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June 18th, 2012 12:57 PM by David W. Welch
I have to bite my tongue whenever anyone brings up price per square foot. The majority of the time, in my opinion the price per square foot is almost irrelevant. It seems like an obvious measure of a home's value, and even a way to easily compute the price a home owner should expect for their house. Unfortunately, price per square foot rarely works for assessing value. The best way to explain is with a few examples.
I will tackle of the less obvious examples first, and that is the idea of diminishing returns. Two houses in the same neighborhood, the first is 2,000 square feet and sells for $200,000 or $100/sq ft. The second house is very similar in condition and the number of bedrooms and baths, but it is only 1,800 square feet. If you apply the $100/sq ft to the second house the value would logically be $180,000. It is entirely possible the lot value for each could be $100,000. If you subtract that out, then the actually price per square foot of the first house is only $50. So $100,000 for the lot plus $100,000 for the house equals $200,000. Applying that methodology to the second home would calculate a value of $190,000. Using a comparable sales approach, I would probably only give the extra 200 square feet a value of $6,000 in this price range, so I would likely give a value of $194,000 to the second home.
Now a couple of easy examples. Condition - Two houses side by side with the same size and floorplan. If one sells for $100/sq ft so should the other, right? What if the first one had a new roof, a/c, remodeled kitchen and baths and was in move in condition, and the second home had a leaky roof, missing a/c and required numerous repairs. Location - Two houses in the same neighborhood in similar condition and the same size and floorplan, aha if one sells for $100/sq ft, so should the other one. What if the first one was on a standard lot in the middle of the neighborhood, and the second one was on a popular ski lake. That second owner, might think your pricing is a little low.
I ran into virtually all of these examples just in the last week, which is why I am posting this. You cannot just apply the price per square foot in determining value. You have to consider the added or lost utility of the square feet, the condition and the relative location of the properties. While price per square foot is an interesting statistic, it is not the best method for valuing real property.
David Welch Real Estate Optimist, Orlando Real Estate, Search for Homes