Living in a Price-Per-Square-Foot World

Buyer, seller, agent or appraiser, price-per-square-foot is a formula everyone knows. We all seem to understand this concept when anyone is talking about real estate and home values. Right or wrong, price-per-square-foot is just the way America perceives home values. It’s a topic discussed daily in real estate offices across the country. Even HGTV® teaches consumers this simplistic calculation at the beginning of many home shows.

Let’s look at this simple calculation in action.

$200,000 sales price divided by 2,000 sqft = $100.00 per-square-foot.

$200,000 sales price divided by 2,200 sqft = $90.91 per-square-foot.

If the next house up for sale is 2,100 sqft, how much difference does this simple calculation make?

2,100 sqft times $100.00 per-square-foot = $210,000

2,100 sqft times $ 90.91 per-square-foot = $190,911

A difference of $19,089.

This scenario is played out in areas all around the country. When people use the square footage totals listed in public records to determine a home’s value, there’s a very good chance the calculations will be wrong. Maybe 50 sqft, may 200, maybe 2,000. Like most of the real estate business, “it depends” applies to every property. However, square footage totals created during a mass appraisal process were never designed or intended to be used for detailed property comparisons. These square footage totals reported in public records are in error more than most industry leaders want to admit. If consumers knew just how much difference their home’s value might be, simply by using the accurate square footage information, they would never accept any CMA from a Realtor® without insisting their home be measured prior to any value being calculated.

If you’ve got an extra twenty grand to play with, go ahead and have your home valued using the square footage total from the local tax office. If you want to know the true size (and value) of your home, have it measured before you decide on a price.

How much is the home per-square-foot? That’s a question Realtors® hear almost daily. While it’s a logical starting point in the valuation process, determining the fair market value of any home is much more complex than using this over-simplified formula. Consumers are often mislead about the importance to place on this calculation, because they see it in every automated valuation model or computerized home valuation service. It’s all over HGTV®, and, it can give a false impression that calculating a home’s value is as simple as plugging in a few numbers and instant real estate guru. In the real world of real estate and home prices, price-per-square-foot can be a very dangerous and expensive lesson.

The concept of price-per-square-foot is easy, it’s simple division. Two numbers and whalla! It’s an all-powerful, almost magical number, price-per-square-foot. Everyone has heard about the formula and many people think there are always these perfect “comparable” homes just waiting to be compared. If only that was true it would make Realtor’s and appraiser’s jobs much easier. However, there’s much more to accurately pricing a home than this simplistic formula. Buyers, Sellers, and many agents use it to compare properties. It is an important first step in valuing a property. Unfortunately, because of its simplicity, it is often misused and misunderstood.

Don’t trust your financial future to a roll of the dice. If you determine the value of your house using the square footage numbers reported by your local tax department, that’s just what you’ll be doing. In a real estate market already in distress, you don’t need any extra reasons to reduce the price.