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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A Rumor About Appraisers & Listings: There is a rumor in the real estate community that appraisers cannot use listings to adjust for how the market has moved (whether up or down). This is definitely 
When hunting for and evaluating homes for my flipper clients, garage conversions have a negative impact. In plain English, I calculate the cost to remove the conversion and restore the garage to original usage in 100% of cases. Why? Most conversions are unpermitted and ultimately that would have to be resolved. Most conversions are poorly executed, have issues with HVAC and access to bathrooms. Buyers want garages for vehicles and storage. While the conversion may have added temporary value for the seller, paraphrasing some of my favorite rock and roll: “you’re fooling yourself if you believe” it adds value for a buyer.
I believe that if done well, they are a wash. They add some value by increasing the size of the home, but at the same time detract value by removing the garage. If done poorly, they can absolutely remove value. This includes if they are done with shoddy workmanship, but also if they are done when there is a lack of other parking or storage space. I have seen numerous examples of homes with converted garages that have little on street or driveway parking and/or have nowhere to store the junk that would normally go in a garage. If someone were to want to do a conversion, they should have ample additional parking and a shed or some other type of storage space for typically garage stuff. I also think that when people do a permanent conversion that removes the garage door and replaces it with an exterior wall, it definitely detracts from the curb appeal and lowers value.
There are several factors that I take in to consideration when trying to determine what adds or subtracts value — OR — adds or subtracts to the desirability of a home in general. Best case scenario with a garage conversion that will add value = good workmanship, done with permits, and the presence of available garage parking that is consistent with the surrounding neighborhood. Worst case scenario with a garage conversion that will subtract value = poor workmanship, done without permits, and no available garage parking that is consistent with the surrounding neighborhood (See more of Erin’s thoughts on conversions 
I can definitely shed some light on how they could possibly add value, for the right buyer. I find that the older, tiny detached garages like ones found in East Sac or Land Park barely fit a car in them as is. When converted to a game room, man cave, or office, it creates a completely private place to escape to. The best example I can think of was an episode of Interior Therapy by Jeff Lewis. In the episode, Jeff converted a backyard garage into a home office and lounge type area. This garage was previously used as junk storage and by the end of the conversion you could see how much it brought to the property.
In my experience, garage conversions typically do not add value to a home. Right off the bat, a large handful of buyers will not even be interested in the property if it does not have a garage. Therefore, the seller is missing out on about 60% of the potential buyers. So now your competition/interest in the home has already dropped. Next, the question screams: “Was it done with a permit?” Most of the time, garage conversions were not done with permits. This causes red flags for buyers and also eliminates more buyers who are using financing that will not allow non-permitted garage conversion purchases. Additionally, most garage conversions have a step down into the room and it typically does not “feel” like the rest of the house. Due to this, it does not add value for the extra square footage. You lose a garage and in place have not as good quality extra square footage. This leads to using the original square footage when trying to value the home with recent sales. With all of this factored in: In most cases garage conversions decrease the value of a home. At best, the conversion equally cancels out the loss of the garage. The only time it would add value is if you are adding a bedroom and/or bathroom that was done with permits, does not have a step down, the central heat/air is tied into the space and gives the same “feel” as the rest of the home.
All I’d really say on the subject of whether garage conversions add value is: It depends. Are they common to the neighborhood? Some older neighborhoods of mostly two-bedroom homes have seen a large number of garages converted to additional living or bedroom space, and in neighborhoods like this it makes sense. Generally speaking, though, I think most people want a garage and are willing to double an office as a guest bedroom instead of looking for two rooms. More often than not when I take clients through homes with garage conversions I get comments like “this is kind of funky” and we have the discussion about how difficult it would be to convert it back to a garage.
Buyers want bedrooms, bathrooms, nice living spaces and in most cases, a garage. In the past 12 years I’ve sold 3 homes with converted garages. These are their stories: 1) A single mother; 2) An investor looking for his next rental, and he liked the converted garage so he could charge more for rent (since it was called a “bedroom” – never mind that the driveway drainage was poor and it slanted down into the garage); 3) An elderly librarian who was also a first time home buyer, who had 12 cats. Yes, the converted garage was for the cats. So for those potential buyers, go ahead and convert those garages! Otherwise, please leave a garage as a garage. I haven’t even gotten into the hassle on the lending side if this conversion was done without permits. If you want to make your home appeal to the most buyers, and sell for more money, leave the garage intact.
I think conversions would really be on a case by case basis… and mostly dependent on the needs of the buyer. I am a strong believer that each sale is unique, and if you are in the right place at the right time, you could sell a property for significantly more than you would at a different time. This definitely includes conversions, as some people try to maximize on their living area. Not having a garage though will definitely have a negative impact on the value. Another big factor would be the neighborhood. Many of the lower priced neighborhoods may even benefit from having a conversion (kind of like diluted price per square foot), so it may have a positive impact on the overall price. Higher end neighborhoods, however, don’t necessarily look at the total square footage to determine the price but more on the outlay, condition, and lot. It would also have a much larger negative impact in a higher end neighborhood as it’s not necessarily seen as “desirable” to live in a conversion. Maybe a cheaper alternative to an in-law quarter. 🙂
As far as conversions, we usually convert them back. We’ve found that most people value a garage more than an additional bedroom. The need for extra storage space along with the reality that most conversions aren’t done very well leaves us converting about 90% back to garages.