Price Per Square Foot is Unreliable as an Indicator of Value

It’s pushed as easy to understand and apply, but price per square foot is unreliable as an indicator of value for detached single family homes. In fact, price per square foot is probably the most unreliable way to estimate value there is. But…it fits the current 5 second attention span, sets a benchmark “number” for comparison and is often vague enough for those that provide it to distance themselves rapidly when needed. It’s also a great throw away line for the 22 minute real estate shows…”See Timmy, my research shows a PPSF is $275 so this home is worth $788,028″. Timmy nods enthusiastically and assumes all is good – just like the teens at camp that walk into the bunkhouse whistling while the “summer camp killer” waits inside with an ax. Don’t be Timmy; price per square foot analysis doesn’t stand up to even the slightest scrutiny.

Variables that Make Price Per Square Foot Unreliable

  • Buyer & Seller Motivations
  • Closing Costs/Concessions in the Price
  • Age/Design/Size
  • Build Materials/Finish Quality
  • Location/Area Appeal/Trends
  • Inaccurate Tax Data

Those are just some of the obvious influences on every sale. Also consider not so obvious things; did a mass murder or other notorious event occur in a home (Timmy)? Did the lead singer from a boy band grow up there and some fan pay extra for that? How far back in time do you go in transitioning areas? How is an over 55 cluster community in the same data pool with multi level golf course homes and lake homes with views and deep water dock rights? Are sales of homes on leased land considered? The variables don’t stop.

Here’s a three minute video that touches the high points of why price per square foot is unreliable indicator of value…

Price per square foot has a place in real estate. It’s mainly a tool for the commercial environment where the variables are fewer; still present but more controlled. In new “cookie cutter – tract construction” it has limited application; but variables like the always mysterious “lot premium” and added upgrades must be accounted for. Condos and townhomes…we see use here as there’s consistency in size and design. The variables include condition, views and the usual buyer-seller conditions. For existing detached residential homes….NO.

Without question the best way to estimate the market value of a home is to have an appraisal completed. Paired sales analysis using recent and similar closed sales will provide a supported estimated value range. The market (buyers) ultimately decide what a home is worth; and that process has it’s own list of influences – mainly emotion on both sides. Buying and selling real estate is unlike anything else; no two homes are alike, no two deals are alike and we’re doing all of this in a constantly moving economy. HGTV et al are not the real world, get educated and work only with pros.

Questions? Maybe we should talk.

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