Wouldn't it be nice to
have an easy way to find out how much the home
you want to buy or sell is worth? Some consider
price per square foot to be a valid way to
determine market value. The price per square
foot is arrived at by dividing the sale price or
estimated value by the number of square feet.
In theory, by using the
price-per-square-foot approach, you could easily
determine what price to pay for a listing. All
you would have to do is find out the price per
square foot for a number of properties that
recently sold in the neighborhood that are
similar to one that you're interested in buying.
Then average these figures and multiple the
average price per square foot by the number of
square feet in the home you want to buy.
Or, if you were selling,
you could determine how much your home ought to
sell for by finding out how much buyers paid on
a price per square foot basis for homes similar
to yours.
There are shortcomings
to this approach. In areas where there is
extreme variability in home size, style,
improvements and amenities, price pre square
foot could mislead you.
Consider three homes
that sold within the last six months in
Piedmont, an upscale community in the east San
Francisco Bay Area. All had about 2,600 square
feet. One sold for $712.16 per square foot,
another for $617.98 per square foot, and the
third sold for $484.18 per square foot. The
average of the three is $604.77.
Given the range of
variability, if you used this average to base
your decision on what to offer on a Piedmont
listing with approximately 2,600 square feet,
you could end up paying way too much or offering
way too little. Likewise, if you used this
information to select a list price for your
home, you could end up pricing it too high or
too low.
HOUSE HUNTING TIP:
For a price per square foot to be a reliable
indicator of value, you need a standardized
housing stock. For example, it would probably be
reliable for condominiums in a development where
all the units were the same size, had the same
ownership dues and offered the same amenities.
But, as soon as variability enters into the
housing stock, price per square foot alone won't
tell the entire story.
When planned unit
developments are new, price per square foot is a
useful gauge. But, as these developments mature,
so does the housing stock. Some people will
completely remodel within a couple of decades
and others may make only minor modifications.
And, then there are those homeowners who do
nothing, thereby creating a neighborhood
eyesore.
In older neighborhoods,
where homes weren't built at the same time or in
the same style, there's even more diversity.
Within this varied environment, certain types of
homes may attract higher prices. For example, in
Piedmont, charming older homes in the center of
town are in high demand, and sell for much more
than newer ranchers on the edge of town. This
accounts for the difference in price between the
houses mentioned above that sold for $712.16 and
$484.18 per square foot.
The most accurate way to
determine the estimated selling price for a
property is to compare all the attributes of
that property with similar properties that have
just sold, not just the price per square foot.
Features like lot size and utility, the view,
the location and the quality of the finishes all
have an effect on value.
THE CLOSING: The
comparative approach to value is more
subjective, but makes up for the shortcomings of
relying solely on price per square foot.
