Wouldn't it be nice to have an easy way to find out how
much the home you want to buy or sell is worth? Some
consider price per square foot to be a valid way to
determine market value. The price per square foot is
arrived at by dividing the sale price or estimated value
by the number of square feet.
In theory, by using the price-per-square-foot approach,
you could easily determine what price to pay for a
listing. All you would have to do is find out the price
per square foot for a number of properties that recently
sold in the neighborhood that are similar to one that
you're interested in buying. Then average these figures
and multiple the average price per square foot by the
number of square feet in the home you want to buy.
Or, if you were selling, you could determine how much
your home ought to sell for by finding out how much buyers
paid on a price per square foot basis for homes similar to
yours.
There are shortcomings to this approach. In areas where
there is extreme variability in home size, style,
improvements and amenities, price pre square foot could
mislead you.
Consider three homes that sold within the last six
months in Piedmont, an upscale community in the east San
Francisco Bay Area. All had about 2,600 square feet. One
sold for $712.16 per square foot, another for $617.98 per
square foot, and the third sold for $484.18 per square
foot. The average of the three is $604.77.
Given the range of variability, if you used this
average to base your decision on what to offer on a
Piedmont listing with approximately 2,600 square feet, you
could end up paying way too much or offering way too
little. Likewise, if you used this information to select
a list price for your home, you could end up pricing it
too high or too low.
HOUSE HUNTING TIP: For a price per square foot
to be a reliable indicator of value, you need a
standardized housing stock. For example, it would probably
be reliable for condominiums in a development where all
the units were the same size, had the same ownership dues
and offered the same amenities. But, as soon as
variability enters into the housing stock, price per
square foot alone won't tell the entire story.
When planned unit developments are new, price per
square foot is a useful gauge. But, as these developments
mature, so does the housing stock. Some people will
completely remodel within a couple of decades and others
may make only minor modifications. And, then there are
those homeowners who do nothing, thereby creating a
neighborhood eyesore.
In older neighborhoods, where homes weren't built at
the same time or in the same style, there's even more
diversity. Within this varied environment, certain types
of homes may attract higher prices. For example, in
Piedmont, charming older homes in the center of town are
in high demand, and sell for much more than newer ranchers
on the edge of town. This accounts for the difference in
price between the houses mentioned above that sold for
$712.16 and $484.18 per square foot.
The most accurate way to determine the estimated
selling price for a property is to compare all the
attributes of that property with similar properties that
have just sold, not just the price per square foot.
Features like lot size and utility, the view, the location
and the quality of the finishes all have an effect on
value.
THE CLOSING: The comparative approach to value
is more subjective, but makes up for the shortcomings of
relying solely on price per square foot.
Dian Hymer is author of "House Hunting, The
Take-Along Workbook for Home Buyers" and "Starting Out,
The Complete Home Buyer's Guide," Chronicle Books.
Copyright 2005 Dian Hymer
