Prices per Square Foot, the Truth for Home Buyers
A real estate appraiser’s perspective: Buying a house based on the price per square foot is like paying for a car based on its miles per gallon; and yet to this day I see buyers, sellers, mortgage and real estate professionals discussing and using square foot price as a method for comparing homes to try and determine value.
A 2,000 square foot home that sold for $400,000 did technically sell for$200/sf so the appeal is understandable because on the surface price per square foot takes a very complex problem and appears to deliver a simple solution but it is an illusion. Tempting as it is using $200/sf as the basis to determine the value of any other home is fatally flawed because it is what lies below the surface that counts.
Here is why price per square foot is misleading as an indicator of a home’s value. My real estate data comes from Boston and its suburbs but wherever you are there are certain universal truths about American real estate values. How much a home is worth ultimately depends on the following list of key characteristics that influence market value of a home.
- Lot size
- Size (square feet)
- Floor plan (#Room/#Bed/#Bath)
- Other amenities
- Time – When the home sold
You can tweak or argue the completeness of the list but it is the differences in all of the various characteristics which influence the sales price and ultimately the price per square foot. Ask yourself this; would someone pay more for a home on a quiet tree-lined cul-de-sac than they would pay for the same exact home along a very busy main street? And since the sale included the lot upon which the house was built, how much of that $200/sf do you think was for the land?
Let us peel back a few layers of the real value problem. Here is a recent real life example of two similar homes that sold recently in Framingham, MA presented in matched pair format where you can see the same sized house sold for two very different prices per square foot, and it is not difficult to understand why.
|Address||70 Hemenway Rd||76 Hemenway Rd|
|location||Not a factor||Not a factor|
|lot Size||0.56 acres||0.59 acres|
|view||Not a factor||Not a factor|
|style||Slab Ranch||Slab Ranch|
|age||56 years||56 years|
|condition||significant updates 2009-2010||carpet/paint toilet oven cheap cabinets|
|quality||upgraded K&B quality||inferior/original|
|Floor Plan||8Rm-3Bd-1.5Ba||7Rm-3Bd-1.5Ba (assessor says 1 bath)|
|Heat/AC||FHW-propane/ CAC||FHW-Oil/Wall AC|
|Other amenities||Fireplace/Radiant bath/Patio||Fireplace|
|Price per sf||$242||$160|
Why the huge difference in the price paid per square foot? These two homes have almost the exact same location, size and bed/ bath utility but there is a difference of $115,000 attributable to the superior condition and quality of the first house. The other home needed of some repairs and the little bit of updating was of low quality.
I describe appraisers as trained professionals who pretend to buy houses for a living. There is a skill set which comes from training and experience and there are practices and methodology that are brought to bear on solving the problem of; what is this hose worth? in the end appraisers mirror the behavior of buyers in the market, and everyone; sellers, buyers, realtors and appraisers are all trying to solve the same problem. What is this house worth today?
How often do you buy or sell a home? Do not be penny wise and pound foolish. If you are buying or selling you need a realtor to navigate through the negotiation and other complexities then hire a knowledgeable independent appraiser to develop their unbiased independent opinion of value.
Resource Box: Adam Wiener is a certified residential real estate appraiser in the Greater Boston area. To see more about on expert methods, tips, and knowledge about residential real estate please visit http://www.aladdinappraisal.com the sales information is publicly available www.zillow.com or www.trulia.com . Framingham assessor’s database is found at http://www.framinghamma.gov/index.aspx?NID=658