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price per square foot

5 things to remember when using price per sq ft in real estate

February 24, 2015 By Ryan Lundquist 19 Comments

Using price per sq ft can be very dangerous. I know that sounds odd because price per sq ft is about as common as anything in real estate. Home owners ask, “How much is the price per sq ft in the neighborhood?”, and real estate agents might say, “I priced this property based on the price per sq ft in the area.” But having a correct understanding about the way price per sq ft works can revolutionize the way we see the market and value properties. Let’s unpack five principles below, and I’d love to hear your take in the comments.

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5 principles to remember when using price per sq ft in real estate:

1) There is a price per sq ft spectrum in a neighborhood: There is never just one price per sq ft figure that applies to every property in a neighborhood. For instance, a neighborhood might easily see a price per sq ft range from $100 to $250 when looking at all sales.

2) Similar houses tend to have a similar price per sq ft: When homes are similar in size, location, bed/bath count, etc…, they tend to have a similar price per sq ft. That’s obvious, but the contrasting factor is that non-similar homes might have a VERY different price per sq ft that shouldn’t be used to value your home.

3) Property characteristics can quickly change the price per sq ft: When there are differences in condition, location, lot size, quality of upgrades, bed/bath count, size, etc… the price per sq ft can change dramatically. We might see a small remodeled home selling at $250 per sq ft, a model match fixer selling at $175 per sq ft, a short sale model selling at $185 per sq ft, and a home with an adverse location selling at $215 per sq ft. Thus even for one model there could be a price per sq ft range from $175 to $250.

4) Smaller homes tend to have a higher price per sq ft: It costs more to build smaller homes, so smaller homes tend to have a higher price per sq ft than larger homes. This is why it’s dangerous to use a price per sq ft figure from a smaller sale to value a larger home. A smaller home might sell at $250 per sq ft, but a larger home might be closer $150 per sq ft. Here is a quick video below (or here):

5) Price per sq ft provides a valuable context: When you can talk through price per sq ft figures in a neighborhood, and explain the above points, you are an incredible resource. Appraisers, pay close attention to the price per sq ft range in a neighborhood. Some appraisers treat price per sq ft as a meaningless metric, but it’s actually valuable. If your value does not fall within the range (especially the competitive price per sq ft range), it’s important to be able to explain that.

CONCLUSION: Be careful about using price per sq ft to price a property because sometimes it’s like putting the cart before the horse. I recommend starting a valuation with an “apples to apples” approach where you first and foremost try to find other similar sales and listings in the neighborhood, and then subtract and add value based on any differences with your property. After you have a grasp of similar sales, research price per sq ft figures for the entire neighborhood as well as competitive properties. Ask yourself if your value makes sense in light of price per sq ft figures.

Questions: Any thoughts or insight? I’d love to hear your take.

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Filed Under: Appraisal Stuff, Resources Tagged With: appraisal methodology, appraiser in Sacramento, how to value a property, larger homes, Price per sq ft, price per square foot, real estate 101, real estate principles, sacramento appraisers, smaller homes, using price per sq ft in real estate, valuation principles

Foreclosures vs. Short Sales vs. Traditional Sales

August 21, 2012 By Ryan Lundquist 3 Comments

We often hear how foreclosures sell for less than traditional sales, but let me show you some actual data to back this up. Let’s take a look all single family sales in the 95758 zip code in Elk Grove. What do you see?

95758 zip code - all foreclosure sales - Sacramento Appraisal Blog

95758 zip code - all short sales - Sacramento Appraisal Blog

95758 zip code - all traditional sales - Sacramento Appraisal Blog

The difference in price per square foot between traditional sales and distressed sales is striking. Generally speaking, the price tier in this market begins with short sales at the bottom, foreclosures just above the bottom and then traditional sales at the top. If you want to sound smart, you can explain this market segmentation by using the word “bifurcation.” Ultimately, since investors are gobbling up the market right now, many traditional sales have been spruced-up or upgraded, which means there can be an understandably huge price difference between these sales and distressed sales. However, even without the difference in condition, distressed sales often sell for less because they tend to be marketed more aggressively since banks must unload their distressed inventory (as opposed to an owner who can take more time to sell a property).

Will appraisers make a huge adjustment for distressed sales? All things considered, it looks like the most recent percentage difference between regular sales and distressed sales in this zip code is 15%. Ideally appraisers will not use foreclosures as comps, but that’s not always a luxury in today’s market. Despite foreclosure rates declining in recent months, there is still a hefty supply of distressed inventory. If an appraiser does use a distressed sale in an appraisal report though, this doesn’t necessarily mean there will be a 15% difference warranting a 15% adjustment. Why? Because part of the 15% difference could definitely include a price premium for condition and level of upgrades – not to mention other factors. Besides, what if new construction in a zip code boosted the overall price per square foot figures for traditional sales? This is why appraisers really need to understand the market and each individual sale rather than rely on general trends that may or may not be representative of the immediate neighborhood. In short, the data above shows a big price difference, which we should take into consideration, but we also must dig deeper into the rest of the market and competitive sales to really uncover what’s going on.

Does it seem most appraisers consider whether there is difference in price between foreclosures and regular sales? Any stories to share?

If you have any questions or Sacramento area real estate appraisal or property tax appeal needs, contact me by phone 916-595-3735, email, Twitter, subscribe to posts by email or “like” my page on Facebook

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Filed Under: Appraisal Stuff, Market Trends Tagged With: 95758 zip code real estate, appraiser in elk grove, Bifurcation, Elk Grove appraisers, Elk Grove Real Estate, Home Appraisal, Home Appraiser, price difference, price per square foot, REOs vs regular sales, segmented market, traditional sales vs foreclsorues

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