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Price per square foot is not an accurate home buying method

August 12th, 2011 Leave a comment Go to comments

Price per square foot is not an accurate home buying method for determining real estate values.

Imperial Valley real estate listings, info & photos on your cell phone, text GOTO IVREO to 95495

As a REALTOR(r), I have seen countless home buyers and even fellow agents who use the price per square foot as a method of trying to determine market values.  I’m very sorry to have to say this, however this method is a very poor way to review and analyze property values.

Why do I say this?  I’m a real estate agent who performs property valuations as part of what I do as a REALTOR(r).  This means banks, lenders, insurance companies, and investors rely upon my expertise in the Imperial Valley real estate market to help them determine what value ranges their property has.  I evaluate about 100 properties per month in addition to my real estate listing and sales business.

Now back to the topic at hand.  There are many reasons why I say using price per square foot is a poor way to analyze value but lets start with the individual homes themselves.  If you look carefully, a typical house and its characteristics are basically broken down into one of four distinct categories.

  1. Economic – this category takes a look at building a home in the most cost efficient manner possible.  Perhaps the materials used in constructing a home in this category would be cheaper or less expensive than homes in other categories.  The goal is to deliver a home that would be affordable to buyers in a lower income bracket, an economical home.  Typically materials used to build a home in this category would be a lower  end or perhaps the lowest grade for cabinets, flooring, lighting, plumbing fixtures, etc.
  2. Standard – this category takes a look at building a home that is a step up from the economic home.  More than likely most homes in a given housing area or subdivision would fall under this category.  You expect to see an improvement from an economically built home.  Standard type homes may use building materials and construction items that may also be found in both the economical and custom home categories.
  3. Custom – this category takes a look at building a custom home, typically items you won’t normally see in either an economical or standard type home.  The quality of construction materials used to build the home and the amenities inside are going to be different.  For example, you may see a higher level of flooring, more detailed woodworking in the cabinetry, higher end granite or Corian counter tops and stainless steel appliances.  Custom homes tend to be more unique and may have other architectural designs and characteristics that would make the home more expensive to build such as intricate roof lines and other materials used on the homes facade such as stone or brick.
  4. Luxury – this category takes a look at the high end home or the “creme de la creme”.  These homes are built with the highest grade construction materials and fixtures.  No expense is spared on anything and the amenities are boundless and may be enough to make your mouth drop.  It’s not unusual to see luxury items such as home theaters that give The Movies a run for their money, indoor swimming pools, wine cellars, libraries, and indoor sports facilities.

As you can imagine any home you see is likely to fall somewhere in between these categories types and hopefully these four distinct categories are enough to help you see why using price per square foot to determine the home value is not a good idea.

Lets take a look at an example of two homes of 1,450sf and both are five years old.

House A as the following amenities:

  • Corian/granite type countertops, custom cabinets, and stainless appliances
  • Custom tile shower in the master bathroom
  • Tile flooring in the kitchen, living area, and hallway

House B has the following amenities:

  • Formica countertops, regular cabinets, and white appliances
  • Standard shower
  • Carpets throughout the home except the kitchen/bath

How about a guess as to which home is going to be worth more using price per square foot?

The example above clearly shows you cannot take the average price per square foot and multiply it by the size of the home you are thinking of buying.  There are just too many other variables involved with the characteristics of the home to make a generalization such as this.  It simply does not work this way.  The pricing per square foot gives you an average or median range, such as a historical account and may even show trends in the market, however it does not calculate market value.

The comparison above only touches one reason why cost per square foot is a  bad indicator of value.  There are other indicators to consider such as the homes location, near schools or public places (they bring the value down), any improvements, overall condition, age and updates to the home, lot size, one and two story, and a host of others.

I think its easy to tell that if Home A is located in the best part of town and Home B is not, the difference of the selling price is going to be even greater which would change the price per square foot between the two homes.

One of the best reasons for even looking at price per square foot of a home is to see what the market trends are in the area you’re considering.  You can look at average price per square foot over a specific time frame and see if the overall market is increasing or decreasing, and thats it.

Smaller homes tend to have higher price per square foot costs than larger homes.  Single story homes typically have higher price per square foot costs due to the larger foundation and larger roof required when compared to a two-story home of the same size.

Another less known fact about a smaller home having a higher cost per square foot than a larger one is there is less space to spread the costs of things such as the kitchen and HV/AC system that every home seems to have.

In Imperial Valley one of the other factors that can really skew the averages on the price per square foot of a home is how the GLA or gross living area (square footage) is calculated.  In the MLS there is a big disparity on what agents include in the GLA of a home.  Some agents include the un-permitted garage conversion or room addition into the GLA, and others do not.  This can cause quite a fluctuation on how these numbers appear when doing an analysis on square footage.

As you can see, an un-permitted garage conversion will have an impact on the overall living area and when you mix these figures together it makes an apple to apple comparison that much more difficult.

I have seen many buyers agents over the years try to present a case as to why their clients offers is fair, however when they start talking price per square foot and after my eyes have glossed over, I usually end up giving them a lesson in proper market valuations.

As for buyers, they are still buying homes that speak to their needs, including their emotional ones.
Remember, a home is more than a stat, you have to love your home.

I look forward to hearing from you and helping you buy your Imperial Valley home today.

Imperial Valley real estate listings, info & photos on your cell phone, text GOTO IVREO to 95495

To learn more about buying your first home, check out my How To video called http://firsthomebuyervideo.com to learn more.

How can I help you? Feel free to visit and post comments regarding the website and stay tuned for upcoming changes to the look and feel of ImperialValleyREO.com

Are you in the market to buy a home? Get personalized information for any area in the Imperial Valley, including El Centro, Brawley, Calexico, Imperial, Heber and surrounding cities by going to ForSaleByFred.com, GetRealWithFred.com, ImperialValleyREO.com, or First Time Home Buyer Video

Imperial County homeowners who are considering selling their home are encouraged to contact Frederic Din, REALTOR(R) for additional information about getting the most current market values for your home or area. Member of the Imperial County Association of REALTORS (ICAOR).

El Centro homes for sale – Brawley homes for sale – Imperial homes for sale – Calexico homes for sale – Heber homes for sale – Imperial County homes for sale – Imperial Valley homes for sale – Imperial Valley REO – Imperial Valley MLS

Imperial Valley real estate listings, info & photos on your cell phone, text GOTO IVREO to 95495

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