By Dian Hymer
Wouldn't it be nice to have an easy way to find out how much the home you want to buy or sell is worth? Some consider price per square foot to be a valid way to determine market value. The price per square foot is arrived at by dividing the sale price or estimated value by the number of square feet.
In theory, by using the price-per-square-foot approach, you could easily determine what price to pay for a listing. All you would have to do is find out the price per square foot for a number of properties that recently sold in the neighborhood that are similar to one that you're interested in buying. Then average these figures and multiple the average price per square foot by the number of square feet in the home you want to buy.
Or, if you were selling, you could determine how much your home ought to sell for by finding out how much buyers paid on a price per square foot basis for homes similar to yours.
There are shortcomings to this approach. In areas where there is extreme variability in home size, style, improvements and amenities, price pre square foot could mislead you.
Consider three homes that sold within the last six months in Piedmont, an upscale community in the east San Francisco Bay Area. All had about 2,600 square feet. One sold for $712.16 per square foot, another for $617.98 per square foot, and the third sold for $484.18 per square foot. The average of the three is $604.77.
Given the range of variability, if you used this average to base your decision on what to offer on a Piedmont listing with approximately 2,600 square feet, you could end up paying way too much or offering way too little. Likewise, if you used this information to select a list price for your home, you could end up pricing it too high or too low.
HOUSE HUNTING TIP: For a price per square foot to be a reliable indicator of value, you need a standardized housing stock. For example, it would probably be reliable for condominiums in a development where all the units were the same size, had the same ownership dues and offered the same amenities. But, as soon as variability enters into the housing stock, price per square foot alone won't tell the entire story.
When planned unit developments are new, price per square foot is a useful gauge. But, as these developments mature, so does the housing stock. Some people will completely remodel within a couple of decades and others may make only minor modifications. And, then there are those homeowners who do nothing, thereby creating a neighborhood eyesore.
In older neighborhoods, where homes weren't built at the same time or in the same style, there's even more diversity. Within this varied environment, certain types of homes may attract higher prices. For example, in Piedmont, charming older homes in the center of town are in high demand, and sell for much more than newer ranchers on the edge of town. This accounts for the difference in price between the houses mentioned above that sold for $712.16 and $484.18 per square foot.
The most accurate way to determine the estimated selling price for a property is to compare all the attributes of that property with similar properties that have just sold, not just the price per square foot. Features like lot size and utility, the view, the location and the quality of the finishes all have an effect on value.
THE CLOSING: The comparative approach to value is more subjective, but makes up for the shortcomings of relying solely on price per square foot.
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