In real estate school, they taught us to determine a property’s value using price per square foot (PPSF). Essentially, dividing the average sale price for a neighborhood by the average square footage to determine an average PPSF. Multiply your PPSF by the house’s square footage to determine it’s value. It’s simple enough way to value a property, but it’s also not very accurate. It took me a while to figure out exactly why, but it makes sense when you think about it. Here are some reasons why price per square foot in real estate is a myth:
Not All Square Footage is Created Equally
The biggest flaw in the PPSF formula is the assumption that all square footage is equal in value. In reality, different types of square footage have vastly different costs to build. For example, the square footage on the main level of a home is far more expensive to build than space in a basement, attic, or even 2nd story.
Let’s say you have two, 1,500sqft homes in the same subdivision. One is a ranch style home and the other is a 2-story. They both have unfinished basements and similar quality finishes. Even though both homes have the same amount of livable square footage, their costs to build differ significantly. The ranch typically has a much larger foundation than the 2-story with the same livable square footage. The larger foundation costs more to build. Additionally, the larger the footprint of a house, the larger the roof. So, in this example, the roof on the ranch house is also larger and more expensive.
Finishing a basement also doesn’t add the same value as building the same square footage on the main floor. The cost of finishing a basement—especially if it’s not a walkout—can be much less than building an additional story. Doubling your livable square footage by finishing your basement, obviously doesn’t double the value of your house. Yet, PPSF does not account for this.
Location Matters More Than Size
Another fundamental problem with using PPSF to determine value is that it ignores the impact of location. In real estate, we’ve all heard the phrase “location, location, location”. Houses in sought-after neighborhoods can command significantly higher prices than larger homes in less desirable areas. For example: houses located in good neighborhoods close to downtown typically cost more than houses in rural areas. The more rural a location, the cheaper the land and less demand there is for housing.
Layout and Design Matter More Than You Think
Beyond just square footage, the layout and design of a home play a huge role in its value. PPSF doesn’t take into account the “livability” of a space. A home that makes great use of space can feel much larger than one with cramped rooms and a poor layout, even if the square footage is identical.
For instance, a home with a large, finished attic may have a lot of square footage on paper, but if the space is difficult to access and impractical for daily use, it won’t be valued the same as more functional square footage on the main level. A home that has wasted or awkward space can often be less desirable despite its high square footage (see conversation pits), yet PPSF would treat both homes as having the same value per square foot.
Adding Square Footage Can Actually Lower Your Value
Not all square footage adds value; in fact, in some cases, it can actually lower your home’s resale value. A prime example is converting a garage into living space. While this increases the overall square footage of the home, it typically does so at the expense 2 things many buyers consider essential: parking and storage. A converted garage is typically much less desirable than a functional, well-maintained garage space. This is a deal-breaker for many buyers who need room for their vehicles or additional storage.
Put yourself in the buyer’s shoes. If they’re looking at true, 2,400sqft houses with 2-car garages, and they tour your house that’s only 2,400sqft because the garage was converted to living space, it’s really not comparable. In this case, the extra square footage likely makes your house harder to sell, as buyers may view the conversion as a negative. Thus, the price per square foot method doesn’t take into account how certain changes, such as losing a garage, can actually reduce a home’s appeal and market value.
The Impact of Upgrades and Finishes
Something else not factored into the PPSF formula is its inability to account for the quality of finishes, upgrades, and overall condition of the property. A newly renovated kitchen, high-end appliances, custom cabinetry, or designer flooring can drastically increase the value of a home (within reason, see: Is Remodeling My Home A Good Investment?), but PPSF treats these homes the same as a property that hasn’t been updated since the 1970s.
Automated Valuation Models Can Be Misleading
Automated valuation models (AVMs), such as Zillow’s Zestimate, are notorious for relying heavily on price per square foot as a core factor in determining a property’s value. This can often lead to wildly inaccurate estimates. Zestimates are much more accurate than ever, but still cannot account for important nuances like a house backing up to a busy road or an industrial area. As a result, buyers and sellers may make decisions based on flawed data, leading to overpriced listings or missed opportunities. This can cause deals to fall apart when the appraiser doesn’t agree with the value determined by the agent(s), buyer(s) and seller(s). If you ever get the opportunity, ask an appraiser what they think about price per square foot. It’s pretty enlightening!
Conclusion
In real estate, price per square foot is a convenient but overly simplistic metric that doesn’t reflect the true value of a home. As I’ve learned over the years, relying on PPSF to value properties can be misleading for both buyers and sellers. Not all square footage is created equal, and the design, location, finishes, and overall livability of a home are far more important in determining its true value.
So, next time you’re evaluating a property, remember that price per square foot is just a starting point—and not a reliable method for determining a home’s worth. Always dig deeper, consider the unique features of the property, and consult with an experienced real estate professional to get a more accurate and informed assessment.
Curious what your house is worth? Give me a call! I’d love to chat.
Justin Rollheiser – REALTOR®
Keller Williams Realty | Diamond Partners Inc
13671 S Mur-Len Rd | Olathe, KS 66062
Direct 913-800-7653
Office 913-322-5878
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