I have a new way to explain how price per sq ft works in real estate. It’s helpful but maybe a little creepy too. No matter what, we need word pictures in real estate to explain concepts, so let’s chat.
The big idea: Using a price per sq ft figure from a different house is sort of like photoshopping someone else’s body on your own. It just might not fit.
Instagram model vs dad bod: Think about it this way. When we use a price per sq ft figure to price a home it can be like taking an Instagram model’s body and putting it on a dad bod. It just doesn’t belong or fit. The problem is we’ve imposed something entirely different on another thing, and it looks awkward. The same holds true in residential real estate when we hijack a price per sq ft figure from a dissimilar house down the street and use it to price a property. Thus if we’re not careful we can end up pricing a “dad bod” home like it was an Instagram model simply because we priced according to model metrics instead of other dad bod sales… Okay, let’s not take this analogy any further. Do you catch my drift though?
Pick your poison: This example isn’t intended to tackle all aspects of price per sq ft, but only help stir conversation. I actually use Starbucks cups and Lamborghinis too, but that’s just me. My advice? Use what works for you.
One more thing. I’m writing as a guy who is currently on a diet, so I’m definitely not poking fun at the reality of dad bods. 🙂
I hope this was helpful (and not too creepy).
Is Blackstone selling? I see Invitation Homes (Blackstone) has a handful of properties listed on the market right now. These could be non-performing assets of course, but we have to ask if they are starting to sell off some inventory too. Stay tuned.
Sign giveaway: Last week I wrote about people who are leaving the market, and I’m giving away the shabby chic signs I made on this Facebook post.
Video: Here’s a video I made to talk through the danger of abusing price per sq ft. Enjoy if you wish. It’s about six minutes.
Question: Does this example work? How do you explain how price per sq ft works in real estate? I’d love to hear your take.
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Come with Ryan if you want to value.
Thanks Gary.
Nice post Ryan! I think the muscle illustration is hilarious! It works. Nice word picture. Price per square foot can get odd fast if not careful. Keep up the nice work with the analogies.
Thanks Jamie. There’s always a risk of being really immature, but I like this. I thought of it last week prior to teaching a class. During the class it got a few laughs and I think it helped advance the conversation, which is a win. I still need to smooth out my language here, but in my book there’s something here worth explaining.
I didn’t think it was immature. I think that being creative and having a little fun helps people understand and remember the things we are trying to teach, more readily.
Thanks Jamie. That’s exactly what I think. There is a powerful truth here too beyond the creepiness of it all. Imposing a price per sq ft from a different house really can be like photoshopping that house onto another.
The irony is it’s not just sellers who use price per sq ft. It’s buyers too. They often value based on it. Thus it gives appraisers a great opportunity to speak into this. And humbly speaking, it’s a good opportunity to listen to the market also. How are people coming up with prices and amounts to offer?
So true!
Who’s that guy you posted on your totally buff bod, Ryan?
Per sq.ft. worked for me when I sold a home within a gated community; otherwise, it’s close to worthless.
Haha. This is a stock photo. I am on a diet right now. Though I’ll never look like this. I care about health and being fit, but I’ll likely never put in the time to being ripped like this.
Glad that worked out for you. If you used the price per sq ft from a similar home, I can see how that could work. Still not my preferred method, but I get it. Congrats to you!!!
I keep trying to explain this grossly worthless metric to realtors and buyers.
They all want to talk about $/ft and it ONLY works in model match subdivisions of the same lot size, same GLA, and in the first stage of life before the first round of renovations or replacements/upgrades.
Once you get past the first 10-15 years, youve gotten to a period with properties with a mix of upgrades/original and if you are in a non-subdivision area(99% of my work) its a wholly useless metric.
If the site size isnt in the exact same tiny range 6-7,000′ or 1-2 acres, etc… then the metric is worthless due to site value.
Or say one parcel is on a busy corner and one is inside a culd-de-sac… again-land/location value skews $/ft into a worthless metric.
I really like how youve attempted to train realtors, I wish realtors had to take an appraisal class and the $/ft metric was removed from all MLS systems…
LOL
Thanks Mark. I hear what you’re saying about non-subdivision work. I do find even in subdivisions there can be a huge price per sq ft range. I think this is where the struggle comes into play with picking one number randomly to use to price a property. There’s simply more than one number to choose from…. I can think of an eclectic area of town where the price per sq ft range is from 300 to 600. So when someone says, “I used 475 psf to price the property,” my question is always, “Why did you pick that number? And moreover, I’d love to see similar sales you used to price the property also.” But even in tract subdivisions I’ll still see a very wide range.
Yes-Like I said, it works in almost new, conforming, cookie-cutter subdivisions with identical lot size or location type. Even a pie or outside lot property would not even apply.
I hear Richard Hagar apply $/ft adjustment value based on what reasonable comparables sell for after the comps were chosen for relevant features. He said he has applied $/ft as low as zero and as high as $1,500/foot.
Like you say-it all depends.
Hopefully the days of “throw $25/ft at it off the chart on the back of your clipboard” are over.
Thanks Mark. I’m glad you brought that up. It’s easy to dog price per sq ft as a metric, but it’s important to watch. I actually report on price per sq ft trends in the Sacramento market each month (along with median price and average sales price). On a neighborhood level as we know it’s just something to be really cautious about using as an exclusive pricing mechanism. I find this to be especially relevant to remember in the midst of a market where sellers are prone to overprice and they’re out of sync with how price-sensitive buyers are right now.
For any onlookers hoping for a bit more information, here are two articles I’ve written on price per sq ft:
1) Here’s 5 things to remember about this metric. https://sacramentoappraisalblog.com/2015/02/24/5-principles-to-remember-when-using-price-per-sq-ft-in-real-estate/
2) Here’s three ways price per sq ft can be a valuable tool. https://sacramentoappraisalblog.com/2016/02/08/3-ways-price-per-sq-ft-is-valuable-in-real-estate-even-for-appraisers/
Your Starbucks analogy is classic.
And I have enough dieting in my life as you well know.
Thanks Joe. Yeah, I like what the ‘Bucks analogy conveys. This hits a different angle, which I also like. The Starbucks one is the best so far I think. Yet we need many word pictures in our real estate quiver.
Let’s keep going on getting fit. Let’s be sure to get that bike ride in also since the rain wrecked our plans a couple weeks ago. Who would have thought we’d have rain in May?
You stated “price per sq ft figure from a dissimilar house down the street and use it to price a property.” It’s quite possible that the house is similar but the property has other characteristics that are dissimilar enough (lot size, quality, view, etc…) to skew the results. I’ve had this conversation more times than I can count. Interestingly, the majority of Real Estate Agents know and understand. But property owners more often than not see what they want to see. Either way, I like your slant…. might have to “borrow” it…. except for the creepy picture (grin).
Thanks Mike. I appreciate it. By the way, I saw your name in an article recently. Very cool. Maybe it was a Homelight one. I don’t recall.
Well stated. The house could be a model match, but it might be selling at a profoundly different price point due to location, upgrades, lot size, condition, etc…
I totally agree about real estate agents and owners. It’s really hard for an owner to see the market at times. That’s why we have such lofty prices at times. The prices sound “record-breaking” and they even make the paper, but despite all the publicity these homes don’t sell…. because the price isn’t right.
You’ll have to share an image you make Mike. 🙂
I always try to explain to agents that price per square foot can work in certain situations but the home, comps, and neighborhood have to meet strict guidelines such as good conformity, narrow range of living area between subject and comps and current sales. If any of these aren’t present you can get really messed up if you only look at price per square foot. This really works for your analogy too because there would not be good conformity between a dad bod and a ripped bodybuilder. Looking forward to your future analogies. 🙂
Thanks so much Tom. Well stated. I used this example today during a presentation actually. What I like is it personalizes talking about metrics and gives language to unpack concepts. I’m finding it’s actually good for simply talking about comps too. If it’s a ripped property, let’s find other ripped comps. We probably don’t want to compare it to “dad bods”, right?
Awesome post and great “factual” analogies – but I’ll never be able to look at you the same again! LOL
Haha. Yeah, sorry about that Michele. 🙂