Yesterday, I received a feed from a blog I follow written by fellow appraiser, Tom Horn, SRA, who works down in the Birmingham, Alabama market. Tom’s a great writer who always has some wonderful insights on the real estate market and appraisal.
I’m sharing his most recent post with you. It hits on a topic that I’ve written about before, that is the ongoing debate on value derived from using Price/Square Foot. As you may know, I’m not a big fan of using Price/Square Foot as a way to determine value. It just doesn’t hold water. Well, Tom does a nice job of tackling the debate and lays out some very solid arguments as to why P/SF is monkey-math.
Here’s a screen shot and link to the full post. I’ve also copied the entire post below:
“A few days ago I had a real estate agent friend ask me how much homes were appraising for per square foot in a local neighborhood. It was a very good question, especially for anyone who wants to get an idea of their home’s value. And because I get asked this question a lot I thought I would take this time to explain how appraisers look at this familiar method of comparison.
The price per square foot is the most familiar method of comparison that many people are aware of. It is such a common method of measuring a properties value that it is listed right below the sales price on the sales comparison adjustment grid on the appraisal report. What you must realize is that everything about the property is summed up in the price per square foot. It’s size, condition, features and overall appeal is reduced to this one number. Because of this it is very important that if you want to find out what homes in your neighborhood are selling or appraising for per square foot in order to estimate your own home’s value you must only use houses that are very similar to your own.
If you have a home built on a slab, and you are using the price per square foot of a home with a basement, then that is going to reduce the accuracy of your estimate because the price per square of the other home includes the value of the basement. When you multiply what it sold for per square foot by your home’s square footage it will be over estimated. This is also true when you look at a home that is a lot bigger than your own. If everything else is similar, such as features and quality, but the comparable is bigger than yours, that can also be misleading because a larger home will usually sell for less on a square foot basis when everything else is the same. As the size goes up the price per square foot goes down. It is the law of diminishing returns at work, which states that the more square footage you add the less value you get per square foot for the larger size. If you multiply the price per square foot of the larger home by your own square footage then your home will be under estimated.
The bottom line is that you should make sure that the sales comps you are looking at are very similar to your own home. If your home is a one and a half story home with finished basement then try and find similar sales with like features. I wrote an article “What is bracketing and why should Realtors do it” that explains the process appraisers go through that goes hand in hand with what I am writing about here. So to finally answer the question asked about at the beginning I would say that the price per square foot can be a very good indicator of market value if the comparable sales are very similar to your own, and you are comparing apples to apples. If the property you are getting the price per square foot from has a pool, when yours doesn’t, or is on 5 acres when yours is on a half acre lot, then you are comparing apples to oranges and the price per square foot IS NOT a good indicator of market value. Does this make sense? If you have any questions I would be happy to answer them for you, just leave a message at the bottom, I look forward to hearing from you.”