3 ways price per sq ft is valuable in real estate (even for appraisers)

My name is Ryan and I use price per sq ft in real estate. There it is. My confession. Are you surprised? I know you’ve heard me talk about how price per sq ft is one of the most abused metrics out there. I still believe that. Yet there are several ways price per sq ft is actually valuable and useful for real estate professionals (even appraisers). So let’s kick around some ideas together below. I’d love to hear your take in the comments. Any thoughts?

price per sq ft value in real estate - image purchased and used with permission by sacramento appraisal blog

1) Price Per Sq Ft Helps Us See the Entire Market: What have buyers been willing to pay in a neighborhood? It’s valuable to see the price per sq ft spectrum to help answer this question. What is the high, the low, and the average? I ran a CMA of sales over the past 90 days in the Mather neighborhood in Sacramento County (a tract subdivision), and the price per sq ft range is $112 to $206.

Mather all sales past 90 days - sacramento appraisal blog

2) Price Per Sq Ft Helps Us See The Competitive Market: Imagine we’re valuing a home that is 1569 sq ft. The question becomes, where does the 1569 model fall on the price per sq ft spectrum that we see above? After running a CMA for model match sales, the price per sq ft range is $184 to $193. That’s a much more narrow range compared to the overall neighborhood, right? Ideally it would be nice to have many more sales, but that doesn’t always happen as we know. This is why sometimes it might be best to look at more than just 90 days of sales and obviously expand the square footage range to maybe 1400 to 1800 or so. Whatever you do, just make sure you have enough data to produce meaningful results.

1569 model in mather - price per sq ft - sacramento appraisal blog

3) Price Per Sq Ft Helps us Talk to Clients About the Market: Some clients are so stuck on price per sq ft that they struggle to think about real estate in any other terms. Here’s how it usually goes. A home owner sees a figure of $206 from a different sale in the neighborhood, fixates on that number, and then expects a value for his own property based on that number (even though no similar sales have commanded a price per sq ft close to $206). After talking through Points 1 & 2, hopefully the client can understand that hijacking a random price per sq ft from the neighborhood isn’t a good valuation methodology. Lastly, it’s critical to actually completely set aside price per sq ft and ask two questions: What have similar properties actually sold for? (sales price) & What are similar listings actually getting into contract for?

price per sq ft in real estate - image purchased and used with permission by sacramento appraisal blog

Application:

  1. Real Estate Agents: Be sure to study the price per sq ft spectrum for the entire neighborhood AND competitive properties in the neighborhood. But make sure you spend a good amount of time finding similar sales and listings. Sometimes agents say to appraisers, “I used a price per sq ft of $215 to price the property”. Okay, but where did you get $215 from? Why not $208, $214, or $225? Remember, appraisers like myself can find value in using price per sq ft to see the context of the market, but at the end of the day we are fishing for comparable sales to tell us what the market has been willing to pay for something similar. So when you communicate with appraisers, I recommend talking about actual sales you used to price the property rather than price per sq ft figures. This helps you speak the language appraisers use, and your initial research with price per sq ft vs. actual sales might even help convince sellers to not get hung up on a list price that is far too high (based on a hijacked price per sq ft).
  2. Appraisers: Sometimes appraisers mock price per sq ft and treat it like a meaningless metric, but there is actually some real value in using it. Not only can we get a more detailed sense of the market, but we can also communicate well with clients. Consider paying close attention to competitive price per sq ft figures (I know, this may not work in rural markets). If you are coming in lower or higher than the competitive range in the neighborhood, just be sure you know why and can explain why. Also, consider using price per sq ft figures in your final reconciliation. For instance, along with statements about comps, I regularly find myself saying things like: “The final value is also supported by trend graphs as well as competitive price per sq ft figures in the neighborhood.”

I hope this was helpful.

reaa-north-bayClass I’m Teaching Next Week: By the way, I’m teaching a class next week in the North Bay to a group of appraisers. It’s called How to Tell the Story of Value in Appraisal Reports (good for 2 hours CE). Come on by if it’s relevant.

Questions: How do you use price per sq ft in real estate? Anything else you’d add to the points above? Did I miss something? I’d love to hear your take.

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Comments

  1. Joe Lynch says

    Hey Ryan, interesting post as always. There’s a really good reason for appraisers to use PSF-it takes into account variances in floor area. So if the primary difference between homes is the living space, using PSF will factor that in.

    When I’m doing trendlines, I use PSF in conforming neighborhoods. It’s more reliable than running a trendline based on sale price. The time adjustments that fall out are more accurate.

    PSF is mostly useless where value factors are less dependent upon the size of the home, like acreage properties, properties with significant differences in location/quality/etc. I don’t include PSF when I write up appraisals for acreage properties.

  2. says

    I am sure you noted the smaller home had the higher pr/sf. I often look at pr/sf on the grid prior to making adjustments in order to hone in on where my adjustments are appropriate. In other words it is a process of elimination, with everything else being equal.

    • says

      Thanks Mark. I did mention the smaller home had a much higher price per sq ft. This neighborhood I ran the CMAs for lines up well with typical tract subdivisions as smaller homes tend to have a higher price per sq ft while larger homes tend to have a lower price per sq ft. It’s an important dynamic to unpack and explain. I appreciate your thoughts.

  3. says

    You said “Whatever you do, just make sure you have any data to produce meaningful results.”

    I think you meant “Whatever you do, just make sure you have enough data to produce meaningful results.”

    Anyway, great article as always. Good topic and well presented.

    • says

      Mike, you are awesome. Thanks for the correction. I especially appreciate it since this post won’t go out to email subscribers until tomorrow morning. I corrected the mistake. Thanks again.

  4. says

    Thanks Ryan. I learned from this post.

    I look at price per sf the same way I look at gross sale price. It is a number which in and of itself doesn’t mean a whole lot. It is what is behind that number that provides insight into value. $/SF is a starting point.

    Within a competitive market segment there is a range of prices. What do properties at the high end of the range have that the others do not have, i.e. views, remodeling, large lots, pools? What are the properperties at the low end of the range missing? Using this type of analysis the elements of contribution within a market segment may be identified and valued. That is where the beef is in terms of residential appraisal.

  5. says

    Great post Ryan. I’m with Joe, I love price per square foot most for running neighborhood trends in price. Price per square foot helps smooth the trend where there might be sings in the size of properties being sold.

    • says

      Well said, Gary. I agree about smoothing the trend. When graphing price per sq ft, this phenomenon can be seen. I find it very helpful to look at trend graphs for both sales as well as price per sq ft. It’s telling.

      If any appraisers are interested in seeing price per sq ft in action, I strongly recommend picking up Don Macholz’s 1004MC program. You can use his program to help generate quick graphs to show sales, price per sq ft trends, etc…. I do very little lender work, but I include graphs like this in each and every report I do because it helps communicate well with my clients. I simply use his program for the quick graphs instead of the 1004MC form. I don’t get anything out of mentioning this, by the way. His program is a one-time fee of $60, and it’s money very well spent. http://donsappraisals.com/spreadsheets-and-instructions/?orderby=price-desc

  6. says

    I agree with you Ryan. Price per square foot is good for looking at the spectrum of value. If we are able to find similar sales that demonstrate the theory of diminishing returns and how larger homes sell for less per square foot then including a graph of this will help give context to the agent or buyer/seller to see where their home’s price per square foot lies on the graph.

    • says

      Well said, Tom. Keeping a client’s beliefs or ideas about real estate in mind is very key. If we can communicate well with clients to illuminate and explain value, that is a good thing. We have to tell the story of value instead of just render a final number. I like how you mentioned context. If we can provide more context as appraisers, we become a helpful (and sometimes convincing) resource.

  7. John S Anderson says

    I find that price per sf only is reliable in cookie-cutter neighborhoods; for example, homes in near new subdivisions from same or similar builders where quality and condition are similar.
    However, in my market area (New Orleans), price per sf is often useless. With most older city neighborhoods, prices vary greatly due to location , lot size, quality of renovation and other features, such as off street parking, porches, patios, pools, etc.
    The local newspaper reports bi-annual price per sf for the metro area as researched by one of the universities as taken from the MLS. This often creates more problems than good. Realtors and their clients seem to think these figures are gospel, rather than simply using them as a guide.
    We have many older neighborhoods that values could be twice as high or low for similar size homes that are on the same block due to their different amenities.
    When I am told by clients that “everyone knows that properties in my neighborhood sell for $xxx per sf”, I cringe.
    BTW, this is my 40th year as a residential appraiser.

    • says

      Thank you John. I appreciate your take, and I think you bring up a crucial point to take price per sq ft for what it’s worth (or not worth for some markets (especially rural areas)). I completely get where you are coming from, and I would be very hesitant to give much weight at all to price per sq ft in a similar area in my market. This reminds us there is no one way to value a property, and not every methodology will work in every location. Yet I would wonder if there may still be value in seeing what the price per sq ft range is in the market area and what competitive properties are tending to fetch in terms of price per sq ft. I wonder what price per sq ft would look like on a graph over the past 10 years too. I also cringe when I hear things like that. Thanks for the comment. I appreciate it. Most of all, Happy 40th!! 🙂

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