Price Per Square Foot: A Terrible Valuation Method in Real Estate (2024)

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A luxury home is considered the best of the best. These homes are constructed with the highest grade of construction materials throughout. There is no expense spared on anything, and the amenities seen inside the home are sometimes enough to make your mouth drop!

Comparing Apples And Oranges With Price Per Square Foot

When you consider the different types of homes that are out there, it is easier to understand why the price per square foot is not the best tool to calculate the value. The cost of a single room in a luxury home may match that of an entire economy home.

Price per square foot only gives you average or median ranges to help you understand market trends. So when someone asks if the price per square foot is the best way to value a home, the answer is clear cut and dry – NO, it is not!

The best way to show you this is to give you a perfectly detailed example. Let’s say you have two homes that are 2800 square feet.

Home “A” has the following amenities:

• A single tab roof shingle and builders-grade windows.
• A dropped flagstone walkway and concrete front steps.
• Carpets throughout the first floor and linoleum in the bathrooms.
• The kitchen and baths have “stock” cabinetry.
• Formica countertops in the kitchen and bathrooms.
• Plastered door openings with no wood trim.
• Hollow core doors throughout.

Home “B” has the following amenities:

• An architectural roof and Anderson windows.
• A brick walkway.
• Hardwood floors throughout the first floor and tile in the baths.
• A custom kitchen.
• Granite countertops in the kitchen and baths.
• Crown moldings throughout the first floor and wide base molding on the first and second floors.
• Solid doors throughout.
• Central air.
• Sprinkler system.
• Security system.

Too Many Other Variables Besides Price Per Square Foot

Now keep in mind these homes are the same size. You don’t need to be a rocket scientist to know that home “B” should sell for significantly more than home “A.” Let’s now go a step further and put home “B’ in the best neighborhood in town and put home “A” on a busy road.

Real Estate agents who want to use pricing per square foot to calculate value this way end up looking like fools. Using the price per square foot method with home “A” selling at $400,000 would give you a price per square foot of $142.86.

Sorry boys and girls but house “B” sure as sh*t is not going to be selling for $142.86 per square foot. This, however, is exactly how some real estate agents and consumers like to calculate a home’s value.

Some home buyers will see that a home sold for X amount on Main Street and try to transfer that calculation to the home they are considering making an offer on. This is NOT how real estate valuation works.

Then, of course, some home sellers will see house “B” selling for a certain amount per square foot and will automatically assume their home should sell for the same, even though they do not have half the amenities and live in a far less desirable location.

Price Per Square Foot Doesn’t Work Pricing Houses

I remember a gentleman interviewing Grafton Real Estate agents a few years ago. He wanted to use the price per square foot to determine his property’s value. Clearly, he did not understand by using this simple method, he was setting a price for his home that did not work.

As many sellers do, he decided to list with the agent that went along with his thinking. Needless to say, I was back in the door four months later, cleaning up this seller’s mess he created by overpricing his home.

This illustration above clearly shows that you can not multiply the price per square foot by the square footage of the home you are considering buying. There are way too many variables with a home’s characteristics to make generalizations like that.

Both buyers and sellers need to understand this is not how to properly value a home. If you are selling a home, the price you set is the most significant reason it will sell.

Overpricing will cause failure nearly every time. Buyers and sellers need to understand proper real estate valuation techniques to accurately understand a home’s true value.

Getting Into The Finer Details of Price Per Square Foot

Another thing to consider about pricing a home is just how much each aspect of a home can impact its value in the marketplace. Many different things can go into a home’s price calculations that are not readily apparent when you look at the price per square foot.

You may have a two-story home, a home that has gone through major renovations, or a home on a big lot. Each of these factors will influence the price.

Comparing a home on a large lot to a home on a smaller one will skew the pricing per square foot – even if the larger one is nicer, its per square foot price can easily be less than the house on the small lot.

A home in a better area may demand far more than a home in a not-so-nice area, which can also change the price per square foot.

The Impact of Other Variables Matter

How the square footage is calculated can also impact the price per square foot. One home may have a square footage calculation that includes a finished basem*nt, while the next may not. Comparing both homes by their price per square foot then becomes useless.

For those who don’t know this, below-grade square footage is worth much less than above-grade space. Any appraiser will confirm this for you.

So if you have one home that is 3500 square feet above grade and another that has 3000 above grade and 500 square feet below grade – all other things being equal, the home with 3500 above grade is worth far more money.

Did you also know that the actual size of a home will impact what it sells per square foot? Yes, it’s true.

Generally speaking, smaller homes will sell at more per square foot than larger homes. As a home gets larger in size, the price per square foot often drops. This is another danger of using prices by square footage to put a value on a home.

Another example is bedroom counts. A smaller four-bedroom home may have considerably more value than a three-bedroom home with gigantic rooms. In these instances, the smaller home can be worth the same or more than the larger one just because it has an extra bedroom.

To take this a step further, you could have a large two-bedroom home that could be considered to have functional obsolescence because the appeal of having two bedrooms is limited.

All of these homes could have the exact square footage, and the bedroom count would seriously impact the total value of each!

Location Makes A Huge Impact on Value

One of the variables that proponents of assessing a home by price per square foot often forget is location. They don’t say location, location, location in real estate sales for nothing.

It is one of the most important factors for placing a value on a property.

A home selling on the main road will sell for something different than the same home on a country road. The same home selling for X on a country road will sell for something else than if it’s located in a neighborhood.

Taking the same home and placing it in the BEST neighborhood in town can cause it to sell for something even more.

Does price per square foot take into consideration a home’s location? No, it does not! This is why real estate agents often emphasize how choosing the right neighborhood is critical to long-term appreciation and resale value.

Those who understand this concept end up ahead in the long run. The difference in value between one neighborhood to the next can be substantial.

Sometimes even being located in one school district over another can influence the value of two identical size homes.

Using Price Per Square Foot Has One Exception

For those who like to use pricing per square foot to evaluate property values, there is only one circ*mstance where it can be helpful. The appropriate word to describe this situation would be UNIFORMITY.

The best example is when you have a neighborhood that only includes a few homes styles and similar lot characteristics. Think tract housing. The community has been developed by one builder who has constructed all the households similarly using the same materials and amenities in all of the homes.

Price per square foot can be helpful as a measuring stick for value because everything is the same. The location is the same; the lots are similar, and the way the homes were built is close to one another.

A good example is condos or townhouses. These housing choices are often very similar to one another, with not much distinction. There will possibly be some upgrades from unit to unit that can be accounted for.

This is the only way that price per square foot will give you an accurate valuation point.

Other Poor Home Value Indicators

Pricing per square foot is not the only lousy value indicator that people use to value property. Some of the others include:

Zillow estimates – A Zillow estimate, or Zillow Zestimate as they like to call it, is a terrible indicator of home value.

Assessed value – an assessed value is another terrible means of arriving at a value. This is one quite a few real estate agents will incorrectly use. Take a look at the article and see why it is off so much. Essentially there is no correlation between assessed and market value.

The assessed value is used for tax assessments on the property to collect an appropriate amount of taxes.

Refinance Appraisal – a refinance appraisal is usually to either get a lower interest rate on a loan or take equity out of the property. They want to see this work for the lender to make additional money. Enough said.

Getting Pricing Right Means Avoiding Pricing Per Square Foot

The only real way to understand the value of any given home is to calculate the value based on the individual home, preferably with the help of an experienced Realtor.

A real estate agent, if she or she has been at this very long, should know how to measure up the value of a home in a particular area and give you an idea of what it is worth.

How to determine real estate market value is something a true professional understands.

Price per square foot calculations should make up little, if any, of the final figure the Realtor gives you. The number is just not that important when comparing home prices.

Your best bet is to find a real estate agent you trust with a proven track record and have them assist you with the buying or selling process.

Your agent will be able to examine all the finer details and come up with numbers that are useful to you.

Accurate information is the foundation of good real estate deals, so ensure you have someone to help you access such information. It can make a world of difference in the outcome.

If you have been trying to sell your home without any luck and remember your agent talking a lot about pricing per square foot in calculating your value, you may be priced too high.

Here are some of the more common ways to know your home is overpriced.

Use a Comparative Market Analysis Instead

Instead of using pricing per square foot to figure out market value, a competitive market analysis should be used instead.

With a CMA, a real estate agent will consider all the variables in pricing a home beside the size. The most essential of these factors will be the following:

• Location
• Bedroom count
• Bathroom count
• Condition
• Amenities
• Age
• Lot characteristics

Of course, the home size will be used, but it won’t be the only variable used to determine fair market value. Picking specific comparable sales will be far more accurate than using a simple formula like average price per square foot.

Real Estate appraisers also use comps when creating their property appraisals.

Conclusion on Price Per Square Foot

By now, you should understand that using the price per square foot to value a home is an awful decision. There are much better ways to place a value on the property, including a detailed analysis from a professional Realtor who knows the differences between location, amenities, and other important factors such as condition and age.

Estimating the value of real estate is far more complicated than using average dollars per square foot. This is yet another way to get your home value wrong.

You need to account for the unique characteristics of each piece of property and either credit or debit the value of the building as appropriate, based on recent sales of similar homes. The size of the home is important, but it’s just one facet.

A skilled real estate agent will consider factors like views, location, finishes, layout, amenities, and styling. These are all important in determining a home’s true market value!

Additional Helpful Articles on Pricing a Home

• Avoid these real estate pricing mistakes – these kinds of pricing mistakes can kill your home sale via Rochester Real Estate Blog.
• Determining the correct list price of a home – pricing a home accurately is one of the most essential tasks to get top dollar for your home via Frederick Real Estate Online.

Use the additional articles to understand why pricing a home is so important for both a timely sale and maximizing the ultimate sales price.

About the Author: The above Real Estate information on price per square foot was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 36+ Years.

Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!

I service Real Estate sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.

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