Our phone rings everyday with questions regarding the local real estate market. I enjoy the conversations, helping people make decisions and often learning as much from them as they learn from me.
The most common question we get is about one simple calculation, the ratio of price per square foot in the valuation of a home. The square footage used in this equation should be heated and cooled living space, also referred to as gross living area. It is easy to calculate, easy to understand, but is also very one dimensional.
For example, would you hire an employee based on only one criteria, like their GPA, without meeting or talking to the person? You would probably want to know how that employee communicates, what skills they possess and what their future goals may be. A person is not a commodity, nor is real estate, so we should be careful in trying to commoditize either.
There are some potential pitfalls when making a real estate decision based on one component, like only the size of the home.
First of all, how accurate is the advertised square footage of the home? I can tell you after 25 years of measuring thousands of homes, it can be significantly incorrect and should be double checked. The posted square footage should be a guide, it may be based on public records or a set of plans and it could be accurate, but is may not be. Knowing what I know, my advice is to never trust the posted square footage unless a private, professional appraiser has placed a tape measure or laser device on the home.
Second, size still matters, but often the most significant selling feature of a home is not the size, but an amenity like a luxurious screened in pool or a well-equipped barn. Covered porches and outdoor living areas becoming more elaborate and costly, yet this space is not included in gross living area.
I have seen Lake Frontage or a golf course view sell a home, but this is not considered when the focus is on one thing, the size of the home. Renovations, curb appeal, functional utility and quality are just a few of the additional factors that may impact the value of a home.
Another thing to keep in mind is the law of diminishing returns, from basic economics. In many cases, the smallest home in a neighborhood will have the highest price per square foot, as it is an entry level home. In contrast, an over improvement for the neighborhood may have to be listed for much less per square foot in order to be competitive.
Regardless of any of these factors, price per square foot is easy to calculate, and it is not leaving our real estate vocabulary. I have counseled hundreds of buyers who have lost a home to other buyers by being stubborn, focusing on only the price per square foot, not seeing the whole picture.
Yet I still embrace this calculation because it has become part of our culture, as have websites like Zillow. I often concentrate on price per square foot when reviewing a large set of data to determine if a property is an outlier. This may lead me to investigate as to why some homes are selling for more or less per square foot than other homes.
Appraisers use many valuation tools and formulas to value a home, price per square foot is one of those. But it can be misleading to focus on this alone, so I caution home buyer and sellers to use it wisely.
Focus on the home, the neighborhood and all of the bells and whistles, as there is so much more to the valuation of a home than just the gross living area. A savvy buyer or seller consults with a Realtor and/or an appraiser before making their largest decision. These professionals will enlighten you on the unique characteristics of your local market.
Greg Lane is Vice President of Timberlane Appraisal Assoc., a local real estate appraisal and consulting firm. Contact him at 894-2500.