Valuation: Price Per Square Foot is only Part of the Answer

Additons and price per square foot values - house being added onto in Silicon Valley - price per SF with add onsThe “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, more than 10 or 15% difference in square footage can make the price per SF very wrong.

When to use the price per square foot data set

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 square foot

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:

Location and lot / land differences and price per square foot

  • 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
    • whether the street is a good one or full of parked cars & RVs
    • whether the house is below or above grade/street level (most people don’t prefer being down from the street)
  • lot size and usability (flat vs sloped)
  • lot shape & access (flag lots may sell for less than homes directly on the street)
  • back yard size

Home changes and condition
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