Why Price Per Foot Is Not The Best Indicator Of Value
I am heavily relying on price per square foot when making offers but I have lost bidding wars on two houses. My agent keeps telling me that the price per square foot is not a good way to determine value. But he really can’t explain why. (He’s my kid’s coach – what can I do)? I respect your opinion; how important is price per square foot when buying?
In today’s current real estate environment with a shortage of inventory, it is difficult for Realtors® to be able to guide their clients as to which price a home might ultimately sell. There are numerous components to the market value equation and price per square foot is just one. Although the calculation is simple: divide the price of the home by the square footage, it is a poor indicator of a home’s true value for several reasons:
Obviously a home on a busy street or next to industrial, or multifamily, will sell for less per square foot than a home just several blocks away in a conforming single family neighborhood.
Condition, Age and Amenities:
If there are two similar homes but one boasts updated kitchen and baths, which do you think will sell at a higher price per square foot? There are certain architectural styles which are highly sought after, such as Spanish, mid-century modern, etc. New construction will also sell at a higher price per square foot than a 20 year old home.
This is a bit trickier. The gross lot size is not as important as the size of the level pad. A large level lot studded with protected trees may not be as desirable as a home on a smaller more usable lot.
Not all square footage is created equal. Tandem bedrooms, square footage carved out of attic space, basements and poor additions will not add the same value as square footage belonging to a conforming floorplan with a good flow.
Unless we are looking at luxury real estate, typically smaller homes sell at a higher price per square foot than larger homes. If you think about this it makes sense. Big or small, each home has a lot and each one has a kitchen (high cost room).
Unless you are comparing apples to apples, price per square foot only provides a very loose comparison and this is why most online home evaluations often vary by 20% or even more. Price per square foot provides average or median ranges to enable all of us to understand market trends.
Have your agent guide you as to which price he believes the home will sell. Keep tabs on the selling price of all of the listings you have looked at and most important the homes you lost.