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.
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.
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?