Homes often have pricing per square foot in their listings. But is this number really a good way to assess the home’s value? The answer is no. Price per square foot is far too rudimentary to calculate home values accurately.
There are limited circumstances where using the price per square foot as a valuation tool will be helpful.
We look at pricing per square foot to show this figure’s importance.
What does price per square foot mean?
Per square-foot prices are often used in real estate to give buyers an idea of how much a home is worth. Many things contribute to the price per square foot of a home. Things like the location, condition, age, and number of rooms, are just some of the things that make up the pricing per square foot of the home.
While a high square foot price might make you think the home is priced higher than it should be, that isn’t necessarily the case.
How to calculate the price per square foot?
If you know the home’s square footage, the price per square foot is the list price divided by this number. If a home is listed for $300,000 and the square footage is 2,000, the square foot price would be $150.
There can be reasons for using price per square foot – the most common being finding averages for a community.
How important is price per square foot?
The price per square foot of the home is often included with other details about the property. This price isn’t necessarily going to be the same for other homes in the neighborhood, but it does provide a way to help buyers judge the value of a property.
While this number might appear to give buyers some very useful information about the home, the reality is that this number isn’t very helpful by itself.
Similar homes in the same neighborhood normally have a similar value. The price per square foot can help you assess how the home you are interested in compares to similar homes in the area.
If you notice that the home has a higher price per square foot, what is the reason? Your real estate agent might know the reason for the difference. It could be improvements that have been completed on the home or other benefits offered.
The square foot price doesn’t give you all the information about the home, but it does help show how much space you are getting for the purchase price.
How the square foot price varies between homes
You could have two neighboring properties that are listed for sale with very different pricing per square foot.
One home could be 2,200 square feet and priced at $320,000, giving a price per square foot of $145. The neighboring home might be 1,600 square feet and cost $290,000, with a price per square foot of $181.
But does this mean that the smaller home is overpriced? And surely the larger home is a really good value as it is $36 per square foot cheaper. These assumptions could be correct, but they could also be very wrong.
Making an assumption based on the square foot price of the home could give you the wrong impression. It might be the case that the smaller property has benefited from some updates that increase its value. Perhaps the larger home is in a worse condition, with some things needing to be replaced in the next few years.
Differences in the quality of the neighborhood and location can also play a significant role.
While large homes normally cost more, it is common for them to have a lower per-square-foot price. Though this could be the reason for some of the price differences, there might be other factors that are a larger contribution to the cost.
Using the median price
The median price in the U.S. is above $220 per square foot. This can help determine the home’s value better than the average of comparable homes. With comparables, there is likely to be greater variance due to fewer homes being used.
Your location might also mean that the price per square foot differs significantly from the median U.S. price. If you are in a city with higher prices, you can expect the price per square foot to be much higher than the national figure.
Final thoughts
While you might expect the price per square foot to give you a good idea of the home’s value, it isn’t that clear-cut. It can help you as a starting point and suggest questions you should be asking, but it doesn’t give you the complete picture.
Your real estate agent will be able to help you understand what the home is worth and if there is anything that makes buying this property a bad choice.
When you want an accurate home value, the best way is to ask your real estate agent to complete a comparative market analysis. Accurate comparables will be used to complete the report.
