Price per Square Foot as a Measure of Value

 

When it comes to determining the value of a home, there are a variety of methods and metrics that can be used. A method that is often thrown around during discussions of real estate value is price per square foot. Even in the news, articles often quote price per square foot as a measure to show trends in certain real estate markets. But what exactly does price per square foot measure? And how effectively can it be used to measure the value of a home?

Price per square foot is calculated by taking the price of the home and dividing it by the square footage of the home. While this can be used as a gauge for the local real estate market, comparing two homes is rarely comparing apples to apples and price per square foot alone is not an accurate gauge of value. A home bought for $400 per square foot home is not necessarily a better value than a home bought for $500 per square foot even if they are in the same neighborhood and exactly the same size. There are things that price per square foot does not account for such as a home’s specific location, layout, condition and any upgrades that have been made.

Although price per square foot is calculated based on the size of a home, it is a measure of the value of the structure AND the land the structure is built on. A phrase that is often repeated in real estate is “location, location, location”. A good neighborhood will command a higher price per square foot compared to a less desired neighborhood. This concept applies for homes located on a safe and quiet street compared to one located on a busy and noisy intersection. Since the value of the land is relatively independent of the home that sits on the land, small homes result in a much higher price per square foot compared to a larger home even if the total price of the small home is much lower. Often times, it is the smallest homes within highly desirable neighborhoods that are setting the high price per square foot records.  

In addition to location, an updated and well maintained home will warrant having higher price per square foot than an older home with lots of deferred maintenance items. While some homeowners enjoy the challenge and the value that they can create by fixing up their own homes, there are also buyers who do not want to deal with the hassle and are willing to pay a higher price for a low maintenance home.  The cost of maintenance and repairs on a home can also add up to the point where a home with a lower price per square foot may seem like a deal at first but become less of a deal once all the additional costs are added up. A home may also have higher quality interior finishes which will be reflected in the higher price per square foot. By only using price per square foot to determine whether a home is a good deal or not, items that add value to a home are not fully accounted for.

Although price per square foot is often quoted as a measure of how the real estate market is doing and the value of a neighborhood, it is important to keep in mind the different variables that can affect the price of individual homes. Desirability of a neighborhood as well as design, condition and layout of a home are all factors that affect price.  Buying a home with a low price per square foot for the neighborhood does not necessarily equate to a good deal whereas buying a home with a high price per square foot may end up being a great value for the money.