Using the wrong comps can lead to the wrong price or value. I realize that’s a no-brainer, but at the same time it’s still a common mistake when using price per sq ft figures to list or appraise a house.
A Recent Scenario: The subject property is a 3-bedroom unit at just about 1500 sq ft. There were zero sales at the contract price and really no reason why it should be selling so high, so I asked the Listing Agent what influenced him to price the property at that level. He shared that the price per sq ft of two nearby homes supported the value. The only problem was that the nearby sales were closer to 1200 sq ft, which was about 300 sq ft less than the subject property. While this might not seem like a big deal, the smaller homes actually had a higher price per sq ft than than 1500 sq ft models. Take a look at the graphs below.
The smaller units were easily between 180-190 per sq ft, but the houses very close in size to the subject property were much closer to 170-ish. This just goes to show how important it is to compare apples to apples in real estate. Or in other words, it’s vital to use data from similar properties when making a comparison. As a rule of thumb I might suggest using sales 10% or so above and below the square footage of the property you’re working with. In this scenario the smaller units easily had a 5%+ higher price per sq ft. You may wonder of course how a property could get into contract 5% too high. Remember that inventory is still tight, but most of all the offer was from an FHA buyer putting very little money down. When you’re not spending your own money, you tend to offer more, right? That’s how it usually works.
The Costco Principle: Why do smaller homes tend to have a larger price per sq ft? Because they cost more to build. It’s sort of like buying one can of 16 oz peanut butter at your local grocery store for say $4.00, but then going to Costco and getting 96 ounces for $12.00. Just as it can be less expensive to buy groceries in bulk, the same is true in real estate when building. Think about how much less it costs to build a second story on top of a one-story house. During new construction it saves a ton of money to simply add the second level because there is no need for an additional roof, foundation or much infrastructure below because it’s already there. This is also exactly why a house double in size is probably not worth twice as much because it didn’t cost twice as much to build.
Questions: Any thoughts or insight? By the way, chunky or creamy peanut butter? I say chunky all the way.
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