Does price per square foot work?

 

As we have been helping people buy and sell properties over the years, the subject of valuing a home has been one of the most misunderstood, and difficult to pin down, of all of the complex things we work with in Real Estate.  Let us help you navigate the complexity of pricing your Real Estate.

 

First, I think it’s helpful to consider all of the different types of properties there are.  Different types of real estate require different types of analysis. For instance, vacant land usually isn’t measured the same way that land with a home on it is measured.  One of the biggest differences in valuation is the comparison that most make between commercial real estate and residential real estate.

 

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Often, commercial real estate is measured in price per square foot. This is simply taking the usable, interior square footage of a building and dividing that by the price you are paying for that space.  It is used frequently in commercial sales and it’s even more common in commercial leases. This is primarily because commercial space in an area is more of a commodity and the land value has little to do with the square footage analysis unless one was purchasing the entire building.  Even then, square footage measurements including lot size can still be used to make apples to apples comparisons.

 

What does that have to do with the value of your house?  The challenge with single family residential homes is that the space in the home isn’t as much of a commodity as it is with commercial real estate.  The other major flaw is that price per square foot doesn’t take into account the lot location, size, amenities, etc.

 

Ultimately, the real value of real estate is the land, which is generally what appreciates over time.  The house built on that land, for the most part, depreciates over time (just ask your insurance company). The purpose of using price per square foot measurements is to compare properties of different sizes to one another.  Due to the fact that the land and location aren’t accounted for in the value means this becomes rather inaccurate.

 

Here’s an example:

 

2 homes in the same community, with locations, lots sizes, and amenities equal in value:  

 

Home A is 1000 square feet.  Home B is 2000 square feet. Another vacant lot of equal value, with no building on it, sold for $100,000 recently.  Home B sold for $200,000. What is Home A worth?

 

According to price per square foot, Home B sold for $100 psf.  ($200,000 / 2000 sq ft = $100 psf)

By that calculation, Home A would be valued at $100,000. (1000 sq ft x $100 psf = $100,000)

 

See the problem?  

 

That valuation suggests that the house located on Home A’s lot has no value as an adjacent similar lot sold for $100,000.

 

Single family residential homes in Palm Beach County sell for different prices per square foot depending on their sizes.

 

There is a lot of nuance when valuing residential real estate. Condition, location, materials, lot size, amenities, schools, etc. can all make a huge difference and must be taken into consideration.

 

As we’ve been evaluating homes in Boynton Beach, Lake Worth, Delray, Boca Raton, West Palm Beach, and all over South Florida, our understanding of values and how to assess homes correctly has allowed us to position our clients for success, and make things happen that others can’t, like successfully disputing appraisals.  

 

If you are curious about the value of your property, or would like a valuation of a home, give us a call.  We’d be happy to help.

 

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-Brian Perry

Perry Home Solutions

Keller Williams Realty