Price Per Square Foot Myth, Don't be fooled..

[Mark Guagliardo]

Price Per Square Foot Myth, Don't be fooled...

When pricing residential real estate (as opposed to commercial real estate), trying to compare two properties based on their price-per-square-foot calculation is a recipe for disaster. First off, I can think of 3 very important aspects to a property that are being ignored when you try to do this:

1) The Location and Lot.
The location and land upon which the house sits is completely ignored in this calculation. If you were to create two identical houses and placed one on a 5k square foot lot on the side of a hill and the other on a flat, 10k square foot corner lot, do you really expect them to sell for the same price? Of course not – but the $/sqft metric doesn’t account for that.

2) The Usage.
Not all square feet are created equal How much would you value an extra 300 square feet in your house? Would you enjoy a larger living room or den? Of course you would, but what if I said that 300 square feet went to an additional bathroom? In the eyes of a buyer, the extra bathroom adds way more value to the house than a larger living room or den. But again, the $/sqft metric doesn’t account for that.

3) The Condition.
If a house has a brand new roof and a completely high end remodeled kitchen with granite counter tops and stainless steel appliances, would you expect to pay the same amount as you would for a dated, 1960s rancher? Of course not. But again, the $/sqft metric doesn’t account for that.

I hope it’s obvious how the price-per-square-foot calculation isn’t enough (on its own) to properly compare the prices of two properties against each other.

Where it does work is if you are comparing kind-for-kind homes in a development or a Condominium building where amenities, view and fixtures are comparable.

True market value is what a buyer will offer, and a seller will accept.

[JD Martin]

I think it depends on who is using the figure on whether or not it is useful. I consider it at 0% when I am looking at investment property - location, layout, condition are far more important to me. But if I was buying a house to live in, and wanted/needed to get the biggest house I could, or something I considered would give me the opportunity to use some sweat equity to improve, I might consider it, because I might want the cheaper SF house that's dated so I can bring some value to the equation; if I am buying at the top of the range already, there's nothing I can do to influence the future value except hope for appreciation.