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Price per sq ft

Real estate math gone wild

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A seller thinks his property is worth about one million dollars more than it actually is because he hijacked a price per sq ft from a different house down the street and applied it to his own. Doh!! This happens all the time unfortunately, and it’s an example of how simple real estate math can create big problems. Let’s talk about this, and I also have fresh stats for anyone interested.

white bricks in the background and an older brown wood floor. A white rectangle is in font of the white bricks, and there is bold black font with today's blog title. It feels a bit rustic. Maybe looks a bit like an apartment in an older city.

THERE ISN’T JUST ONE PRICE PER SQ FT NUMBER TO USE:

It’s easy to overprice if we’re just looking at price per sq ft instead of actual comps (similar homes). Check out the range of price per sq ft among sales in the wider Sacramento region. There is a massive spectrum depending on size, location, upgrades, etc… In other words, there isn’t just one number that fits all properties in the neighborhood.

DOWNLOAD THIS TEMPLATE:

If anyone wants to create a table like this for your area, I’ve included a template. You just need to find the stats. Download the template here and use however you want. I think it could be cool to do neighborhoods instead of cities too. If you have a Rapattoni MLS system, you can actually use the statistics tab to quickly find the high and low. Do a map or standard search (selecting only closed sales), and then hit the statistics tab. Scroll down to find the data. I double-checked data for multiple areas to be sure it is accurate, and it’s spitting out the right numbers.

NOT STUCK ON THE LOWEST NUMBER

People often get stuck on a lofty price per sq ft because the math gives an incredible answer that people want to hear. I rarely meet anyone stuck on the lowest number in the range unless assets are going to be split and one party is trying to short the other. In conclusion, check your bias in situations like this. Are you using a price per sq ft figure because you’re looking at comps, or are you fixated on a number because it gives you an amazing result? 

STARBUCKS CUPS ANALOGY

My favorite way to describe price per sq ft is with Starbucks cups. I’ve used Dad bods and Lamborghinis too. My advice? Use what works for you.

REAL ESTATE CANCELLATION CULTURE

I’ve been getting more questions about cancellations lately, so I ran some stats. I can keep adding to these visuals if it would be helpful (let me know). In truth, I think I need to compare the number of cancellations with the number of active listings somehow since we still have such an anemic supply today. Basically, cancellations have risen, but we’re not at alarming levels. Keep in mind we do have more listings this year, so it seems like we would probably have more cancellations too unless there were many more buyers.

FRESH STATS in 9 COUNTIES:

I’m pulling stats for nine counties these days, and I’ll keep doing so as long as it’s a felt need. You can view all these visuals under the STATS tab on the navigation bar too.

HOW I’M DESCRIBING THE MARKET RIGHT NOW:

The good news is we have more closed sales, more pendings, and more new listings this year, but overall, it’s been pretty mediocre growth with closed sales. Much of the volume growth we’ve seen this year is thanks to Placer and El Dorado County. The market still has historically low supply as we’re missing about 5,000 new listings compared to a normal year, but this year we’ve had about 2,000 extra new listings compared to last year, so sellers aren’t as stuck as one year ago. I think we’re feeling a temperature difference due to more new listings since the gap between sales and listings is wider this year. Yet, the market has been slightly more competitive than normal still when looking at many metrics. Basically, we are now so much closer to normal than the craziness of 2021. Keep in mind buyers are hungry for the good stuff, so there can be intense competition when a property hits the market that checks all the boxes (too many buyers are looking for that one property). With that said, it’s either multiple offers or crickets these days, so sellers need to be ready to find the market through price reductions if buyers aren’t biting. Anyway, more on my socials this week.

IMPORTANT NOTES:

1) Down from 2022: Keep in mind prices are still down from their peak in May 2022, but they are up from one year ago since prices saw a bigger dip for the second half of 2022.

2) Don’t be rigid: Median price and average price change doesn’t translate rigidly. In other words, it would be a mistake to think your value is up X% since the median is up that much. Maybe. Maybe not. Look to the comps.

3) Smaller counties are erratic: I’m not crazy about some of the price stats in the smaller counties since there just aren’t enough sales to be meaningful. Please note smaller counties are grouped in 60-day chunks since stats are erratic with only 30 days. I might even try 90 days instead.

YEAR OVER YEAR

MONTH TO MONTH

I hope this was interesting. Thanks for being here.

Questions: What resonated with you the most above? What price per sq ft stories do you have to share? What did I miss?

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Starbucks cups & price per sq ft in real estate

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It’s easy to get into valuation trouble when we focus too much on price per sq ft. Seriously, this can be a massive problem leading to major heartache during escrows. Okay, that sounds so dramatic, but it’s important to know how to explain how price per sq ft works. Let’s talk about this by using my favorite analogy – Starbucks cups. I wrote about this six years ago, but it’s time to expand some thoughts. Here’s round two.

NOTE: These are Sacramento prices. Are they different in your area?

BIG POINT: The larger the cup, the less you pay for each ounce of coffee. Or let’s say it differently. Smaller cups of coffee tend to cost more per ounce. This is an example of economies of scale, and we see this principle all the time when buying products of different sizes. If you don’t believe me, check the labels when you go to the store. But this isn’t just about buying drinks or chips. This is also something to keep in mind in real estate.

BIG REAL ESTATE TRUTH: The larger the house, the less you tend to pay for each square foot. That’s a huge point, and let’s say it a different way. Smaller homes tend to have a higher price per sq ft compared to larger homes. This is a principle we see when looking at county stats, but it’s also something we tend to see in neighborhoods (assuming we have enough data). Just like coffee costs less per ounce the more you buy, it tends to cost less per sq ft for the more house you buy. That’s the big idea.

Price per sq ft scatter graph in 95757 zip code

95757 Example: This visual shows a ZIP code with conforming tract homes. Do you see how smaller homes tend to have a higher price per sq ft? And larger homes have a lower price per sq ft?  That’s the big point.

PICK YOUR POISON: This example isn’t intended to tackle all aspects of price per sq ft, but only help stir conversation. I’ve used Dad bods and Lamborghinis too. My advice? Use what works for you.

THE PRICING PROBLEM: We can miss value in residential real estate when we hijack a price per sq ft figure from a dissimilar house down the street. Imagine, for instance, using the price per sq ft from a 1,000 sq ft house to price a 4,000 sq ft property in the ZIP code above. After looking at the visual, we’d probably end up with a really inflated value, right?

A VIDEO: I forgot about this, but I made a video about abusing price per sq ft. Here’s some rationale and word pictures (added 3/30/22).

UNSOLICITED ADVICE: Pay attention to price per sq ft, but don’t forget to look at similar properties (comps) when trying to figure out value. And feel free to use the Starbucks cups analogy. I use it frequently in conversation to help paint a word picture when talking about real estate. Here’s 5 things to know about price per sq ft in case you wanted to read more.

REAL WORLD EXAMPLES: I’ve included some examples in various neighborhoods around the Sacramento region. The truth is there is always a price per sq ft range, size matters for value, and property characteristics can make a massive difference in the price per sq ft.

North Highlands scatter graph to show price per sq ft among recent sales

Price per sq ft - Oak Park

Price per sq ft - Rosemont

PROBLEM VISUALS: Okay, you might not care, but I wanted to mention that price per sq ft visuals can be problematic. When an area has a huge variety of prices or custom homes, this means price per sq ft can be ALL OVER THE PLACE (just like the comps are all over the place).

AN ASTERISK: Sometimes the higher end of the price market doesn’t always follow a perfectly predictable trendline for price per sq ft. What I mean is a 5,000 sq ft custom home won’t always sell at the lowest range possible just because it’s larger in size. I think some of the graphs below show this. But Gary hit the nail on the head in the comments as he said, “I think if a larger home doesn’t drop in price per square foot, then you’re likely seeing extras like view, site size, quality features like pools or elaborate finishes/design, etc…” Bingo.

TWO THINGS: 1) We need to be careful about imposing a trendline from tract homes on custom homes (preach it brother). In other words, the trendline for tract homes doesn’t mean anything for custom homes because these are two different products; 2) Sometimes buyers pay a higher amount per sq ft for larger custom homes simply because they recognize the quality of the home, location, view, etc… Of course, that’s something we would hopefully see in the comps too.

Here are a few examples where some of the larger homes have a huge price per sq ft. Do you see what I’m talking about? The largest homes still aren’t at the very highest price per sq ft in the market, but it does look like these homes are able to command a higher price per sq ft than the overall trendline from all other sales would maybe suggest.

Price per sq ft in Folsom (scatter graph)

FREE MARKET UPDATE NEXT WEEK: Next week I’m doing a free market update on Zoom for SAFE Credit Union. It’ll be one hour and I hope everyone leaves with lots of nuggets. This will focus on the Sacramento market, but you don’t have to be local to attend (sign up here for free).

An image to invite people to a free market update I'm doing. See link below.

MARKET STATS: I’ll have lots of market stats out this week on my social channels, so watch Twitter, Instagram, LinkedIn, and Facebook.

Thanks for being here.

Questions: What is the best way you’ve found to explain how price per sq ft works or doesn’t work? What sort of problems have you encountered with price per sq ft in real estate?

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Photoshopping & price per sq ft in real estate

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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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Being neutral, price per square foot, and the Governor’s new digs

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I have a few things on my mind. Let’s talk about me being asked to recruit for a brokerage (really), price per sq ft, and the Governor’s new digs.

1) WHY I SAID “NO”:

A brokerage recently asked me if I would help them recruit agents. The idea was I could use my influence to attract agents to a certain brand and then get a commission for each person I recruited.

I said NO, and my answer will always be NO. I probably don’t even need to mention this, but I want to communicate clearly. As an appraiser I won’t take sides. I’m neutral in my work, but my independence also extends in the way I interact with the real estate community. This is why you’ll see me speaking in many different places and real estate offices. I’m here to educate, not advocate. The truth is if I said yes I would’ve instantly destroyed my credibility.

2) PRICE PER SQ FT:

Here’s a look at price per sq ft trends in a few local areas. I plan to share more graphs like this throughout the year if people like them. Does anyone want to see a video tutorial for how to make these? Let me know. What do you see?

Two Takeaways:

1) RANGE: There’s always a price per sq ft range, which means there’s never just one price per sq ft figure that applies to every property in a neighborhood. Sellers often want to hijack a price per sq ft figure from a sale down the street, but that’s one of the quickest ways to overprice. My advice? Pay attention to price per sq ft, but most of all ask yourself what the comps are selling for. That’s exactly what appraisers are going to do.

2) OUTLIERS: There are clear outliers. As an FYI, usually the highest price per sq ft figures end up representing the smallest-sized homes or over-the-top unique properties.

3) THE GOVERNOR’S NEW DIGS: 

Gavin Newsom is the new governor of California and he just bought a $3.7M house in Fair Oaks. This price point isn’t much in many areas of the country, but it’s actually the fifth highest residential sale ever in Sacramento County. This home is said to have over 12,000 sq ft and it’s located on 8 acres. It’s near the American River, but not on the river. Now two of the top five sales in the county have a connection to a governor (the other was the mansion Ronald Reagan started to build in Carmichael in the 1970s).

Here’s a picture I took of the front gate this week, and here’s a video from a previous listing if you wish to see the home. Not too shabby, right?

Value thought: In the future we’ll have to consider whether there will be a price premium or not for this home because a governor owned the property.

CLASS I’M TEACHING: I’m teaching my favorite class at SAR called How to Think Like an Appraiser on January 31st from 9-12pm. We’ll dig deep into comps and adjustments (and have some fun). I’d love to have you come out.

I hope this was helpful or interesting.

Questions: Would you pay more if a governor previously owned the home? What do you think of my recruiting story? I’d love to hear your take.

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