Great article…along with the comments that followed. How would you determine value for this situation: Home A recently sold for $465,000, and is 2,580 sq feet. Home B is 1,940 sq feet. Both homes are in the same neighborhood, are the same age, have the same amount amount of Bedrooms/baths along with being in similar condition. Basically, home B is a smaller version of home A. EVERYTHING else is the same. There hasn’t been any other sales within the neighborhood within the last 24 months, never mind 6 months. Thoughts??

$/sq ft is fluid; it is very relative. So for almost each client, I search for the property they want and generate a list. I then search for those same properties which have SOLD in the last 3 – 6 month. Many times the least expensive homes that are available are 20 – 40% HIGHER than the least expensive homes which have just sold. House + amount of work/equipment = full value. Full value + extras = higher price.

Just my thoughts

Your argument makes more sense when you are talking about a neighborhood that has homes built with the same builder who used relatively similar building specifications for all the homes. Your argument does not hold water when comparing custom homes to homes that are stripped. As an example there are plenty of homes built in neighborhoods where the homes are identical in size but don’t sell for anywhere near the same price. Some builders load their homes with custom features with the highest quality possible. Other tailor their homes based on affordability.

Price per square foot does not account for land costs or location among other variables as well. I am sure their are some neighborhoods where you live that command a premium event though they could be the same size home as a lesser desired area?

All those high end amenities translate to higher cost to build or replacement cost, but not necessarily $ for $ market value. There is plenty of data about ROI for remodels that show this. The higher you go above your relative market in cost to build, there are less potential buyers and return. If your cost to build was double the $/SF for similar houses in the region you will likely take a haircut when you sell. Nice amenities may appeal to more buyers, but ultimately market value is only what someone will pay for it. $/SF for reasonably comparable homes is a tool that should be used when making purchasing , building or remodeling decisions. It won’t do the fine tuning, but if there are enough comparable homes, it will get you into the ballpark.

If you use recent sales by neighborhood, then zone, and using the same style of home, you are off to a very reliable per sq. ft. analysis of value. You correctly give the way to rectify values by the age and quality of the homes used. So, give a total of five or six rankings, and, voila, you have a way to adjust upwards or downwards by its rank.

Five rankings, with new construction being 1, or the best, and a tear down being 5, gives you a rough adjustment capability of 20% up or down. So, if I am trying to estimate the value of new construction in a one acre zone in a neighborhood that has only had homes over 5 years old sold as my comps, I will take the average of those heated, livable sq. ft. numbers and mark them up by 20%. You will find that this will give you a very good number, providing we are, indeed, comparing heated livable sq. ft. and not gross improved area, which includes garages, porches, decks, mechanical rooms, etc. As for finished basements, you can either throw the improved area, under air, as they say in the south, in its entirety or take 50% of it and add it on.

Mark ups of 5% are usually good for aspects, such as location, pools, tennis courts, amenities, quality of neighborhood relative to others in the particular zone, etc. However, you will find that these balance out in many cases, making the rougher estimate very reliable.

Jonathan Wilcox