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.
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.