If there’s one conversation to master in real estate, it’s explaining how price per sq ft works. Or rather how it doesn’t work. In the past I’ve used Starbucks cups and even toilet paper to explain things, but today let’s use price per pound. What do you think? Let me know.
Seller: I used price per sq ft to price my property.
Me: That’s great. Did you pick the right number?
Seller: What do you mean?
Me: Imagine your neighbor just bought a Toyota Camry for $24,000. If we do some quick math, she paid $7 per pound based on the weight of the car.
Seller: Okay.
Me: Now imagine a different neighbor wants to buy a Lamborghini. It’s been his dream since middle school, but it’s way out of his budget. Well, not any longer though since he just learned the price per pound for a vehicle is $7. He can now afford the Lambo. Pretty cool, right?
Seller: It doesn’t work that way.
Me: Exactly. Why not?
Seller: You can’t use the price per pound from a Camry to price a Lambo. Those are two completely different cars.
Me: Well said. And in the same way we can’t borrow a price per sq ft from a dissimilar property down the street and arbitrarily use it to price your house. That’s a bit like using Camry stats to price a Lambo.
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UPDATED on 2/08/2018 (“Picking the right number”): Someone read this post and thought I was saying price per sq ft is a good metric to use. That’s definitely not what I’m saying. To be fair I think I can see why this person thought that because I mentioned “picking the right number” in the conversation above. I’m not suggesting there is a right number to choose, and that example question is really only a device to help move conversation forward (rather than something to be taken literally). The big point here is choosing a random price per sq ft to price a property is a really bad idea. I suggest actually paying attention to similar sales more than anything. Does that make sense? I hope so.
This car example isn’t intended to tackle all aspects of price per sq ft. It’s simply a way to start conversation. Read more on price per sq ft here.
Mastering this conversation: I highly recommend for real estate professionals to master this conversation. If you don’t like the car example, that’s fine. My sense is it’s critical though to have a few examples at hand to quickly explain how price per sq ft works (and doesn’t work). Why? Because when sellers overprice it’s often because they’re hung up price per sq ft.
I hope this was interesting or helpful.
Questions: Does this work? Why do some sellers and real estate professionals get hung up on price per sq ft? Did I miss something?
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Is your house a commodity like grain, gold, oil, or beef? Then don’t price it like one.
I love it Gary. Thank you.
As usual, spot on. In the forums there seems to be a segment of the group that loves ppsf. I think if you have highly similar properties with little variance, fine, the metric might mean something. Otherwise, it’s best to move on…
Thanks so much Abdur. I always appreciate your take and insight. Yeah, I’m bullish on using price per sq ft blindly. It’s a very quick way to get into value trouble. In the past I’ve written about how I use it, and for any onlookers, know that I definitely pay attention to price per sq ft. I just don’t use it blindly for value like the home owner in this example. Here’s a post I wrote: https://sacramentoappraisalblog.com/2016/02/08/3-ways-price-per-sq-ft-is-valuable-in-real-estate-even-for-appraisers/
I agree with you about some appraisers. Some use it to make adjustments, and I actually really like that idea.
I’ll admit, as a Realtor, this is my biggest weakness. I do use it as a crutch when I’m going quickly.
Question: Can price/sf be more helpful when comparing like-kind properties? For instance, comparing price/lb on Lamborghinis, it might be more accurate when comparing Lamborghinis and similar luxury cars.
Corey, you are awesome. Thanks as always for pitching in your thoughts.
I honestly think we SHOULD be looking at price per sq ft, but we cannot forget to look at actual similar sales too. I remind agent friends that if they only look at price per sq ft and do not look at similar sales, they are going to struggle to communicate well with appraisers. Why? Because appraisers pull actual “comps” in an appraisal report and won’t simply be entering a price per sq ft in lieu of say Comp 1. Thus when an agent says, “I used 295 price per sq ft,” it’s like speaking Alien to many appraisers. It’s so much more powerful when an agent says, “I paid attention to price per sq ft trends, but most of all I looked at these few properties….”
We all know price per sq ft can be very deceptive because it can range widely based on a better location, larger house, upgrades, condition, etc…. But similar homes do tend to have a similar price per sq ft, so it is valuable to look at. I think price by pound would be totally irrelevant for cars to be honest, though maybe if we are just looking at luxury cars there could be a connection (I say that with a grain of salt). It makes for great conversation though, which is why I mentioned it. I’ve been testing out this analogy and I’m finding it’s a helpful conversation starter. Price per pound might actually work though with some commodities like spices or illegal drugs (kidding on that one… sort of).
I am bullish on blindly using price per sq ft, but here are two articles that are very important to understand for this conversation:
1) The big takeaway with this one is that similar homes tend to have a similar price per sq ft. You are 100% correct about this. Also, there is ALWAYS a price per sq ft range in a neighborhood. https://sacramentoappraisalblog.com/2015/02/24/5-principles-to-remember-when-using-price-per-sq-ft-in-real-estate/
2) The takeaway with the following article is how price per sq ft can be useful. I actually use it in almost every appraisal to help see the context of the market (the range of value for similar homes). I was actually just tweeting about this today. Here is a graph I made to help show the context of the price per sq ft range in a neighborhood I’m doing an appraisal in. The range is pretty wide here, but if my value does not fit within this range, it would be a good idea to understand why and explain it. In other words, knowing the range of price per sq ft and the range of similar-sized properties is really helpful. It’s like a system of checks and balances for me. https://twitter.com/SacAppraiser/status/961283906543656960
I suppose theoretically if someone is only looking at similar homes, and using price per sq ft of similar homes, then that person is going to be close to value. But in my experience that’s not often how it goes when sellers are looking at price per sq ft. Sellers tend to only see the highest price per sq ft in the neighborhood rather than the most similar one. It’s like sellers (and some agents) get distracted by the best possible number out there instead of a realistic number. So price per sq ft becomes a quick way to overprice rather than accurately value.
My advice to agents would be to really study price per sq ft and try to get sellers to see the price per sq ft of similar properties. Try to get sellers to understand there is a range too. I think the idea of a range is lost on many. There is not just a range in eclectic neighborhoods either. I find a huge range of price per sq ft in even cookie cutter tract areas. For instance, in Sacramento there is one neighborhood I can think of where the price per sq ft range is 200 to 550. That’s huge. So while sellers often pick 550 as their magic number, it would be great to show them similar properties that might have a price per sq ft range between say 300-350 instead. That’s powerful and a fantastic way to use data. It underscores how important it is for us to be in tune with both price per sq ft trends and similar properties (comps like appraisers would use). I am not an agent of course, but it seems like agents have to be prepared to talk through the numbers in listing presentations. It seems prudent to be able to talk through both actual comps and actual price per sq ft figures. That’s just me though. https://sacramentoappraisalblog.com/2016/02/08/3-ways-price-per-sq-ft-is-valuable-in-real-estate-even-for-appraisers/
Okay, that was maybe logorrhea on my part, but hopefully it was useful. If anyone has a take or further thoughts, let’s talk shop.
LOL awesome. This totally works. Especially for me out in the luxury market where clients are familiar with one of these fancy cars and probably own way. Great job!
Right on. Thanks Wes. I gave this is “test drive” during a presentation a couple weeks ago and it seemed to work well. Glad it connected with you too. Good luck out there in luxury land. 🙂
Love the analogy!
Thanks Shannon.
Ryan, thanks for the great points. Price per square foot is a metric that can promote ignorance among market participants. I wrote an article on this subject a few years ago which noted multiple flaws with the misuse of $/sf. Keep up the good work. As usual, you bring a fresh perspective to issues.
Hi Mike. Thanks so much. That’s great. I’d love to see what you wrote. By the way, now that you have an approved comment you can say what you want when you want. The first one is always moderated to avoid spam. Thanks.
Here is the link to the article. http://appraisalnewsonline.typepad.com/appraisal_news_for_real_e/2013/05/the-reality-of-price-per-square-foot-.html
Thanks Mike. I’ll check it out. Appraisal Scoop is a blast from the past. That’s great.
Hi Ryan I just saw your YouTube Video on FHA repairs needed for home appraisal. I currently inherited my mother’s home along with my brother, I want to do a cash out refinance to buy his half out, but I’m afraid the home needs some work before it will qualify for a conventional loan (I’m not doing FHA) a few of the problems are there is no oven, the flooring is horrible, the bathrooms look like they have moisture damage, some missing kitchen cabinet doors and hallway cabinet doors, what are the requirements for a conventional cash out refinance?
Hi Megan. Thanks for watching the video and then stopping by. It’s hard to speak specifically without really seeing the property because your version of “horrible” could be much different than what I think. Here are some comments nonetheless though:
– It’s okay if a home needs some work. Houses don’t have to be perfect for conventional financing (or any type of financing).
– It’s okay if the flooring is not perfect, but if it’s a safety issue for some reason, then it may have to be cured. I don’t want to be gross, but if a house had feces everywhere mashed into the floor, that would probably be a problem. Otherwise it’s okay if there are stains and such as long as they don’t pose a safety issue for some reason. In short, if the carpet is simply older, I wouldn’t stress about it.
– Moisture damage is a very subjective thing because if it looks bad an appraiser may call for further investigation or repair. If there is an unknown blackish substance growing (“mold”), then it would be prudent for an appraiser to call for further investigation. At the same time if there is evidence of minor deferred maintenance, I wouldn’t overthink it. But if there is evidence of a roof leak or something to that effect then it’s prudent for the appraiser to call that out for repair or further investigation.
– It’s okay to be missing some cabinet doors. That is not going to kill the loan. An appraiser will mention the missing doors, but that’s nothing that would likely need to be repaired.
– Some lenders are particular about stoves, but others are not. I would think you’ll be okay without one, but maybe ask the loan officer first if it’s going to be an issue. If you know it’s going to be an issue upfront, then have one installed first so you don’t have to pay an additional re-inspection fee to have the appraiser come back out to verify an oven is present.
Let me know if you have any questions. Hope that helps a bit.
Hey Ryan thanks for replying! I have a gameplan. I’m going to get a new water heater and flooring installed because I honestly think the floor is more of a safety issue. No feces but it’s ripped up in a lot of places and there’s also a few holes that were cut out the floor to fix the plumbing. I’m going to sand down the bathroom walls and paint and just go through and fix what I can in the next couple of months and then apply for a loan, would love to send you some pictures to get an opinion if possible and thank you so much for the advice it’s appreciated
No problem. Sounds like a good plan. I don’t mind taking a quick look at a couple pics for a quick opinion. Feel free to email me.
Hey Megan,
I’m familiar with this loan scenario and can walk through the best way to tackle this if you would like some experienced help on the matter. I’m in my 14th year have run across this many times in my career. Call me if you would like to discuss this further or a second opinion.
Best of luck,
Matt Von Bergen
Branch Mgr/Senior Mtg Originator
916-337-1242
Ryan, can you comment specifically on McKinley Village? The price per square foot is roughly $300 on a brand new house. Yet neighboring East Sac is close to $400 a square foot in many cases, for older homes. At those prices, MV looks like a good buy. Typically the newer homes sell for more per square foot.
In Westshore in Natomas, the newer homes are more costly per square foot than the homes built 10-11 years ago before the crash in the same neighborhood.
Would you anticipate the average price to even out when the new build integrates with older homes in the same neighborhood? Or is a neighborhood like McKinley Village just too different than old East Sac.
Hi Bob. Thanks for reaching out. I’m grateful for the conversation, and let’s keep it going as needed. First, here’s some specific numbers:
* Last year in East Sacramento the price per sq ft range was $262 to $606 when looking at all sales.
* Last year in McKinley Village the price per sq ft range was $268 to $422. Granted, there were only six sales listed on MLS though, so I wouldn’t put too much weight on this range because the builders certainly had more sales that were not listed on MLS. With more data I would expect this range might widen even more. We also have to remember that homes in McKinley Village tend to be larger in size too, and that may naturally mean price per sq ft figures end up being smaller since larger homes tend to have lower price per sq ft figures (https://sacramentoappraisalblog.com/2016/04/18/starbucks-cups-and-price-per-sq-ft/).
Whatever the case, the big point here is the range is wide in both areas, and it’s not as simple as $300 vs $400.
It’s honestly hard to compare these two areas perfectly because we’re looking at a brand new tract neighborhood and one of the most sought after areas of Sacramento (East Sac). In my mind McKinley Village is unique compared to some other newer tract areas because it is located in East Sacramento. Thus comparing it to new construction trends in Natomas might not correlate perfectly since the dynamics are different. For instance, in a typical tract neighborhood we are bound to see higher price per sq ft figures for newer homes because the newer homes almost always command a price premium compared to even slightly older homes. A tract market is often much like a car dealership where buyers simply tend to pay more for the newer models. Yet McKinley Village is a bit different because it is connected to a much older high-dollar area where buyers might pay more for older homes with era charm rather than brand new homes. This is a huge difference compared to a typical tract market, and it reminds us data from Natomas might not correlate perfectly when comparing “old vs new” data in East Sacramento.
McKinley Village is still an emerging market and the neighborhood isn’t built out yet as we both know. My sense is that despite McKinley Village being a place where many buyers are looking, over time it’s simply going to be different from the rest of East Sacramento. It looks different, it’ll always be newer in age, and it feels more disconnected from the rest of East Sac too. In no way am I speaking down about McKinley Village. I’m simply stating facts.
In terms of value, clearly there is a relationship between McKinley Village and the rest of East Sacramento. If there wasn’t, we wouldn’t be seeing sales between 700-900K+ in McKinley Village. Ultimately time will tell and we’ll know more fully how price trends emerge once we have more time under our belts. The truth is this new market hasn’t fully blossomed yet, so we don’t have exact answers.
Any thoughts?
In commercial appraisals, the ppsf is often the basis. However, appropriate adjustments are made for dissimilar attributes. But, as a stand alone my analogy is the price per oz of soda, specifically the difference between a bottle of Coke at Disney vs a case of soda at a wholesale stores
Thank you Fielding. I appreciate the clarification as commercial has a different lens than residential. Love the analogy too. That’s great.
Being that literally everyone in the real estate industry, except appraisers, prices properties by the sf, I simply tell people that it’s something, a factor, I consider along with many other factors. That’s better than making false or silly equivalencies and it lets them know that you’re not at odds with them/their thinking and or consider their thinking false or irrelevant. Needlessly throwing people off balance can make them very angry and we definitely don’t need any more of that than we already have. And, sometimes it’s best to simply nod our heads in agreement and keep our mouths shut.
And, to be truthful, we DO consider $/sf. We or we should always at least look at the stats in an area to see to see if the subject varies significantly in $/sf from other similar properties and then ascertain why. Sometimes it makes sense, sometimes it doesn’t. But, hey, we know we’re going to be asked about it by the buyer, seller, listing agent, selling agent, lender, builder, etc., so why not deal with it up front?
Thanks Free Speech. It’s important to be able to master this conversation because people often want to talk about it. Or I find clients are sometimes hung up on price per sq ft, so I need to be prepared to help them understand how price per sq ft does and doesn’t work in real estate.
I’m with you in that I would never be combative. But it’s important to be able to find ways to explain these things. I’m not sure what you meant by “false or silly equivalencies”, but for me having a few good word pictures and metaphors is beneficial to help advance the conversation. Thus price per pound can be a great way to help create conversation that leads to understanding. Or better yet I often explain how price per sq ft works by using Starbucks cups, and it’s been a great way to break the ice…. Metaphors and analogies can go a long way for us. It’s cool if that doesn’t work for you or others of course. To each his/her own. https://sacramentoappraisalblog.com/2016/04/18/starbucks-cups-and-price-per-sq-ft/
I also agree that price per sq ft is an important metric. I use it all the time to see the range of value in a neighborhood. I don’t use it to value properties, which is one of the ways the metric is abused in te marketplace. I definitely use it to help see the market and explailn it though.
Anyway, thanks.