Kopa Real Estate Blog

One of the most misunderstood aspects of real estate is dollars per square foot ($/sf). Even with my own clients it can be difficult to get them to realize there are too many factors that go into pricing real estate for this to be a reliable statistic.

What is $/sf?

If you take the sales price divided by the size of the home you will have calculated $/sf. Comparing 2 homes by $/sf would be fine if both homes are exactly the same, but that rarely happens.

Here are some of the reasons why comparing homes by $/sf may not be accurate:

1. Lot value as part of the overall home value.

The value of the lot is not considered when calculating $/sf. A home that is on a more valuable lot for whatever reason (size, greenbelt, swimming pool, etc) will sell for a higher $/sf than another home on an inferior lot.

In many parts of Austin the value of the lot far exceeds the rest of the home. In these areas a larger home may sell for a significantly lower $/sf because the size of the home has little to do with the market value of the overall property.

A $50,000 lot would represent $25.00/sf with a 2,000 sf home but if the lot is $100,000 that would now represent $50.00/sf.

2. Comparing a 2 story home to a 1 story house. 

A 1 story home will typically sell for a higher $/sf than a 2 story home.

Let’s compare a 2,500 sf 1 story home and a 2 story home with 1 1,250 sf first floor and a 1,250 sf second floor. The foundation and roof of the 1 story home may be twice as large and twice as expensive as the foundation and roof of the 2-story home.

The lot of a 1 story home may also be larger than a 2 story home because when the home was built it needed to be on a larger lot to fit the footprint.

When you add in those extra expenses you can see why a 1 story home would sell for a higher $/sf than a 2 story home.

When comparing home prices it is a good idea to start by comparing a 1 story home with another 1 story home. Otherwise your calculations may be significantly off. On the other side if you are pricing your 2 story home by comparing it to a 1 story home you may be overpricing the house, causing it not to sell.

3. Comparing homes of different sizes.

Comparing homes of different sizes by simply multiplying the difference in sf by the $/sf of one of the homes will not give you an accurate estimate of market value.

For example, let’s say a  2,000 sf home sells for $100/sf ($200,000 sales price). If your home is 2,300 sf you can’t multiply 2,300 by $100 to come up with a market value of $230,000.

The reason for this is many of the big ticket items in the two homes may be the same. Some of the most expensive items in a home are the kitchen and the master bath.

Those areas in a smaller home may be exactly the same as a larger home.  It costs much more to build a kitchen than to build a 300 sf game room.

That is part of the reason you can’t simply multiply the $/sf by the difference in sf when comparing homes. The extra 300 sf game room didn’t cost as much to build because it isn’t much more than a box of air compared to the kitchen and you can’t expect someone else will pay you the same when you go to sell the home.

How do appraisers use $/sf

It’s important to remember in most cases you not only have to sell a buyer on the price of a home but also an appraiser.

For an appraiser the $/sf comes at the end of the calculation. The appraiser calculates a value and that results in a $/sf.

They do not calculate the average $/sf in a neighborhood and then simply multiply that by the size of the home.

4. The average $/sf for a neighborhood may not mean anything.

In most cases someone is only buying or selling one home. Looking at the average $/sf over time can be an interesting metric to gauge the real estate market in an area but it may not mean much when valuing one home.

Often you will see large differences in the $/sf in a neighborhood due to the size of the home, lot value or upgrades and improvements of homes. There is never one $/sf that applies to every home in a neighborhood.

Conclusion

$/sf can be a valuable statistic when gauging where a property falls within the range for a neighborhood. However, using it as a means to multiply the size of a home could cause a buyer or a seller to price a home incorrectly.

For a seller the math may result in a sales price too high to sell or so low that money is left on the table.

For a buyer the math may result in paying too much for a home or passing on a great property because a miscalculation showed the home was overpriced.

Instead of trying to calculate the value of a home instead of using $/sf that may cause an error call/text me at 512-791-7473 or email at eric@koparealestate.com and we can talk about getting you a more accurate estimate.