When it comes to buying a home, one of the most common metrics buyers consider is the price per square foot. It never used to be that way, but my career pre-dates the websites with online listings that feature the price/per square foot so prominently, which quickly became a lazy way to determine value without really digging in.
On the plus side, it is a value that offers a straightforward way to compare properties and assess their relative value. On the downside, price per square foot has serious limitations and should really be just one of many factors buyers consider before they make an offer.
So, how much value should you place on the price per square foot when making an offer on a home? Here’s what to keep in mind.
Understanding Price Per Square Foot
Price per square foot is calculated by dividing the sale price of a property by its total square footage, but how you calculate that square footage varies greatly, which means the calculation is only as good as the base square footage number. In practice, it provides an average value—and that’s key—for the space within a property. While it can serve as a starting point for comparing homes, it should most definitely not be the sole determinant of a property’s worth. At best, price per square foot can be a helpful data point, but it’s important to be aware of its limitations.
Price per square foot doesn’t account for important factors that directly impact a home’s value, including:
- The original square feet calculation: unwarranted square footage is often left off of posted listings because it hasn’t been deemed legal square footage yet, but in practice functions as a usable space to the property.
- A home’s location
- A home’s condition
- A home’s unique features and upgrades
- The overall quality of construction
- The varying ways square footage is measured (walls in vs walls out measurements can add or subtract 100 sq ft and on a small condo that skews that average tremendously)
Ignoring any of these elements may lead to an inaccurate assessment of a property’s true market value. Remember the best definition of market value is what a willing buyer is willing to pay and a willing seller is willing to sell for.Of course, even cookie-cutter properties in the same neighborhood can vary significantly in terms of layout, architectural style, views, upgrades, and overall condition. A home with a breathtaking view, exceptional landscaping, or high-end finishes, for example, will have a higher value per square foot compared to other properties in the area that are in original condition. The same is true of features like the number of bedrooms and bathrooms, the layout, architectural style, amenities, and any special attributes like a pool, a view, or a recently renovated kitchen. These kinds of details aren’t adequately captured by the price per square foot method.
Remember to Account for Current Market Trends
Real estate markets are dynamic and subject to quicker fluctuations than you may realize, which means relying solely on historical price per square foot data often does not reflect current market conditions. It’s also why I’m not a big fan of metrics like the Case-Schiller reports to determine value. Appraisers take into consideration current market trends and adjust accordingly, which ends up being in most cases an “educated opinion.” Line four appraisers up and I can often get a $200,000 difference for the same property, which is swayed by that particular person as much as data points since it’s rare to find perfectly similar recent sales as comps to rely on.
Look to the Experts
There’s no substitute for experience, and that’s especially true in real estate. Yes, listing agents are paid to highlight the best attributes of their listings and good buyers agents will poke holes in those assertions to try to get you the lowest price, but over time you can see certain trending talking points in the area you’re looking to buy (or sell in) rise to the surface. Good agents that know their area will tell you why that side of the street is less desirable, or why being a few blocks away from another comp will put you in heavy traffic trying to get to say the slopes, or yes, that home has great views but have you thought about the wind factor on your outdoor grilling aspirations? True experts have both the knowledge and the experience to evaluate properties for their strengths and weaknesses more accurately than any online calculation can reveal. A great agent can help you navigate the complexities of determining a fair offer or listing price by considering multiple factors far beyond just the price per square foot.
The Bottom Line
Price per square foot is a helpful metric in comparing homes, but don’t look at this calculation alone to determine value. When you fixate entirely on price per square foot, you overlook other, more important considerations that impact a property’s real value. The best approach is to be clear on the inherent limitations of price per square foot and most importantly get good counsel. Of course, you should also do your own research so that you can make a truly informed decision.
Looking for property in the San Francisco Bay Area, Reno-Lake Tahoe, or just have questions about price per square foot in your area? You know where to find me.