Price per square foot (PPSF) is very important when determining the value of a property, however, it’s a tool that must be used with all property features carefully factored in. It’s the primary reason that AI will never be an adequate replacement for a home appraisal or a market analysis that has been prepared by your trusted Realtor®.
If you are going to compare homes based on price per square foot, you will want to make sure that they are as similar as possible and that the closed sales are recent. The homes should be a fairly close match in all of the following: square footage, lot size, location, condition, view, age, and number of stories. Did you know that single story homes usually have a higher value per square foot? It’s both a matter of construction cost (a larger percentage of the home is foundation & roof) and greater demand (everyone can live in a single story house, but not everyone can manage stairs).
It’s important to note that smaller homes usually have a higher price per square foot than larger homes, if other features are the same. Why? Once again, there is the construction cost. The smaller home will still have a kitchen and bathrooms…parts of the home that are the most expensive to finish, whereas a home with larger square footage most often has larger or more rooms, that are less expensive to build. Keep in mind, this sort of comparison only works if other features are very similar. Demand for smaller homes is another reason that the PPSF value will be higher, especially in our local market. A smaller home is a desirable purchase for many different types of buyers: first-
time buyers, singles, empty nesters, investors and any buyer who simply cannot afford a larger home. The result is that these homes automatically attract the attention of many more buyers, increasing demand and subsequently selling for a higher PPSF. The larger the home, the fewer buyers there are.
Price per square foot comparisons work best in neighborhoods that are not typical of our local market. For example, some cities have miles of tract homes, all built in similar sizes, at the same time, by the same builder, with the same general finishes and no views. If lot sizes are similar, school boundaries are the same, and if it’s in an area where most buyers accept the builder’s standard finishes (instead of upgrading) and the homes are still fairly new, then a direct price per square foot comparison is going to be pretty accurate.
You may be wondering why we’re even talking about price per square foot, if homes in our area have so many differences? From a home buyer’s perspective, it’s important. They want to have some sort of a common baseline, when comparing homes. It’s also super important if the buyer will be financing part of the purchase, because their lender will likely require an appraisal and PPSF will be at the core of that analysis. If the home doesn’t appraise for the sales price, the buyer may have to put a lot more cash in to the purchase, to be able to close the sale. Thankfully, an appraiser will look at the big picture, searching for other recent property sales that most closely match the subject property, adding and subtracting value for specific features.
Anyone assessing value needs to be intimately familiar with the local market. It’s one of the main reasons that home buyers and sellers turn to a trusted Realtor® for guidance. There are certain negatives that can have a huge impact on value, and past sales with those features should be excluded from the calculation, assuming that the subject property does not have the same negatives. Some homes also have rare, amazing features that deserve a much higher value. Trying to compare value without knowing the fine details is impossible and both buyers and sellers should keep that in mind, before turning to a computer app to see how much a home is worth.
Every home is unique. If you’re looking for professional guidance, please feel free to reach out to me at 925-964-5010 or via email at Lisa.Hopkins@Compass.com. Even if you’re not planning to move and you’re simply curious about your home’s value, I’m happy to provide you with a custom analysis. Buying or selling, it’s never too early to start planning for success.
