Over the years working as a Realtor I have seen numerous home buyers as well as other Realtor’s try to use dollars per square foot as a good measuring stick for market values. Sorry folks but that is a very poor way to analyze value.
There are a number of reasons why this is the case but lets just start with individual homes themselves. If you look carefully at housing characteristics you can basically break down a home into one of four categories.
Economy~ Economy would be characterized as building a home in the most cost efficient manner. The materials used in constructing a home in this category more often than not will be cheaper than other categories of homes. The goal is to deliver a home that would be affordable to those buyers on a lower income. If you looked in a catalog of materials such as cabinets, flooring, lighting and plumbing fixtures you would see the lowest grade used in this category.
Standard – A home built under this category would be a step up from an economy home. A large percentage of homes would come under this category. You would expect to see the quality of the home jump from an economically built home. With a standard built home you may see some construction items that could also be found in both economy and custom categories.
Custom – In a custom built home you are bound to see things that you will not find in either an economy or standard home. The quality of the materials used to construct the home as well as the amenities inside are going to be different. As an example you may see a higher level of finish woodworking, cabinetry, flooring selections and hot buttons like granite counter tops and stainless steel appliances. Custom homes are more unique and may have other architectural characteristics that make them more expensive to build such as intricate roof lines and higher end materials used on the facade such as stone or brick.
Luxury – A luxury home is the best of the best. These are the homes that are built with the highest grade construction materials. There is no expense spared on anything and the amenities seen inside the home are sometimes enough to make your mouth drop! It is not unusual to see such things as home theaters that rival going to the movies, indoor swimming pools, wine rooms and other such amenities.
Of course it is possible for a home to fall somewhere between each of these categories but the four categories are enough to show you why using price per square foot to determine a homes value is a very poor measuring stick.
Lets look at a quick example of two homes that are both 3000 square feet. They are both a year old.
- Granite counters and stainless appliances
- A custom tile shower
- Hardwood floors throughout the 1st floor
- Raised paneling and crown moldings
- A brick walk way
House “B” has the following amenities:
- Formica counters and white appliances
- A standard shower
- Carpets through out the 1st floor
- Plastered door openings with no molding
- A dropped flagstone walkway
How about a quick guess of which home is going to be worth more on a dollars per square foot basis?
This example clearly shows that you can not take the average price per-square-foot and multiply it times the square footage of the home you are thinking about buying. There are far too many variables involved with the characteristics of a home to make a generalization like that. It just doesn’t work that way. The pricing per-square-foot simply gives you average or median ranges; it shows you trends in the market. It does not compute value! Want to view an even more detailed post that shows you why price per square foot in not an accurate way to value a home? This article not only touches on how homes are very different from one another but it also goes into an in-depth discussion of how much location can impact the price of a home.
The comparison above only touches on one reason why cost per square foot is a poor indicator. There are others including the fact that prices per-square-foot can vary based on the homes location, improvements, condition, age and updates, including lot sizes, and whether it’s a one-story, two story or split-level home, among other things. This article analyzes all of these things in an easy to understand way. Is it any wonder why those who try to use price per square foot get their home price completely wrong?
Going back to the above example, I think it is easy to see that if home “A” was also located in the best part of town and home “B” was not, the disparity of the selling price is going to be even greater which would change the price per square foot between the two homes.
One of the best reasons for even looking at the price per square foot of a home is to see what the trends are in an area. You can look at the average price per square foot over a given time period and see whether overall market are values going up or down. The only time price per square foot can be useful is when all the homes are completely uniform. Of course this does not happen all that often! Typically you would see this in a neighborhood where all the homes were built by the same builder and have very similar amenities. This does not happen on a regular basis.
In Massachusetts one of the other factors that can really skew the averages on the price per square foot of a home is how the square footage is actually calculated. In the Greater Boston MLS there is a big disparity on what agents include in the gross living area of a home. You will see that some homes include finished basement space and others do not. This can cause quite a fluctuation in how these figures appear when doing an analysis on square footage value.
As you may realize, finished space below grade is far less valuable than above grade living area. When these figures are mixed together it makes a straight line comparison much more difficult.
I have run into plenty of buyers agents over the years that try to present a case of why their clients offer is a fair one. When they start talking about price per square foot I usually end up giving them a lesson in proper market evaluations:)
About the author: The above Real Estate information on price per square foot is misleading for Real Estate values was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at firstname.lastname@example.org or by phone at 508-435-5356. Bill has helped people move in and out of many Metrowest towns for the last 28+ years.
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