The real estate industry is full of buzzwords and catchphrases. The one we’ll be looking at today is the price per square foot. This is a phrase you’ll hear a lot when comparing different homes on the market. It’s meant to give you an idea of a home’s market value and can be useful in helping you determine if a property is a good deal or not. However, to be in any way useful, the accuracy of the data has to be questioned as well as whether you’re making an accurate comparison with other properties. Let’s take a closer look at the price per square foot, how it can help you shop for a home, and what its limitations are.
How is Price Per Square Foot Calculated?
Almost every home listing will have the price per square foot clearly stated where every potential buyer can see it. This is simply the square footage of a home divided by its sale price. But how is the square footage calculated and who does the calculating? Home sellers and their agents will rarely do it themselves as it opens up huge liability if they misrepresent it, even inadvertently. Instead, most square footage numbers come from previous listings, a recent appraisal, county tax records, or the floor plan from the original developer.
How accurate this information is can be a bit contentious. By its nature, home building is imprecise. Many homes have difficult to measure areas and there are often stark differences in new constructions between the final build and the original floor plan. Different states, counties, and MLS’s can also have different guidelines on how square footage is to be calculated. Make sure you know what the guidelines are in your area.
In most cases, the square footage should include all finished and unfinished “living space” in a home. Living space is usually defined as any area that is heated and a part of the main structure. This excludes the garage, attic, porch and any detached structures like a guest house. If a listing does not specify the square footage, then you can find out by calling the county tax assessor’s office and asking for the property’s tax records. This will specify the square footage of the homes living space. However, as mentioned, this number may be inaccurate due to survey errors or recent alterations. As a buyer, the best approach to finding out the square footage of a home is to get a survey done by a licensed contractor.
How to Make Use of Price Per Square Foot
On its own, price per square foot doesn’t really tell you much about a property. You make use of it by comparing it to similarly listed properties in the neighborhood. You can do this by calculating the average and/or median value. Depending on the neighborhood and how comparable recent sales are, one will be more valuable as an indicator of value than the other.
1.) Average Price Per Square Foot
Calculating the average is useful when most of the local listings are roughly the same in value. You can calculate this by adding up the cost per square foot of each listing or recent sale in a neighborhood and dividing that by the number of homes sold. For example, let’s say three homes in a neighborhood were recently sold for $200,000. Our first property, Property A, was 1,000 square feet, while properties B and C were 1,200 square feet. Across the street, two more homes were sold. Property D for $180,000 at 1,200 square feet and Property E for $585,000 at 2,100 square feet. When looking at their price per square foot the numbers come out like this:
- Property A – $200 per square foot
- Property B – $167 per square foot
- Property C – $167 per square foot
- Property D – $150 per square foot
- Property E – $1278 per square foot
When added together and divided by the number of properties, this gives an average price per square foot of $192.
2.) Median Price Per Square Foot
When there are extremes in pricing, the median price per square foot is far more valuable as an indicator of value. It’s simply the middle point between the higher half of the data from the lower half. For the example above, the median would be $167.
The Importance of Keeping Things in Perspective
Knowing the price per square foot of a home can be useful, but it’s important to keep things in perspective. Prices per square foot can vary widely based on location, lot size, overall condition, the age of the property, upgrades, and a host of other factors that make each property unique. These have to be considered when comparing different properties and neighborhoods. Just because you’ve found a listing that’s priced below the median doesn’t necessarily make it a great deal. You have to look at why this might be the case. Is the lot size smaller than other listings in the neighborhood? Does the property need a little TLC? Have any major improvements been made to the other listings?
A lot goes into deciding on whether or not to make an offer on a home. Price per square foot is just one aspect and should never be relied on solely in determining a home’s value. Still, it can tip you off that there’s different about a listing if it’s above or below the average, and it’s virtually identical to comparable properties. For more buying tips like these, check out naeba.org or consider hiring an Exclusive Buyer’s Agent today.