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Price per Square Foot - Don’t Make this Pricing Mistake

I have heard it said numerous times in different ways – using price per sq.ft. as a basis of value for a property:

“the house down the street sold for $80 per sq.ft., mine should bring at least that”

“I priced my home at $75 per sq.ft., which should be a good price given homes typically sell $70-$85 per sq.ft.”

“lowest price per sq.ft. in the neighborhood”

The problem is, price per sq.ft. can be misleading if not used within the correct context, and it can lead to a home being overpriced or underpriced if used as the sole basis for pricing a home.  Using Price/Sq.Ft. is not a good way to price a home.

EXAMPLE 1

In relation to a home’s value, without any context about the home, price per sq.ft. can be misleading - think about it this way:

If House A sold for $80 per sq.ft., and House B sold for $75 per sq.ft., which sold higher?

Without the context of the sizes of homes, there is not enough information to answer the question:

 

House A could be 2000 sq.ft. x $80 = $160,000   while

House B is 2200 sq.ft. x $75 = $165,000

Or

House A could be 1000 sq.ft. x $80 = $80,000   while

House B is 800 sq.ft. x $75 = $60,000

You see, price per sq.ft. without any context doesn’t help us much when valuing a home - above, House B sold higher in example 1, while House A sold higher in example 2.  

EXAMPLE 2

House A sells for $75 per sq.ft., House B sells for $75 per sq.ft..  Both are the same size, both are the same quality and condition.  Which purchase was a better deal?

In this example, you have the price per sq.ft., you know the houses are the same size, same quality, same condition and location – but again, you are missing some of the pieces to the puzzle.

What if House A is a 2000 sq.ft. 3/2 with a 1 car garage, while House B is a 2000 sq.ft. 3/2 with a 2 car garage – House B has an extra garage stall at the same price – I would say House B is the better deal.

EXAMPLE 3

Another example I use to point out how using only price per sq.ft. can be a misleading tool in valuing a home is with the value of the lot a home sits on.

In this example, House A and House B both sit on the same size lot, same external influences (view, sounds, access to neighborhood amenities).  Let’s say these lots are worth $30,000 each – the lot itself does contribute value, and therefore does contribute to the price per sq.ft..  If all other things are equal (quality, condition, bedroom/bath count, car storage, etc), but House A is 2000 sq.ft., and House B is 2200 sq.ft., then the lot contributes $15 per sq.ft. to House A ($30,000/2000sf) and contributes only $13.64 per sq.ft. to House B ($30,000/2200sf) – a difference of $1.36/sq.ft., and that is only the lot.  There are numerous factors that contribute to the price of a home (sq.ft., overall quality/condition, level of updates/upgrades, bedroom/bathroom count, workshops, pools, etc.), each one contributing to the value of the home, and a small part of the overall price per sq.ft..  Added up, each of these differences could lead to large mistakes in pricing a home off of this 1 measurement of value (Price/Sq.Ft.).

CONCLUSION

How can Price/Sq.Ft. be used?  By making sure the comps used in the comparison are truly comparable – a very tight sq.ft. range, similar quality/condition, same bedroom/bath count, same car storage – when the homes are basically the same.  A search that has truly comparable sales could give a price/sq.ft. that is a good indicator of value.  The best example would be a neighborhood that has been developed by one builder, using the same quality materials, constructed in the same relative way, same basic amenities.

I hope this gives you some insight into how pricing a home solely on Price Per Sq.Ft. can lead to overpricing or underpricing a home.  Estimating a home’s value is much more complex than a simple formula using 2 variables.  There are more features to a home that contribute to it's value than just the size of the home.

If you are thinking of listing your home in the near future, or your home has been on the market for an extended period of time, consider giving me a call.  I have been appraising real estate in the Lubbock Market for almost 15 years and can assist in pricing your home the right way.



Posted in:General and tagged: PricingReal EstateValuation
Posted by Eric Geiser on December 26th, 2018 7:11 PMLeave a Comment

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