The Misconception of Price Per Square Foot
Share News:
Price per square foot seems like a logical way to figure out value of a home right? WRONG!
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!
When it comes to determining value of a home, there are many factors other than psf that need to be considered
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.
Agents and clients alike can be flabbergasted as to how to determine the price of a home if not for price per square foot — this is why you need a true real estate sales professional working for you.
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.
Feel free to point your finger and laugh at someone who tries to tell you PSF is a way to figure out a good price for your home.
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.
15 Comments
Leave a Comment
Might consider a third option instead….how about sharing your knowledge with the stranger at the party instead of laughing in their face or walking away feeling superior. Just a thought…
I’m sorry….what? That is your questions or response? C’mon, I spent way too much time on a genius blog to have that as a question. Brandy, if you were at a dinner party and were spouting about price per foot…I would certainly tell you why that is an absurd way to value a property. Is that your only question?
The exception being high-rises where units trade in a fairly narrow band and it’s easy to find identically-sized units. The differences effecting price in high-rises are sometimes height and always the level of finish/renovation.
Or how about subdivisions. Cookie cutter developments.
Cookie Cutters thrive on the price per foot because they are hoping that their Buyers are suckers. No one – not banks, not appraisers care about price per foot except Texan Buyers…we need to educate our Buyers to stop looking at that because it just doesn’t matter and it just doesn’t justify any price
Condos are buying space and air…and psf still doesn’t equate there. Let’s just get price per foot out of our vernacular and thinking…what really gives your property value??? How can you PROVE that said property has value??
Price per square foot is not a “texas thing” I only have experience in Boston and Dallas, but it’s definitely in both places. I’d argue anywhere there’s an internet connection and it’s killing our earth! Builders building obscenely large homes on residential infill lots just to make a buck. I mean it’s a good thing our average household size isn’t following our increase in house size or our planet would be in real trouble.
At some point in the near future my hope is “developer” will be a profession one needs an education to enter into… our built world would be well served by a more holistic approach!
As I have heard from other people I am realizing that PSF isn’t just a Texas Thing…but I’m really surprised it’s a Boston Thing…would expect prices of real estate to have tremendous PSD. Builders are going to build as large as they can because they are giving the consumer “what they want” …. the more the consumer says “I’m okay with 1,000 ft. of living space” then builders will oblige. But consumers aren’t saying that and so builders keep going bigger and bigger…a developer can provide homesites based on cost of raw land, cost of infrastructure and improvements…we are all at fault…sellers of land are greedy, contractors are sick-and-tired of being abused by Big Box developers…it all trickles down to the consumer…and they’re still paying those prices so why change?
If I had to value or buy a property knowing only two variables, I would choose location, location, location, and square footage. Thankfully there are more variables, and thankfully excessive square footage is starting to cost so much that buyers are considering functionality as much or more than overall size. Good article, Seth. You’re catching on.
Well… you just don’t compare 2 properties that are 1,000 sf difference, or even more than 300 +/-. Thanks for sharing “How to find value”. But wait, you stated that appraisers look at “size, bedroom count, location, etc” isn’t “size” square footage????? Yes, there are a gazillion variables in addition to “size” (aka square footage), however appraisers DO adjust price of 2 different houses because a 2000 sf house can be compared to a 2200 sf house, right? But the larger house is most definitely worth a bit more. How do they adjust if not by psf? Pick a number? I can tell you when I value a property, I’m usually not off by more than a couple thousand different than the appraiser – based on psf (because size IS square footage). lol
As 100% of appraisers will tell you, they will go 20% above and below the size of the home they are appraising. In the ‘burbs and Generica-America you can look at price per foot earlier in the equation than in older, established areas of the Metroplex…most of the homes are similar size, age, materials.
If you want to use a 2,000 ft. home built in 2004 in one neighborhood then it’s not that difficult to guesstimate value of a 2006 home of 2,200 ft. in the next neighborhood over…regardless of what builders try to spew on you–most production builders are the same, they use same materials, same vendors, same contractors and crews. While an appraiser still won’t automatically go to the PSF for valuation, it certainly plays into the mix.
If you go to an established neighborhood where the world isn’t cookie cutter and homes are built by different builders, in different eras with different materials…going to price per foot is ludicrous. You absolutely cannot look at every 2,000 ft. home as the same. One 2,000 ft. home could be poorly constructed with lesser materials vs. one that is designed and built with the top materials. There is more value in a wood window or a steel window frame than a vinyl frame.
The problem with using PSF as an incorrect crutch is that people think that Bigger = More Expensive or Better Value…when that’s just silly. A kitchen might be $1,000 psf to build but a bonus room more around $75…why? Because a kitchen is plumbing, counters, cabinets, tile, appliances and a bonus room is carpet, sheetrock and paint.
That is why appraisers and realtors should not and cannot use the PSF model of valuation as the #1 go to method. Does PSF eventually play a part in coming up with a price? Of course…but first, second or third in many neighborhoods.
In the end…the market will tell what the real price is…thanks for your comment–keep reading!
I created a pricing model for homes a few years ago when I was looking to purchase. Reason being, I learned that square footage alone was woefully inadequate for determining true value after looking at several houses.
Basically, I contemplate square footage, lot size, # of bathrooms, # of bedrooms, and age of the home to come up with a price per square foot that takes the entire house into account. I believe this type of model is suitable for the real estate market but it’s interesting that not all of these things are taken into account when prices are set.
In regards to new home construction, I can see where the question of price per sqft would make sense. Its the question that is never asked. “Could you “the builder” provide a materials cost list illustrating how much it actually cost to build the house”? Some custom log home builders will do it, but not the big builders who are operating in mulitiple states creating urban sprawls throwing up trac homes in HOA’s.
The materials cost list for the builder to construct the home before final interior ammentitys is the same weather its a $250k 2,500 sqft home or a $500k 2,500 sqft home.
Materials cost for the foundation, framing, roof, plumbing, electrical, essentially the home before its outfitted with final interior ammenities. is the same for the builder.
Price per square foot is something builders actually use, but dont want to pass onto the consumer. Its the big secret. Realtors dont want you to think about that either.
Would you go to the local Toyota or Ford dealership and ask how much the steering wheel costs? Or what do you think you are paying for tires on a new car. It’s not the builder’s responsibility to give a cost breakdown of materials. You wouldn’t go to the grocery store and ask how much you’re paying for plastic bags. Unless you are building a custom home and doing a cost-plus job (where Buyer is paying actual cost plus Builder mark-up fee) then it’s not any business of the Buyer or Realtor what the Builder is making or paying.
As a buyer or someone who has been looking to buy over the years I will say I am heavily influenced by square footage & location. To me, that is where I place the value. I understand that everyone is different. Some people like decked out kitchens or decked out bathrooms. To me, those don’t increase the value of the home at all. I want large, spacious bedrooms and dining areas. I want Open Floor plans. I don’t even care if it is a home or a mobile home.
So if you can keep the price per square foot down then I’ll likely be your buyer. If I ever care about upgrading my kitchen or my bathroom, I’ll worry about that later!