Guilty! Buyers, sellers, Realtors … all guilty! All are at fault for using price per square foot (psf) when attempting to come up with the price of a home.
It’s pretty easy if you think about it. Even I can do the math (with a calculator): divide the price of home by the air conditioned square footage of the home and come up with price per square foot. Once you have that amount per foot it should be an easy way to figure out prices for other homes in area too right? Wrong!
“The last time I checked, price per square foot was not something they were teaching in Principles of Real Estate or Valuation of Homes,” explains Robert Totten, Fort Worth real estate appraiser. “I have been an appraiser for over 35 years and never has using price per square foot been a way to come up with a value for a home. There is no class called Pricing a Home with Price Per Foot.”
When Did This PSF Thing Begin?
No one knows exactly when homes in Texas started being more about the price per square foot versus a true value, but some believe it came from the early production builders in the 1970s and 1980s.
Back then builders were trying to prove they were a better value by decrying a low price per foot over other builders…I guess to prove that a bigger home was a cheaper home which meant it was better? That doesn’t make sense to me.
Too Many Variables
Appraisers all swear up-and-down that they do not compare price per foot of one home versus another when appraising a property.
“There are simply too many variables,” states Totten. “Price per square foot is a lazy way that people who don’t understand real estate came up with to quickly find a price for a home. It’s more dangerous than anything.”
And yet the first question buyers and sellers all seem to want answered is, “What’s that price per foot?” “What about the home down the street? It sold for a high price per foot … doesn’t that make my house more valuable?”
As a profession, Realtors have failed our clients for not educating them enough to leave price per square foot alone. Partly that can be attributed to various websites that tend to have misinformation, bad practices, and unsubstantiated values of homes — yeah Zillow, I’m talking about you!
PSF Must Be A Texas Thing
When talking to other agents or friends who live in California or New York, they never have mentioned price per foot as a deciding factor for purchasing a home.
According to the Knight Frank Wealth Report for 2017, the price per foot method of valuation is just absurd. Real estate for $1 million in New York will buy you about 430 square feet of living space! That’s nothing compared to Monaco where $1 million will get you approximately 160square feet to call home!
Do you think buyers in those areas care about price per foot? Heck no! No one is saying, “Well I don’t understand why one home is $20,000 per foot and the other is $25,000 per foot.”
It must be a Texas thing because in other areas of the world the amount a home costs per foot is just another number.
How to Find Value
So if we are not supposed to multiply the size of home by the average price per square foot of homes nearby to determine a price, what do we do? We have to figure out a price for a home.
“Common sense is the first thing when determining value,” inserts Totten. “You have to take out emotion — of the buyer and seller — and strictly look at the data. This is where a good real estate agent makes all the difference.”
The best way is to find multiple homes that are the most similar to ours that have recently sold and figure out if they are a good comparable.
If Home A is a two-story, 2,500-square-foot home with a three-car garage, and Home B is a recent sale on the same block and a single-story, 1,800-square-foot home with two-car garage that sold for $360,000 then you can’t transfer the $200 psf from Home B to Home A and give it a value of $500,000 — it doesn’t work that way. The two homes are not similar enough to one another.
Appraisers not only look for homes of similar size they look at location, bedroom count, location to points of interest, the presence of a pool, an outdoor kitchen, unique features that would give it more value … It’s not rocket science, but it’s certainly not price-per-square-foot math either.
Now You Know
The next time you’re at a cocktail party and someone says, “I heard the home down the street sold for $300 per foot so that means mine is worth at least $325 per foot.” You can either laugh in their face or walk away knowing that they don’t have a clue and you’re smarter than they are!
Pass this knowledge on … don’t be guilty of the price-per-square-foot fallacy.
Well that’s all from Tarrant County Tuesday this week, Dirty Readers. Remember, if you have questions, comments or ideas for future stories — please send me an email or call 817-980-6636.
Seth Fowler is a Real Estate Sales Professional for Williams Trew Real Estate in Fort Worth. Statements and opinions are his own. Seth has been involved with the home sales and real estate business throughout D/FW since 2004. He and his family have lived in the Fort Worth area for over 15 years. He also loves bow ties! If you have questions or would like to view any of the homes in this blog, please reach out to him at 817.980.6636.