Don’t overemphasize a house’s price per square foot
When house shopping, price per square foot often comes into conversation. As one of the most familiar methods of home comparison many people are aware of, it is a common method of measuring a property’s value. This method is so widely used, it is often listed with the sales price on many appraisal reports and listings. Everything about a home is included in the price per square foot. Not only does this number consider its size, but also its condition, features, amenities, etc., and consolidates all of this information into one number.
Most people tend to associate price per square foot as a primary determining factor in a home’s value. Unfortunately, aligning square footage price on its own with a home’s value becomes a terribly inaccurate and misleading way to assess value. Many sellers falsely assume that a higher square footage warrants a higher price tag, or assume lower square footage should have a lower price.
Only calculating the relationship between size and sales price ignores all the considerations a potential buyer may make. When comparing two identical properties that are identical with the exception of size, then it is assumed that the larger home may sell more and warrants a higher price and therefore the price per square foot could be an accurate scale. But, if we choose two identical homes in terms of size but one has a better plot of land and therefore sold for a higher price, the equation fails to be reliable. The more dissimilar features, the less reliable price per square foot becomes as a function of indicating value.
A primary conversation I have with any seller is the appropriate valuation of their home. This may or may not change because of the home’s square footage because many factors play into the value puzzle. For me, location, the top priority of real estate, takes precedence first and foremost. Then, things like features, finishes, amenities and many
other factors are considered, including square footage.
The problem arises when buyers and sellers compare homes in different locations, using only a price per square foot evaluation. It would be similar to comparing a Maserati to a Kia – they both have 4 tires – so should they cost the same amount per tire? If we all agree that location, location and location are the 3 most important factors of real estate, how can we try and assign a value using an equation that never considers location?
With all that said, when does price per square foot fit into the equation? I believe it is most useful when comparing homes in the same neighborhood or very close proximity. It is very helpful in determining a value associated with a location and in looking at homes sold, can give a worth to an area that otherwise might be hard to determine.