In my January newsletter I wrote an article on price per sq ft. I wanted to share it on my blog as well as I had a lot of positive feedback. Hope you find it beneficial and insightful! Enjoy!
Price per square foot? Last month I attended a seminar put on by a reputable Appraiser in our area, Ryan Lundquist. The topic was “How to Think Like An Appraiser”. I would like to touch on one point that was covered in that meeting, “Price per Sq Ft”. When working with buyers and sellers this comes up quite frequently and it is not so simple. 4 principles to remember when using price per sq ft in real estate:
1) There is a price per sq ft “spectrum” in a neighborhood: There is never just one price per sq ft figure that applies to every property in a neighborhood. For instance, a neighborhood might easily see a price per sq ft range from $100 to $250 when looking at all sales.
2) Similar houses tend to have a similar price per sq ft: When homes are similar in size, location, bed/bath count, etc…, they tend to have a similar price per sq ft. That’s obvious, but the contrasting factor is that nonsimilar homes might have a VERY different price per sq ft that shouldn’t be used to value your home.
3) Property characteristics can quickly change the price per sq ft: When there are differences in condition, location, lot size, quality of upgrades, bed/bath count, size, etc… the price per sq ft can change dramatically. We might see a small remodeled home selling at $250 per sq ft, the same model match that is a fixer selling at $175 per sq ft, a short sale model selling at $185 per sq ft, and a home with an adverse location selling at $215 per sq ft. Thus even for one model there could be a price per sq ft range from $175 to $250.
4) Smaller homes tend to have a higher price per sq ft: It costs more to build smaller homes, so smaller homes tend to have a higher price per sq ft than larger homes. This is why it’s dangerous to use a price per sq ft figure from a smaller sale to value a larger home. A smaller home might sell at $250 per sq but a larger home might be closer $150 per sq ft.
Ryan used Starbucks to further explain this concept.
The Point: The larger the cup, the less you pay for each ounce of coffee. Or we could say it a different way. Smaller cups of coffee tend to cost more per ounce. This is interesting, but it’s not really surprising because it’s merely an example of economies of scale, right? We see this principle all the time when buying bigger or smaller items, yet it’s easy to ignore when it comes to housing. I hope this helps to give you a better perspective on how to look at price per square foot. It is not one shoe fits all. There is a lot more that goes into this equation.