The “price per square foot” data point can be useful between uniform or very similar homes, but using it with dissimilar properties (size, lot size, school districts, and other elements) will result in a wrong valuation and upset home sellers and listing agents.
An important real estate principle to know is that smaller homes nearly always sell for more on a per square footage basis than 10-15% larger houses in the same area. The reason why is that kitchens and bathrooms are the most expensive rooms, but often there is just 1 kitchen and a similar number of baths with smaller vs larger homes.
Even if the properties are comparable in many ways, a 10-15% difference in square footage can make the price per SF very wrong.
When to use the price per square foot
If evaluating condos in the same complex, such as a 2 bed, 2 bath with 1,000 SF, it makes sense to compare units in the same complex with 900-1100 SF (plus or minus 10%). If nothing is available, going to 15% may work, but the data won’t be as reliable – 850 – 1150 SF.
In a subdivision of houses that are all about the same age and with similar lot sizes, the target would again be 10% of the home size. In a 2,000 SF house, that means plus or minus 200 SF, ideally, but not more than 300 SF.
If a 1500 SF house is included in the analysis of a 2,000 SF house, it will mislead the home owner because the 1500 SF house will sell for more on a per SF basis than the much larger 2,000 SF house. The seller will overprice the home if doing that.
As one factor among many, it’s completely fair to include the price per SF when trying to determine what a home’s probable market value ought to be, as long as it’s within that 10% range, ort 15% at the very outside.
Other factors that influence valuation – beyond the price per SF
Remember, too, that a house, condo or townhouse isn’t worth one exact number, but a range – because the terms involved also impact the sales price. Although price per square foot is one way of finding approximate value, often is not the best, especially if you use it alone, because there are other factors besides the square footage of the house. Here are some of the other factors that can mess up that valuation based on price per square foot alone:
- precise location (view, proximity to something undesirable)
- for example, one house is next to tidy homes, but another has a junky neighbor or two
- one house is internal to a neighborhood, and another is on a busier road
- one residence backs to commercial property or a tall apartment building, which another backs to a single story house
- lot size and usability
- lot shape & access (flag lots may sell for less than homes directly on the street)
- whether the house is below or above grade/street level (most people don’t prefer being down from the street)
- back yard size
- amount of remodeling (and how recently it happened, whether with permits/finals)
- care for the home
- additions vs original square footage – most of the time, additions do not sell for as much as original SF
- this is often due to an awkward layout and a weird Winchester-y feel from one or more additions
- most of the time, if bedrooms are added, the need for a larger kitchen is there, but usually not addressed
- sometimes the additions are just a family room or bedrooms with no plumbing features, and these are generally less costly
- adding a new primary suite with spacious closets and bathrooms may not sell for less if the layout feels natural
- whether the street is a good one or full of parked cars & RVs
- landscaping (especially “hardscaping”)
- with luxury properties over $4 million and with large backyards, some homes are lavish with summer kitchens, ADUs, tons of pavers, outside fire places, sports courts, pool and spa, tennis courts, fire pits, and more – some homes may sink $500,000 and more into the backyard alone
- others may be more limited to patios, pools, and grass
- whether there were multiple offers soon after it hit the market or if it was one offer after languishing for weeks or months
The variance from “all original” to “all remodeled” alone can swing value 10% – 20% in the San Jose area. Add to that other factors and the divergence in value can be much, much greater.
Sometimes it’s easy to calculate the value if the nearby comparable sale is identical in all but one or two ways, such as the same layout and level of remodeling, but one has a pool or an ADU and the other does not, especially if that extra element is brand new.
What about new construction and price per square foot?
In a tract neighborhood of NEW HOMES, if the locations are similar and finishes are similar (no upgrades), there’s a better shot of the price per SF being useful information. Many new homes, though, offer a completed home with basic finishes, and the buyer must opt for upgrades such as adding a fireplace with custom mantle to the family room or master bedroom, better appliances or counter tops to kitchen and baths, etc. Further, some new homes have basements and it’s possible that they may not be included in the square footage – and yet, of course, they may have immense value!
So even with tract homes, there are lots of caveats. Additionally, the older a home gets, the less likely this approach is to be accurate because some owners will remodel their home every 10-15 years and others won’t do a thing, not even basic maintenance, and the home will be “tired” (at best) very soon.
Online and automatic valuations
Often when home buyers look at Silicon Valley properties for sale they compare the list prices via online valuations. The difficulty is that the “auto-comp” figures are often wrong because they are based primarily, if not exclusively, on the “price per square foot” of the house’s listing. The online valuations often pick the middle of the viable range between “total fixer, probably needs to be demolished” to “completely remodeled or brand new home”. Most of the time, the “range” is about 10 – 15% from fixer to fixed, so most of the time, the online valuation will be right in the middle with a 5% swing either way. But some of these sites (if you read their disclaimers) say that they are within 80% of market value most of the time. That’s not too accurate.
Sometimes those auto comps cross boundaries that make a difference, whether zip code, school district, city border or just a major road where prices jump on one side versus the other.
Let’s use round numbers to make this easy. Let’s say that the online real estate pricing says that a home is probably worth $1 million dollars. It might be that the actual pricing range goes anywhere from $900,000 to $1,100,000, but the virtual pricing tools don’t know if the home is next to high voltage lines, a busy road, is in the lesser school district, is remodeled or what.
Or, conversely, if it’s a short sale, has been a rental property that got totally trashed, or has terrible terrible neighbors in the immediate vicinity who have garage sales on a weekly basis and need safari gear to get through their front yard. The true market value could be 5-10% higher or lower. It just depends.
So please take the price per square foot a grain of salt. If you look at the online pricing and decide it’s correct but the house you’re buying is in a lesser location or in worse condition, you’ll overpay. And if it’s better, you’ll be too low and will wreck your odds of succeeding.
Don’t forget to include market heat when trying to determine the likely selling price of the home you want. If similar homes are getting multiple offers and selling 5% or more over list, then the sale from 3 months ago is only old news, not today’s prices. In those cases, if you only rely on comps, you will find that you miss the mark every time. Home buyers who lowball their offers in a rapidly appreciating market will find that an expensive mistake to make, with the biggest risk being that they could even price themselves out of the market entirely.
Get professional help with valuations!
My suggestion is to hire a good Realtor who can assist you with pinpointing the pricing, whether you are buying or selling, so that you can negotiate competitively and get the best deal you can for your home. I don’t mean buyers hiring the listing agent, either. When you do that, the agent also represents the seller and may be inclined to fight just for the other side – or for the highest price. Get your own real estate sales person who’s in your corner, helping you to evaluate properties and market value, and who will provide you good counsel all the way through the shopping, contract writing, negotiations, inspections, closing and beyond.
Real estate professionals have learned from experience what the buying public want and what they reject. Let their experience help you in nailing the valuation!
There’s no reason to go it alone, and in fact doing so could cost you more in the long run. Amateur real estate hobbyists may believe that if they calculate the price per square foot, they’ll know what a home should be worth. Hopefully our readers can see that a lot of nuance is needed before relying too heavily on that one data point, and that it should only be used within tight parameters.
For more reading on the same topic:
Assessed Property Value vs. Market Value of Silicon Valley Real Estate
Sometimes the List Price Isn’t the Expected Sales Price, So Run Comps!
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