My name is Ryan and I use price per sq ft in real estate. There it is. My confession. Are you surprised? I know you’ve heard me talk about how price per sq ft is one of the most abused metrics out there. I still believe that. Yet there are several ways price per sq ft is actually valuable and useful for real estate professionals (even appraisers). So let’s kick around some ideas together below. I’d love to hear your take in the comments. Any thoughts?
1) Price Per Sq Ft Helps Us See the Entire Market: What have buyers been willing to pay in a neighborhood? It’s valuable to see the price per sq ft spectrum to help answer this question. What is the high, the low, and the average? I ran a CMA of sales over the past 90 days in the Mather neighborhood in Sacramento County (a tract subdivision), and the price per sq ft range is $112 to $206.
2) Price Per Sq Ft Helps Us See The Competitive Market: Imagine we’re valuing a home that is 1569 sq ft. The question becomes, where does the 1569 model fall on the price per sq ft spectrum that we see above? After running a CMA for model match sales, the price per sq ft range is $184 to $193. That’s a much more narrow range compared to the overall neighborhood, right? Ideally it would be nice to have many more sales, but that doesn’t always happen as we know. This is why sometimes it might be best to look at more than just 90 days of sales and obviously expand the square footage range to maybe 1400 to 1800 or so. Whatever you do, just make sure you have enough data to produce meaningful results.
3) Price Per Sq Ft Helps us Talk to Clients About the Market: Some clients are so stuck on price per sq ft that they struggle to think about real estate in any other terms. Here’s how it usually goes. A home owner sees a figure of $206 from a different sale in the neighborhood, fixates on that number, and then expects a value for his own property based on that number (even though no similar sales have commanded a price per sq ft close to $206). After talking through Points 1 & 2, hopefully the client can understand that hijacking a random price per sq ft from the neighborhood isn’t a good valuation methodology. Lastly, it’s critical to actually completely set aside price per sq ft and ask two questions: What have similar properties actually sold for? (sales price) & What are similar listings actually getting into contract for?
- Real Estate Agents: Be sure to study the price per sq ft spectrum for the entire neighborhood AND competitive properties in the neighborhood. But make sure you spend a good amount of time finding similar sales and listings. Sometimes agents say to appraisers, “I used a price per sq ft of $215 to price the property”. Okay, but where did you get $215 from? Why not $208, $214, or $225? Remember, appraisers like myself can find value in using price per sq ft to see the context of the market, but at the end of the day we are fishing for comparable sales to tell us what the market has been willing to pay for something similar. So when you communicate with appraisers, I recommend talking about actual sales you used to price the property rather than price per sq ft figures. This helps you speak the language appraisers use, and your initial research with price per sq ft vs. actual sales might even help convince sellers to not get hung up on a list price that is far too high (based on a hijacked price per sq ft).
- Appraisers: Sometimes appraisers mock price per sq ft and treat it like a meaningless metric, but there is actually some real value in using it. Not only can we get a more detailed sense of the market, but we can also communicate well with clients. Consider paying close attention to competitive price per sq ft figures (I know, this may not work in rural markets). If you are coming in lower or higher than the competitive range in the neighborhood, just be sure you know why and can explain why. Also, consider using price per sq ft figures in your final reconciliation. For instance, along with statements about comps, I regularly find myself saying things like: “The final value is also supported by trend graphs as well as competitive price per sq ft figures in the neighborhood.”
I hope this was helpful.
Class I’m Teaching Next Week: By the way, I’m teaching a class next week in the North Bay to a group of appraisers. It’s called How to Tell the Story of Value in Appraisal Reports (good for 2 hours CE). Come on by if it’s relevant.
Questions: How do you use price per sq ft in real estate? Anything else you’d add to the points above? Did I miss something? I’d love to hear your take.