There are lots of ways to value a property. Clearly, looking at sold comparable homes in the surrounding area is a start. Knowing the sales prices of similar homes that have sold in recent history is one of the best guides to pricing a property properly. Understanding market conditions is a key factor in arriving at value, and of course, there are other factors to take into account — competing inventory, property condition, seller motivation, etc. But, what about valuing property based on price per square foot?
Price Per Square Foot
You might have heard that a property’s price per square foot is a poor indicator of a home’s actual value. In general, I agree. However, looking at price per square foot can give you a gauge of value. An indicator as to how the property stacks up against other competing homes and past sales. It might even be a clue as to Seller motivation. If a property is exceptionally large, it stands to reason that the price per square foot will be lower than smaller homes in the neighborhood. But, what if you are looking at an average-sized home in a neighborhood of similar properties?
Is the home you are looking at valued higher on a per square foot basis? Lower? The lower price per square foot just may be an indication that the Seller has priced their property well. Perhaps the Seller is highly motivated. Or, maybe there are issues with the home that have warranted a more competitive list price. Whatever the reason, I think it is helpful to look at price per square foot as one of many factors in determining value.
Determining Property Value Is Not So Simple
Granted, determining the actual value of a home is much more complicated than a simple “price per square foot” formula. Many different things go into a home’s price calculations. Things that are not always readily apparent. It’s important to keep in mind that valuing a property based on price per square foot works best when there is uniformity. It’s a helpful measuring stick, especially when houses are similar when location is the same.
For years, I’ve heard arguments pro and con about using price per square foot as a means of valuing property. I don’t think it is right or wrong. I simply believe that when it comes to valuing a property, we should look at all factors. A thorough analysis using the data at our disposal helps to narrow down and define value. Price per square foot is yet another clue in assessing overall value and one that should not be overlooked.