death, bankruptcy, FSBO’s and more throughout San Diego county. For more information please contact us at (760)741-7699, or visit our website at Brandlinappraisals.com, or email us at admin@brandlinappraisals.com

Mike Brandlin
San Diego, CA // Real Estate Appraiser
www.brandlinappraisals.com
(760) 741-7699

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