Is the price per square foot important? This is a question that lots of buyers and sellers want to know.
In real estate, as with many things in life, the most straightforward solutions to a problem are not always the best solutions.
Take calculating the value of a home for sale. Realtors, sellers, and buyers want concepts they can use to quickly and easily convey a home’s value.
One of the most familiar concepts in real estate is the price per square foot.
Take the price of a home, divide it by the square footage of the property, and you have the cost per square foot.
Easy right? Yes – and people who use this valuation method get the price wrong nearly every time!
Although the price per square foot can help you learn about the general value of the real estate in a particular area, it is a poor indicator of a home’s actual value.
There are so many components of a home that must be considered. This, by the way, is part of what keeps professional Realtors working.
As a Realtor who has been practicing real estate for almost forty years, this comparison metric should not be used.
You are asking for trouble as it is not a sound method professionals use.
Let’s look at everything to know about per-square-foot pricing.
What Does Price Per Square Foot Mean?
The pricing per square foot measures the cost of a property or project area. It is a common but simplistic valuation method in real estate.
It divides the total price by the total square footage. This calculation helps compare the value of properties or construction costs quickly.
Sometimes, sellers foolishly set their asking price based on this metric. Buyers also use it to assess property value and make offers. Doing so is not a good idea. It varies widely by location, property type, and market conditions.
In most circumstances, wise Real estate agents and appraisers don’t rely on this figure for accurate property evaluations. The method is usually only helpful in cases where housing is nearly identical or cookie-cutter.
For example, tract housing, where most homes only have minor differences.
How Big is a Square Foot?
The size of a given space can be calculated by multiplying the length and width of the area. One foot is equivalent to 12 inches, meaning that if a space measures 12 inches in length and 12 inches in width, this area is one square foot, which equates to 144 square inches.
This Valuation Method is Too Simplistic
Determining a home’s actual value is much more complicated than a simple formula using only two variables.
However, some real estate agents not skilled in pricing a home will use this simple formula to estimate home value.
This is a gigantic mistake and one that causes so many Realtors to price homes WRONG! Price per square foot is one of the least accurate means of valuing a home!
What real estate agents and consumers should understand is the most critical factors in pricing a home for sale. In the article, you will see what matters and what doesn’t when trying to price a home accurately.
The danger of using this method to value a home is significant.
How to Calculate Price Per Square Foot
The calculation is easy to do. To calculate, you take the cost divided by the home’s square footage.
For example, if you have a 4000-square-foot home priced at $800,000, you would divide $800,000 by 4000. The result would be a price per square of $200.00.
The price per square foot calculation can be used for many things, including measuring carpets, granite countertops, sod, and other home-building products.
Those thinking about building a home will often research house building prices per square foot. To calculate the cost per square foot, you must know how to measure a house.
The same can be said when calculating how big an acre of land is. Calculating price per square foot is used for less consequential items. As you’ll see, it should not be used to value homes.
More Examples to Help You Understand
The definition of cost per square can be easily explained by showing it to you. Here are a few examples of using this metric for calculation purposes.
- Example A: A property priced at $400,000 with 2000 square feet would = $200 per square foot.
- Example B: A property priced at $750,000 with 3000 square feet would = $250 per square foot.
- Example C: A property priced at $235,000 with 900 square feet would = $261 per square foot.
The calculation is simple math, but you can use a calculator to help.
Understanding Basic Home Types
To clarify why the price per square foot is such an inadequate measurement, it can be helpful to understand the basic categories of homes in most instances. They are:
Economy Housing
An economy home is built to appeal to lower-income buyers and people who want to spend as little as possible on a house.
Builders are careful to use materials that will keep costs down, so every part of the home will be made using materials that – while meeting code requirements – are not of the greatest quality or desirability.
Everything from the roof, plumbing fixtures, and flooring will be low-end.
The home is certainly functional, but compromises had to be made to build it to a certain low price point. This kind of home is constructed in the most cost-efficient manner.
Individuals choose this option based on their budget and affordability.
Standard Home Construction
Most homes are of standard build quality. Everything in the house is constructed of more durable materials than the economy home.
The different components of the home, such as the cabinets, may be mass-produced, but they are produced using higher quality materials that will last longer and hold up better to wear and tear.
Standard homes can contain components from both economy homes and possibly some elements of custom homes.
Keep in mind every builder constructs homes differently. Some build in a particular manner where the quality of the materials is not visible to laymen, not in the construction industry.
While most buyers can tell the difference between a Marvin window vs. a builder’s grade window, most would not be able to see the difference in quality from one heating system to the next.
Home “A” might have a heating system that costs $12,000, while House “B” has one that is only $8000.00.
Custom Homes
A custom home kicks it up, adding elements not found in lower categories. The cabinets in this home may be custom-made by hand.
The flooring may be hardwood, while the counters may be granite. You may have higher-end appliances, better windows, and bathroom fixtures in this home.
As the name suggests, custom homes can also feature unique, customized amenities not typically seen in a standard or economy home.
Custom homes are unique and reflect the characteristics and desires of a particular buyer. Custom homes may also be built with other architectural features that make them more expensive, such as intricate roof lines and higher-end materials used on the facade. It is not uncommon to see stone or brick as siding choices.
Luxury Built Homes
Luxury homes are at the top end of the housing market. These are the homes that feature the best of everything. Indoor swimming pools, home theaters, wine rooms, and more.
The home is built out of the best materials, and every feature in the home may be customized to the needs of the individual who had the house constructed.
A luxury home is considered the best of the best. These homes are constructed with the highest grade of construction materials throughout.
There is no expense spared on anything, and the amenities seen inside the home are sometimes enough to make your mouth drop!
Comparing Apples And Oranges
Considering the different types of homes makes it easier to understand why the cost per square foot is not the best tool to calculate the value. The cost of a single room in a luxury home may match that of an entire economy home.
Price per square foot only gives you average or median ranges to help you understand market trends. So when someone asks if the cost per square foot is the best way to value a home, the answer is clear cut and dry – NO, it is not!
The best way to show you this is to give you a perfectly detailed example.
Let’s say you have two homes that are 2800 square feet.
Home “A” has the following amenities:
- A single tab roof shingle and builders-grade windows.
- A dropped flagstone walkway and concrete front steps.
- Carpets are throughout the first floor, and linoleum is in the bathrooms.
- The kitchen and baths have “stock” cabinetry.
- Formica countertops in the kitchen and bathrooms.
- Plastered door openings with no wood trim.
- Hollow core doors throughout.
Home “B” has the following amenities:
- An architectural roof and Anderson windows.
- A brick walkway.
- Hardwood floors throughout the first floor and tile in the baths.
- A custom kitchen.
- Granite countertops in the kitchen and baths.
- Crown moldings are throughout the first floor, and wide base molding is on the first and second floors.
- Solid doors throughout.
- Central air.
- Sprinkler system.
- Security system.
Too Many Other Variables Are at Play
Now, keep in mind these homes are the same size. You don’t need to be a rocket scientist to know that home “B” should sell for significantly more than home “A.” Let’s now go a step further and put home “B’ in the best neighborhood in town and put home “A” on a busy road.
Real Estate agents who want to use pricing per square foot to calculate value this way look like fools. Using the price per square foot method with home “A” selling at $400,000 would give you a price per square foot of $142.86.
Sorry boys and girls, but house “B” sure as shit is not going to be selling for $142.86 per square foot. This, however, is precisely how some real estate agents and consumers like to calculate a home’s value.
Some home buyers will see that a home sold for X on Main Street and try to transfer that calculation to the house they are considering offering. This is NOT how real estate valuation works.
Then, some home sellers will see house “B” selling for a certain amount per square foot and automatically assume their home should sell for the same, even though they do not have half the amenities and live in a far less desirable location.
Price Per Square Foot Doesn’t Work Pricing Houses
I remember a gentleman interviewing Grafton Real Estate agents a few years ago. He wanted to use the comparison to determine the value of his property. Clearly, he did not understand by utilizing this simple method, he was setting a price for his home that did not work.
Like many sellers, he decided to list with the agent who followed his thinking. I was back in the door four months later, cleaning up this seller’s mess he created by overpricing his home.
This illustration above clearly shows that you can not multiply the price per square foot by the square footage of the home you are considering buying. There are too many variables with a home’s characteristics to make generalizations like that.
Both buyers and sellers must understand this is not how to value a home properly. If you are selling a home, the price you set is the most significant reason it will sell.
Overpricing will cause failure nearly every time. Buyers and sellers must understand proper real estate valuation techniques to accurately understand a home’s true value.
Getting Into The Finer Details of This Valuation Tool
Another thing to consider about pricing a home is just how much each aspect of a home can impact its value in the marketplace. Many different things can go into a home’s pricing calculations that are not readily apparent when you look at the cost per square foot.
You may have a two-story home, a home that has gone through major renovations, or a home on an oversized lot. Each of these factors will influence the price.
Comparing a home on a large lot to a smaller one will skew the pricing per square foot – even if the larger one is nicer, its per square foot price can easily be less than the house on the small lot.
A home in a better area may demand far more than a home in a not-so-nice area, which can also change the cost per square foot.
The Impact of Other Variables Matter
How the square footage is calculated can also impact the price per square foot. One home may have a square footage calculation that includes a finished basement, while the next may not.
Comparing both homes by their pricing per square foot then becomes useless. For those who don’t know this, below-grade square footage is worth much less than above-grade space. Any appraiser will confirm this for you.
So if you have one home that is 3500 square feet above grade and another that is 3000 square feet above grade and 500 square feet below grade – all other things being equal- the home with 3500 square feet above grade is worth far more money.
Did you also know that the actual size of a home will impact what it sells per square foot? Yes, it’s true.
Generally speaking, smaller homes will sell at more per square foot than larger homes. As a house gets more significant, the price per square foot often drops. This is another danger of using prices by square footage to put a value on a home.
Another example is bedroom counts. A smaller four-bedroom home may be more valuable than a three-bedroom home with gigantic rooms. In these instances, the smaller home can be worth the same or more than the larger one because it has an extra bedroom.
To take this a step further, you could have a sizeable two-bedroom home that could be considered to have functional obsolescence because the appeal of having two bedrooms is limited.
All of these homes could have the exact square footage, and the bedroom count would seriously impact the total value of each!
Location Makes A Huge Impact on Value
One of the variables that proponents of assessing a home by price per square foot often forget is location. They don’t say location, location, or location in real estate sales for nothing.
It is one of the most critical factors for valuing a property.
A home selling on the main road will sell for something different than the same home on a country road. The same home selling for X on a country road will sell for something else than if it’s located in a neighborhood.
Taking the same home and placing it in the BEST neighborhood in town can cause it to sell for something even more.
Does this metric take into consideration a home’s location? No, it does not! This is why real estate agents often emphasize how choosing the right neighborhood is critical to long-term appreciation and resale value.
Those who understand this concept end up ahead in the long run. The difference in value between one neighborhood and the next can be substantial.
Sometimes, even being located in one school district over another can influence the value of two identical size homes.
Using This Method Has One Exception
For those who like pricing per square foot to evaluate property values, there is only one circumstance where it can be helpful. The appropriate word to describe this situation would be UNIFORMITY.
The best example is when you have a neighborhood with only a few home styles and similar lot characteristics. Think tract housing. The community was developed by one builder who constructed all the households similarly using the same materials and amenities in all of the homes.
Pricing per square foot can be helpful as a measuring stick for value because everything is the same. The location is the same; the lots are similar, and the way the homes were built is close to one another.
A good example is condos or townhouses. These housing choices are often very similar to one another, with not much distinction. There will possibly be some upgrades from unit to unit that can be accounted for.
This is the only way price per square foot will give you an accurate valuation point.
Other Poor Home Value Indicators
Pricing per square foot is not the only lousy value indicator people use to value property. Some of the others include:
Online Home Value Estimates
Zillow estimates – A Zillow estimate, or Zillow Zestimate as they call it, is a terrible indicator of home value. There are no online home value estimators that can accurately determine the value of a home.
Redfin and Zillow are the two most well-known, but other companies have them. You would never want to use these tools when negotiating buying or selling properties.
Property Assessments
Assessed value – an assessed value is another terrible means of arriving at a value. This is one quite a few real estate agents will incorrectly use. Look at the article and see why it is off so much. Essentially, there is no correlation between assessed and market value.
The assessed value is used for tax assessments on the property to collect an appropriate amount of taxes.
Refinancing Mortgage Appraisal
Refinance Appraisal – a refinance appraisal usually gets a lower interest rate on a loan or takes equity out of the property. They want to see this work for the lender to make additional money. Enough said.
They want to give you the mortgage so they can make more money. They already know you’re paying back the loan, so they don’t have worries about doing something that will improve your financial situation.
Getting Pricing Right Means Avoiding This Measurement
The only natural way to understand the value of any given home is to calculate the value based on the individual home, preferably with the help of an experienced Realtor.
A real estate agent, if she or she has been at this very long, should know how to measure up the value of a home in a particular area and give you an idea of what it is worth.
How to determine real estate market value is something a true professional understands.
Pr</p>ice per square foot calculations should make up little, if any, of the final figure the Realtor gives you. The number is just not that important when comparing home prices.
Your best bet is to find a real estate agent you trust with a proven track record and have them assist you with the buying or selling process.
Your agent will be able to examine all the finer details and come up with numbers that are useful to you.
Accurate information is the foundation of good real estate deals, so ensure you have someone to help you access such information. It can make a world of difference in the outcome.
You may be too high if you have been trying to sell your home without any luck, and remember your agent talking a lot about pricing per square foot in calculating your value.
Here are some common ways to know your home is overpriced.
Use a Comparative Market Analysis Instead
A competitive market analysis should be employed instead of pricing per square foot to determine market value.
With a CMA, a real estate agent will consider all the variables in pricing a home besides the size. The most essential of these factors will be the following:
- Location
- Bedroom count
- Bathroom count
- Condition
- Amenities
- Age
- Lot characteristics
Of course, the home size will be used, but it won’t be the only variable used to determine fair market value. Picking specific comparable sales will be far more accurate than using a simple formula.
Real Estate appraisers also use comps when creating their property appraisals.
Conclusion
By now, you should understand that using the price per square foot to value a home is an awful decision. There are much better ways to value the property, including a detailed analysis from a professional Realtor who knows the differences between location, amenities, and other essential factors such as condition and age.
Estimating the value of real estate is far more complicated than using average dollars per square foot. This is yet another way to get your home value wrong.
You need to account for the unique characteristics of each piece of property and either credit or debit the value of the building as appropriate, based on recent sales of similar homes. The size of the house is essential, but it’s just one facet.
A skilled real estate agent will consider views, location, finishes, layout, amenities, and styling. These are all important in determining a home’s actual market value!
If you have any questions, feel free to contact me.
Additional Helpful Articles on Pricing a Home
- Avoid these real estate pricing mistakes – these can kill your home sale via Rochester Real Estate Blog.
- Determining the correct list price of a home – pricing a home accurately is one of the most essential tasks to get top dollar for your home via Frederick Real Estate Online.
Use the additional articles to understand why home pricing is vital for a timely sale and maximizing the ultimate sales price.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided information on price per square foot. He is an expert in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications he has been featured in. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 38+ years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
