One South Realty

The Consistent Misuse of ‘Dollar Per Square Foot’

We are all guilty of it. Realtors. Developers. Builders. Lenders. Appraisers. And of course, the buying and selling public.

What are we guilty of? Misusing the ‘dollar per foot’ metric in our analysis of housing values.

What is Dollar Per Foot?

If you are unfamiliar with the ‘dollar per foot’ measurement then you haven’t been looking at housing recently. Dollar per foot (or sometimes referred to as ‘price per foot’ or $/SF) is equal to the price of a home divided by its number of finished square feet.

Everyone tends to use the metric rather blindly in an attempt to compare one house’s value over another. Unfortunately, the comparison is used without really understanding its best application.

When $/SF Works

We will begin where the $/SF analysis works well: When comparisons are made between houses that are HIGHLY similar.

What does highly similar mean?

  • condos with similar views
  • housing built in the same neighborhood with similar designs, materials, age and especially, lots
  • retirement communities
  • townhouse communities

If you are comparing a townhouse in Community A to another townhouse in Community A on a different street, then yes, $/SF is helpful. Knowing that one townhouse is priced $5 per square foot less might make a difference in your decision.

But if you try to compare the townhouse $/SF to the condos built down the street, you aren’t going gain any real insight. It isn’t dissimilar from comparing the price of a hamburger from McDonalds with a steak from Ruth’s Chris. Yes, they both are food, and (allegedly) beef, but the similarities end there.

When $/SF Doesn’t Work

So here are the common mistakes we see:

3rd Floors and Basements: A finished 3rd floor or basement is not worth the same — on a $/SF basis — as the first and second floor are. Often sellers assume that a $150/SF average in the neighborhood means that the 500 SF finished on the third floor or finished basement adds $75,000 to the overall value of the home. It doesn’t. Most appraisers will discount the additional space at roughly half of the neighborhood average, but even that adjustment varies wildly.

Condos vs Single Family: First of all, condos are measured differently (they tend to take interior measurements versus exterior ones making them technically smaller, even if the floor space is the same). And second, the maintenance burden for much of the exterior and landscaping is carried by the association. When the roof goes on a single family home, the owner pays for a new one. In a condo, the new roof is budgeted for with each owner only responsible for a fraction of the cost. Don’t use $/SF when comparing different asset types.

Lot Differences: All lots are not created equally. A lot on a main road that backs to the community pool is not nearly as private as the one in the rear of the community that backs to a creek, and thus far less valuable. So if you were going to use $/SF to compare the two, you would need to account for the value difference in the land to gain any real insight.

Poor Design: Lastly, people tend to really miss out on the impact of design. Two 3,000 SF homes, even in the same neighborhood and built by the same builder, can vary wildly in price due to poor design (kitchens separate from living spaces / oversized formal dining rooms) or dated decor. It’s hard to look at pictures online and gain any real sense of the difference, but if you are going to use $/SF, you should try.

Summary

I like to tell clients that using $/SF IN your analysis is fine. Just don’t use it as your analysis.

If your decision will lean heavily on $/SF, make sure that you are really comparing highly similar properties, with nearly identical lots and quality levels. If you are in an urban area where property values shift quickly, tall condo buildings where views can be radically different, or in areas where lots vary greatly (especially along water), then you can kind of just toss $/SF out the window.

If you know how to use $/SF properly, then it can be a helpful tool in decision making. But if you just use $/SF and don’t ask questions, your analysis won’t be very valuable.

Finding and Setting the Right Price

You did all the right things.

Before the sign went up and your home hit the market, you pre-inspected and fixed every little defect. You uncluttered—including the garage and every closet; you painted; you cleaned all of the carpets; you landscaped and added a few plantings; and, lastly, you put away all of those ridiculous knick-knacks that your mother-in-law gives you each year (and expects to see every time she visits).

But 60 days later … no sale.

If you did everything else correctly, then chances are you read the comps incorrectly.

What are “comps?”

Comps (which is short for “comparables”) are past sales. They are not pending sales, as we don’t yet know their actual sales prices, nor current listings, because they haven’t shown that they can even pull in an offer—and, ideally, those that are closely comparable to your home in terms of size, area and overall features (thus the name). Chances are, no past listing is going to be exactly like your home, but we have methods for weighing and balancing out the differences to determine what those past sales may tell us about your home’s value. The key word here is: may. And for a few reasons.

First, it’s worth noting that comps only tell us where the market was at a given point in recent history, but not necessarily where it is currently, or where it’s heading. For this reason, comps only tell us about what a listing was actually worth when it went under contract. That’s something that could change as little as two weeks later. The real estate market has a mind of its own — one that’s driven by the behaviors of buyers and sellers, along with other factors. For this reason, in real estate, and especially when formulating price, the present is the only thing that really, truly matters. Along with some Realtor intuitiveness.

Subjectivity

For these reasons, comps are great as mere data points, but it’s important to know that they’re also subjective. Let’s face it, buyers’ decisions are not only based on the attributes and pricing of an individual home; they’re also based on things like other available listings, as well as personal reasons, like life changes and finances. For this reason, in order to get a good measure for value, the more data, the better. At the same time, it’s important to remember that in no way do comps serve as a crystal ball for what comes after them, so it’s important to regard them as one factor that can help us to determine value, but not the factor. The biggest factors should be current and expected market conditions, which are a little harder to determine.

One inevitable trend to bear in mind when selecting and weighing out comps includes buyer and seller subjectivities. In other words, whether they realize it or not, most sellers select the comps that give their home the best value. What’s worse? Once they lock in on that comp, they tend to use it as the only measuring stick. Meanwhile, buyers are doing exactly the same thing on the opposite side of the equation.

Both are wrong.

‘Tis all about the season

In order to generate an accurate estimate of current value, you’ve got to weigh market conditions. When there are more listings than there are buyers (which can be determined partly from things like average days on market), then you can bet that the lower priced comps are closer to accurate. When there are more buyers out there than there are listings? Well, then you can expect to be in steep competition, when homes will often fetch more than their asking prices as more people fight over them. The words “spring fever” mean everything in real estate, so you shouldn’t expect a comp that sold in the height of that fever to accurately reflect what a similar home is worth in fall or winter. These seasonal changes have anything and everything to do with value.

Reading Between the Lines

So back to your dilemma: 60 days on market and you don’t have a contract. At this point, change is inevitable. But, in addition to revisiting your comps and re-weighing how you’ve used them, a good agent can also read between the lines to see what all of the activities surrounding your listing tell us.

By looking at things like number of calls, number of showings, repeat showings and other inquiries, a good agent can get a feel for where the hang-up lies. For instance, if they’re getting a lot of showings, and even some repeat showings, but no offers? The issue may be price. Why? If they liked it enough to schedule the first showing, then liked it enough to see it again, but stopped short of making an offer, then there’s a good chance that they felt their idea of value was far enough apart from yours that they shouldn’t bother making an offer. Your agent also may be able to report on specific feedback provided by those buyers. Maybe there were specific elements that turned them off, like countertops or carpets—things you can change going forward.

Of course, the best agents also know how to dig deeper—like into available inventory and historical absorption rates for your specific area. By combining this information with the feedback mentioned above, you should begin to get a feel for why your home hasn’t elicited an offer.

There are no Shortcuts

As much as I’d like to tell you that you can just look at some recent comps, make a few adjustments and then slap a number on your home, it’s just not that easy. What buyers in a certain market are willing to pay for your home at any given time is a little more complicated than what someone else decided to pay for a similar home in recent history. If your home’s been on the market for 60 days, that doesn’t mean your agent isn’t doing a good job; it could be that the market is shifting. Maybe you’re out of sync with other current listings.

Reasons to Call Us – Beyond What You’d Think!

Even if you don’t plan to move any time soon, there are plenty of reasons to call us.

According to statistics, people tend to move every five to seven years, on average. And that equates to three to four houses over the course of most lifetimes.

What does this mean? With such short spans of ownership, all of the fixing, maintaining or improving you do now is essentially preparing it for sale. That door you’re thinking about replacing? It’s got to do more than just make you happy when you pull in the driveway and step through it; it’s also got to appeal to the buyers you’ll be facing in a few years (chances are, within five to seven at best).

Partly for this reason, while it might sound counterintuitive, you don’t just need a Realtor every time you place a home on the market; you should be using your Realtor as a resource between sales— and a free one at that!

Here are four times that we would like for you to call us:

Contractor Referrals
If you knew how frequently we help to navigate home repairs and improvements for our listing, then you’d know how critical it is that our contractors be affordable, trustworthy, and reliable. Angie’s list and HomeAdvisor may have ratings to guide you, but we have our own system that we feel works much better. No matter what your needs are, chances are we have a good, reliable, go-to person—someone who will do the job right and won’t charge you an arm and a leg for it.

Is your roof 50-year-old slate? Metal? Bitumen?
We have someone who specializes in all of them.

Do you have drywall or plaster walls that need repair? Want to install shiplap?
We’ve got somebody.

Maybe you’re thinking about “going solar?”
We know all the ins and outs, and the right people.

You get the point. When you need something done, just call and ask us. We’re happy to help you find the right person.

Bloated tax assessments
Let’s face it: cities, counties and municipalities operate off of taxes. So, when it comes to property assessments, they want to get every penny they can. Makes sense, right?

That said, every time you open an envelope to find out that your real estate taxes have gone up—again—it isn’t always justifiable. And we can help to prove it.

We’ve helped our fair share of clients to combat this issue over the years and can advise you on how to go about it.

Value-added improvements
When it comes to home improvements, a dollar invested doesn’t always equal a dollar in added value and equity. Further, what adds value to a home in one neighborhood doesn’t always have the same effect in another. Sounds crazy, right? But we’ve seen it time and time again.

We want you to make the improvements that make you happy, but we’re also here to help you determine how those improvements may or may not add value to your property. That doesn’t mean you shouldn’t do them, but knowing this information is the only way to make the best decision for your hard-earned money.

For staying in the know
When you spot a bull dozer across the street from your house, a ‘zoning case’ sign going up, or an office building being torn down—those can be unsettling discoveries.

We’re constantly tuning into what’s going on around town—including what’s being built where and who’s building it. We also watch zoning changes, development proposals, population changes and countless other factors that help to keep us on top of any and everything real estate.

Chances are, whatever it is you’re wondering about, we know something. If not, more than likely we can find out with a phone call and we’re happy to do it.

The bottom line is this: Just call us.

We don’t think of our clients as now again people, so you shouldn’t hesitate to reach out for any reason. We want you to call us when you’re thinking about buying or selling, but we also want you to call us when a five-minute conversation might be helpful.

You’re never bothering us.

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