Over the years working as a Realtor, I have seen numerous home buyers and other Realtors try to use price 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 several reasons why this is the case, but let’s start with individual homes themselves.
Looking carefully at housing characteristics, you can break down homes into four categories. Let’s look at how each category could be the same size home but have a widely different price per square foot value.
Economy housing would be characterized as building a home in the most cost-efficient manner. More often than not, the materials used in constructing a home in this category will be cheaper than other categories of homes.
The goal is to deliver a home that would be affordable to those buyers with 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.
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.
In a custom-built home, you are bound to see things 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.
For example, you may see a higher level of finish woodworking, cabinetry, flooring selections, and hot buttons like granite countertops 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.
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, a home can fall between these categories, but the four categories are enough to show you why using price per square foot to determine a home’s value is a very poor measuring stick.
An Example of Two Identical-Sized Homes
Let’s 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 walkway
House “B” has the following amenities:
- Formica counters and white appliances
- A standard shower
- Carpets throughout the 1st floor
- Plastered door openings with no molding
- A dropped flagstone walkway
How about a quick guess of which home will be worth more on a dollars-per-square-foot basis?
This example shows that you can not take the average price per square foot and multiply it by the square footage of the home you buy.
Far too many variables are involved with a home’s characteristics to generalize that. It just doesn’t work that way.
Price Per Square Foot Does Not Calculate Market Values
The pricing per square foot gives you average or median ranges and shows market trends. It does not compute value!
Want to view an even more detailed post showing why the price per square foot is not an accurate way to value a home? Check out the reference above from Maximum Real Estate Exposure.
The article not only touches on how homes are very different from one another but also goes into an in-depth discussion of how many locations 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 that prices per square foot can vary based on the home’s 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?
Location Play A Significant Role in Market Values
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 the trends in an area.
You can look at the average price per square foot over time and see whether overall market values are going up or down. The only time price per square foot can be helpful 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 regularly.
How is The Square Footage Calculated?
In Massachusetts, one of the other factors that can skew the averages on the price per square foot of a home is how the square footage is calculated.
In the Greater Boston MLS, there is a significant disparity in 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 analyzing square footage value.
As you may realize, the finished space below grade is far less valuable than the above-grade living area. A straight-line comparison is much more difficult when these figures are mixed together.
Over the years, I have encountered many buyer agents trying to present a case of why their client’s offer is fair. I usually teach them proper market evaluations when they discuss the price per square foot.
Using price per square foot to value real estate is just as bad as trusting Zillow home values. Please don’t do it!
Square footage is only one variable in pricing a home correctly. A detailed comparative market analysis should be prepared to get a house’s most accurate value.
It will be the best method for accurately arriving at fair market value.
About the author: Bill Gassett, a nationally recognized leader in his field, provided the above Real Estate price per square foot for home values. Bill can be reached via email at email@example.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 36+ Years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.