Truth About Price per Sq.ft. in Valuations
…has nothing to do with size…
This article from realtor.com titled ‘Forget Price Per Square Foot: The More Accurate Ways to Determine Your Home’s Value’ explains why price per square foot is not a good gauge of value.
A home’s price per square foot is a common way to quantify its value… Many home shoppers even use it as a determinant for whether or not they’ll even consider touring a home.
But that doesn’t mean it’s the most accurate, end-all and be-all way to gauge a home’s value and compare it with other houses. Why? Because all homes are different.
Why price per square foot isn’t a good gauge of value
Homes come in different styles, are built with different materials, come with different amenities, and exist in different locations. Each of these factors has a profound effect on a home’s value and has nothing to do with size.
Price per square foot also doesn’t take renovations into account. A completely refurbished kitchen will add value to a home without changing the overall square footage of the property. Therefore, two homes may be the exact same size, but can look completely different inside.
While the writer concentrates on ‘size’, the actual determination of Price per square foot is determined by the Sale Price divided by the Gross Living Area only. It does not (directly) take into account any additional square foot living space in basements, or added amenities on the property, although that or those may be a component of the Price. nd when the Agents include ADU living space into the GLA, it skews the price per square foot.
Price per square foot really only works in conforming tightly located neighborhoods with similar homes, on similar size lots. As the writer notes, there are far too many variables in real property to make Price per square foot a reliable metric. Unfortunately, far too many Real Estate Agents believe it to be, and base list prices on it.
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Many not in our profession watch too many shows on tv about Real Estate and that’s mostly what the realtors always talk about price per sf when passing through the room when my wife is watching…lol It’s the same with those CSI shows too. They always have DNA…etc…etc, when in the real world that’s not how it is.
Dude, if you spend 10k on a kitchen, I can guarantee you a 15k return! Trust me, I’m a salesman, I know these things.
This is so true. I have told our local realtors time and time again to quit referring to properties with a price per square foot. Yet they always seem to ignore the truth because they don’t understand and/or are just too lazy to look at properties in more detail.
When you seek out comps by price and end up with gross character mis matches, that’s a common result.
It’s not just real estate agents, homeowners and buyers that must be convinced how worthless a residential value is when obtained by a PSF comparison. FNMA has to be persuaded too. A good start would be removing that category from the top of the Comp Adjustment Grid.
I completely agree
That’s there for an important reason, the need to bracket the ppsf along with the other required points of high/low bracketing. That section of the 1004 has a very limited scope of applicable use. That point of bracketing happens naturally if one is actually picking reasonable high and low matches in terms of size and price. So if you’re selecting comps honestly without bias, that particular ppsf data slot always lines up anyways and you don’t really need to but glance at it for assurance. Alternatively, that entry slot makes for a quick indicator of fraud, if you pump up comps out of appropriate comparison range, suddenly the ppsf number jumps sky high in comparison and is not bracketed on the low side. (High side if you’re dealing with short sale or a sort of dump it cheap fraud.)
There goes clever regression analysis, the cornerstone of hybrid products and avm utilities. Rightfully so, the ppsf is better utilized as an indicator of improvement quantity and improvement quality, rather than a base valuation indicator.
If appraisers want to get better at valuation principals, they should go to the hardware store, learn real world current pricing structures of contractors and materials in those various fields of service, and apply a reasonable and relative, fairly distributed allotted adjustment scheme. That’s the art not a science part of it.
I have been able to support quality and condition adjustments based off of ppsf however as an appraiser we can do the math ourselves and best to remove it from the report since it is being misused IMO buy whoever uses it to suit their argument. It causes more trouble than needed. An underwriter can do the math as well
I concur! The #1 misleading comment I hear real estate salespeople making is using price per sq.ft. as an absolute!
Then they complain why didn’t you make contract price!
It’s a dumb metric for single family homes as it does not include site value and is misleading. For condos it can be very relevant depending on your market.
Sign them up for a remedial math course in “Quantity of Scale 101”