The next most important thing to remember about price per foot is that it is not linear.
What do I mean?
Just because a 3,000 SF house is worth $400,000 does not make a 6,000 SF house worth $800,000 or a 30 SF house worth $4,000.
So often, people get hung up on price per foot as the absolute gospel when it comes to house valuations. Price per foot, while a tool that can be very insightful when applied correctly, tends to act as a point of contention to ‘price per footists’ when the price for a home exceeds the price per foot within a neighborhood. For whatever reason, a price per foot average within a neighborhood tends to drive decisions far more often that it should.
Here are things to take into account:
- For price per foot to be at its most effective, lot prices, finishes, age, materials and other features (garage sizes, basements) must be very similar. Examining homes in the same suburban neighborhood with similar features will be a good use of $/SF. Using it to compare a brick ranch built in 1957 to a colonial built in 1987 is not the right use.
- Comparing a home with a finished 3rd floor or basement against a home with unfinished areas is wrong.
- Comparing home built prior to 1940 or so is really not a good idea as time has really eroded the accuracy of the measurement.
- Using $/SF to compare different builders is also an issue. Buying a home built by Ryan because it is cheaper by $10/SF than Boone is a very flawed decision.
I like to use $/SF as tool in the following manner:
- $/SF can be used to establish neighborhood minimums and maximums. This needs to be looked at in companion with aggregate sales prices in the neighborhood. In other words, if a neighborhood has a average $/SF of $160 but a maximum price of $300,000, then be careful of a home that is 2,000 SF priced at $360,000.
- $/SF works really well in new construction within the same neighborhood.
- $/SF is a helpful tool in renovation or addition properties. It can help the decision process greatly.
- $/SF is helpful when it benefits you and a pain when it does not. I use it to defend appraisals and listing prices or to argue down pricing for my buyer clients.
When the dust settles, using $/SF to make a decision is a bad idea. When it is one part of an overall analysis, then it can be powerful.