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Why Price Per Square Foot Is a Terrible Indication of Home Value

Look at any home’s listing here in San Francisco or anywhere, and price per square foot will have a prominent spot. That’s because people buying and selling want simple ways to convey the value of a home, and price per square foot, for better or for worse, has become one of them. Unfortunately, price per square foot is a terrible indication of home value. Here’s why.

But It’s Easy Math…

Start with the price of a home, divide it by the property’s square footage, and boom, you get the price per square foot. Accountants love this approach, since their focus is entirely on the numbers in relation to land costs, construction costs, and the sales price per square foot. For them, the higher the number, the better!

But this magic number is still just a number, and it fails to adequately account for the fact that there are different categories of homes on the market. Take two homes of the exact same square footage, but put one in a desirable neighborhood with great schools and the other on a busy street. Immediately, you know that home A will sell for more. But pricing out these homes based on square footage means one is getting a price that simply will not work.

This kind of bad pricing can also create a ripple effect, with potential sellers assuming their homes of a certain square footage should automatically sell for the same price as similar-sized homes, regardless of neighborhood, upgrades, property size, and other variables. Unless an experienced agent is stepping in with a healthy measure of stone-cold reality, these folks are setting themselves up for disappointment.

Measurement Discrepancy

Another pitfall in relying on price per square foot for pricing a home? There’s a huge discrepancy in the proper way to measure square footage – do you measure to the interior of the wall? Include deck or patio space? I’ve even seen garage spaces included!

This focus on price per square foot creates a blind spot wherein people find themselves scoring a great price per square foot, but just a so-so property. And that really defeats the entire purpose. It’s where terminology like “wasted space” comes into play.

Understanding a home’s true value means accounting for all the variables that make it unique. And that’s best done with the help of someone with the experience and expertise to understand what matters, and what doesn’t. A detailed analysis will go so much further in helping you price your home appropriately. If that sounds like a good place to start, I’m here to help.

CalBRE #01224570

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