Let’s look at one of the most common value mistakes made with square footage in real estate. This error is extremely easy to make if we’re not careful, and it’s something that happens quite a bit in the real estate community. I’d love to hear your thoughts in the comments below. I hope this is helpful.
Here’s how the error works:
- A property sold for $205,000.
- The house is 1164 sq ft.
- $205,000 / 1164 = $176 price per sq ft
- Now apply $176 to any difference in square footage with other properties. For instance, if a house is 100 sq ft smaller, the value difference between the two houses is $176 x 100 = $17,610.
The Big Error: When we apply $176 for the square footage adjustment, we make a huge mistake. Why? Because $176 represents everything about the property from the structure, lot size, upgrades, driveway, layout, landscaping, sewer connection, bedrooms, garage, etc…. So when we apply a figure that encompasses the entire property to only one little part of the property (square footage), it’s very easy to get an off-base value adjustment.
A market-based methodology: If you want to know how much square footage is worth, it all comes down to comparing homes in the neighborhood. In this case we need to find other similar-sized homes to the 1164 sq ft model. What type of price difference is there? Why is there a price difference? Is it the square footage? Condition? Upgrades? Location?
In this case I found a property that sold for $197,000, but it had 100 less sq ft and one less bathroom. Assuming there are other sales out there like this too (we need more than just one example), we now see the combined value difference for the extra 100 sq ft and one bathroom is only $8,000. In other words, buyers were really only willing to pay about $8,000 for the extra square footage and bathroom. That’s a far cry from the $17,610 figure we came up with above, right? We could take more time to figure out how much the bathroom contributes to the $8,000 and how much the square footage contributes to the $8,000, but let’s not make this post too long.
The Point: Be very careful about making a square footage adjustment by using the entire price per sq ft of a property. This is applicable for any price range too – not just the lower end of the market. How much are buyers actually willing to pay for the extra square footage? The best way to know is to start finding some sales that are a bit larger and others that are a bit smaller. Assuming all else is fairly similar, what is the price difference? For more information, check out how appraisers make square footage adjustments and choosing comps like an appraiser.
Questions: Do you have anything else to add? Any stories or points to share?
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