Using Price Per Square Foot When Determining Home Value

Attempting to measure a home’s true market value using a price per square foot calculation is more often confusing, misleading and quite possibly deceptive. Using price per square foot as a valuation tool is a little like predicting the local high and low temperatures by using a national weather temperature averages. But, even with its inherent inaccuracies, price per square foot is still something most Austin home buyers insist on comparing. Here’s why using price per square foot when determining home value is generally not a reliable measure.

How is Price per Square Foot Calculated?

Price per square foot is determined by dividing the sales price by the number of square feet of living space. The living space is generally considered the attached air conditioned space of the house. Of course, this calculation ignores many other variables which must be considered to arrive at a true market value.

Price Per Square Foot Works with Homes in the Same Neighborhood, Right?

When comparing homes in the same neighborhood, some buyers like to start their comparison using price per square foot. Comparing similar homes only in the same tract or neighborhood may provide some insight, but I have yet to find more than a few homes in a neighborhood that one could accurately compare using price per square foot. Though homes are located in the same neighborhood, they are generally very different when you compare lot, level of finish out, location in neighborhood, etc.

Price per Square Foot Generalities

There are, however, some generalities you can expect to find when observing price per square foot trends in a neighborhood:

• The smallest home in the tract will have the highest price per square foot
• One story homes will bring higher price per square foot than two story homes
• Older homes will generally have lower price per square foot than newer homes
• Larger lots, cul-de-sac and view lots usually have premium price per square foot
• Golf course and water frontage lots will show an additional premium
• Custom homes with ultra quality appointments and high end finishes reflect increase price per square foot calculations

The More Unique the Home, The Less Valuable Price/Sq Ft Numbers Are

The more unique your home, the less valuable neighborhood price per square foot statistics are. Price per square foot is meaningless as a universal factor when you have a unique property. It ignores the many other variables that contribute to value.

Value is the Sum of Many Parts, Not an Average

Every feature of a home has a value. The home’s value is based on what the market (buyers) are willing to pay for those collective parts. No two homes are absolutely identical in every feature and characteristic. Size is merely one factor, and it turns a blind eye to the varied definitions of square footage.

Price Per Square Foot is Inconsistently Defined

One of the biggest weaknesses of using price per square foot as an indicator of comparative value is the lack of consensus is measuring square feet. For example:

• Some builders measure all living space both above and below ground level
• Some municipal building departments use only above ground level living space
• Tax records are often inaccurate in terms of actual square footage
• Appraisers, builders, tax assessors each have a different method for measuring square footage
• Given the inaccuracies of the reporting, it makes it impossible to compare value using only price per square foot

Weaknesses of Price Per Square Foot

When using price per square foot as a measure of value, you’ll want to understand the weaknesses of the method. Some of which are:

• County Central Appraisal District records can be erroneous
• Some building departments measure ranch homes using the dimensions including the roof overhang as much as 3-4 feet beyond the exterior walls
• Ignores other variables such as appointments, finishes, lot premiums, age and style
• Does not consider property condition, such as foundation or termite problems
• Fails to factor in sales date of comparables, days on the market, seasonal aspects and all the differences between each home in the analysis
• Sales data may be unreliable as Texas is a Non-Disclosure state where actual sold prices cannot be posted on Zillow or Trulia

Use Price Per Square Foot as Part of Your Value Determination

Price per square foot can be an interesting comparison when determining what to offer on a house. But, because value is made up of many different aspects, some of which can’t be averaged, it should only be one of the metrics you use to determine a home’s value.

Have an Eleven Oaks Realty Buyer’s Specialist Help You Evaluate Value

The best guide about the value of a home or what you may have to pay for a home is to have your Eleven Oaks Realty Buyer’s Specialist research the neighborhood and similar neighborhoods for recent comparable sales within the last 3 months. Unless the home you wish to buy is a foreclosure, don’t include foreclosures as a comparable. Our team will research the age of homes, level of finish, updates, seller concessions as they affect the final price. We pride ourselves in helping our clients make informed business decisions.

Thinking About Buying a House in Austin?

Our team of buyer’s specialists can help. We understand value and also how to negotiate great deals so you don’t have to pay more for a house than you absolutely have to. Check out our Austin Home Buyers section to learn more about our team of Austin Home Buyer Specialists. Then, call us at (512) 827-8323, email us at info@11OaksRealty.com or fill out our Buyer Survey to get started.