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Can I Use the Price Per Square Foot to Figure Home Values?

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Home prices per square foot show trends but not necessarily accurate value.

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Question: Can I Use the Price Per Square Foot to Figure Home Values?
A reader asks, "I keep reading that the real estate prices per square foot are falling, but the asking prices for homes I'm looking at keep going up. This doesn't make sense to me. If the price per square foot is dropping, then values should drop, too. Can I use the price per square foot to figure out values? I don't want to pay more than I have to."
Answer: It's true that the price per-square-foot for a home could fall while the overall prices for homes can go up, because per-square-foot costs that you read about are based on one of two computations. To figure the price per-square-foot, take the sales price and divide it by the square footage.

Say you are looking at a 1,500-square-foot home that is listed for $150,000. The price per-square-foot is $100. Maybe the home next door is 2,000 square feet, and it is listed at $185,000. The price per-square-foot of the larger home is $92.50. Which is a better buy? (Don't worry, it's a trick question.)

Smaller square-foot homes command higher per-square-foot costs. Larger square-foot homes command lower per-square-foot prices. To get a good feel for square-foot pricing, it helps to look at how square footage is calculated.

Median vs. Average Per-Square-Foot

  • Average (mean) price per square foot

    You can arrive at the average-per-square-foot cost of a home by adding the square-foot cost of each home that has sold in any given area and dividing by the number of homes that sold.

    For example, say three homes sold on Broadway for $200,000 each. Property A was 1,000 square feet, and Properties B and C two were $1,200 square feet. Two more homes sold a block away. Property D was $180,000 and 1,200 square feet, while Property E was $585,000 and 2,100 square feet.

    Property A sold at $200 per square foot.

    Property B sold at $167 per square foot.

    Property C sold at $167 per square foot.

    Property D sold at $150 per square foot.

    Property E sold at $278 per square foot.

    The average per-square-foot cost is $192.

  • Median price per square foot

    The median price is the halfway point. It is the middle price point. It means half the homes sold above the median and half sold below the median. It is often used as a more accurate measure of value; although it's better than a mean pricing, especially when there are extremes. However, it, too, is not a clear picture.

    In the example for average per-square-foot costs above, the median price would be $167.

    Per square-foot costs are used in construction. The square-foot cost to rebuild your home, if it's older, is going to be higher, most likely, than the cost to buy. Those can be based on averages because 2x4s, Sheetrock and other construction materials cost the same per square foot.

    It's not wise to base the purchase price of a home you are going to buy on either median nor average per-square-foot costs. That's because each home is unique.

    Prices per-square-foot can vary based on location, condition, improvements and updates, including lot sizes, and whether it's a one-story or multi-level home, among other factors.

    The main reason prices per-square-foot is important is to show you trends. If you can compare the average price-per-square-foot for the past 12 months, you can determine whether values are rising or falling.

    But much of that depends on the average size of home. As long as all homes are similar in square footage, the average price per-square-foot will show you a trend. But if some homes are larger than others, an average won't help you at all.

    The answer to whether it's better to buy a smaller home at a higher per-square-foot or a larger home at a smaller per-square-foot cost depends on the the typical average square footage of homes in that area. Although many buyers want to buy a larger home, if that larger home is a white elephant, it's not the best financial choice.

How Does the Price Per-Square-Foot Help to Determine Values?

In short, it really doesn't. You can't take the average price per-square-foot and multiply it times the square footage of the home you are thinking about buying. It doesn't work that way. The pricing per-square-foot simply gives you average or median ranges; it shows you trends. It can't compute value.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.

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