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Price per Square Foot - Don’t Make this Pricing Mistake

I have heard it said numerous times in different ways – using price per sq.ft. as a basis of value for a property:

“the house down the street sold for \$80 per sq.ft., mine should bring at least that”

“I priced my home at \$75 per sq.ft., which should be a good price given homes typically sell \$70-\$85 per sq.ft.”

“lowest price per sq.ft. in the neighborhood”

The problem is, price per sq.ft. can be misleading if not used within the correct context, and it can lead to a home being overpriced or underpriced if used as the sole basis for pricing a home.  Using Price/Sq.Ft. is not a good way to price a home.

EXAMPLE 1

In relation to a home’s value, without any context about the home, price per sq.ft. can be misleading - think about it this way:

If House A sold for \$80 per sq.ft., and House B sold for \$75 per sq.ft., which sold higher?

Without the context of the sizes of homes, there is not enough information to answer the question:

House A could be 2000 sq.ft. x \$80 = \$160,000   while

House B is 2200 sq.ft. x \$75 = \$165,000

Or

House A could be 1000 sq.ft. x \$80 = \$80,000   while

House B is 800 sq.ft. x \$75 = \$60,000

You see, price per sq.ft. without any context doesn’t help us much when valuing a home - above, House B sold higher in example 1, while House A sold higher in example 2.

EXAMPLE 2

House A sells for \$75 per sq.ft., House B sells for \$75 per sq.ft..  Both are the same size, both are the same quality and condition.  Which purchase was a better deal?

In this example, you have the price per sq.ft., you know the houses are the same size, same quality, same condition and location – but again, you are missing some of the pieces to the puzzle.

What if House A is a 2000 sq.ft. 3/2 with a 1 car garage, while House B is a 2000 sq.ft. 3/2 with a 2 car garage – House B has an extra garage stall at the same price – I would say House B is the better deal.

EXAMPLE 3

Another example I use to point out how using only price per sq.ft. can be a misleading tool in valuing a home is with the value of the lot a home sits on.

In this example, House A and House B both sit on the same size lot, same external influences (view, sounds, access to neighborhood amenities).  Let’s say these lots are worth \$30,000 each – the lot itself does contribute value, and therefore does contribute to the price per sq.ft..  If all other things are equal (quality, condition, bedroom/bath count, car storage, etc), but House A is 2000 sq.ft., and House B is 2200 sq.ft., then the lot contributes \$15 per sq.ft. to House A (\$30,000/2000sf) and contributes only \$13.64 per sq.ft. to House B (\$30,000/2200sf) – a difference of \$1.36/sq.ft., and that is only the lot.  There are numerous factors that contribute to the price of a home (sq.ft., overall quality/condition, level of updates/upgrades, bedroom/bathroom count, workshops, pools, etc.), each one contributing to the value of the home, and a small part of the overall price per sq.ft..  Added up, each of these differences could lead to large mistakes in pricing a home off of this 1 measurement of value (Price/Sq.Ft.).

CONCLUSION

How can Price/Sq.Ft. be used?  By making sure the comps used in the comparison are truly comparable – a very tight sq.ft. range, similar quality/condition, same bedroom/bath count, same car storage – when the homes are basically the same.  A search that has truly comparable sales could give a price/sq.ft. that is a good indicator of value.  The best example would be a neighborhood that has been developed by one builder, using the same quality materials, constructed in the same relative way, same basic amenities.

I hope this gives you some insight into how pricing a home solely on Price Per Sq.Ft. can lead to overpricing or underpricing a home.  Estimating a home’s value is much more complex than a simple formula using 2 variables.  There are more features to a home that contribute to it's value than just the size of the home.

If you are thinking of listing your home in the near future, or your home has been on the market for an extended period of time, consider giving me a call.  I have been appraising real estate in the Lubbock Market for almost 15 years and can assist in pricing your home the right way.

Posted in:General and tagged: PricingReal EstateValuation

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Measurements – Easy Pre-Listing fix to Avoid a Potential Future Headache

I have been an appraiser in the Lubbock area for almost 15 years now.  One source of problems I have seen prior to a purchase closing is when the sq.ft. advertised on the MLS is different than the actual sq.ft. of the home – how does this happen?  More often than not, the Lubbock Central Appraisal District is used as the source for sq.ft..  While they aren’t always wrong, when they are wrong this can cause some issues in more than one way.  For my first blog post, I want to talk about how using the wrong sq.ft. on your MLS listing can negatively affect you (whether you know it or not).

While I believe the cost for measurements to be low enough to justify the verification of the sq.ft. for every listing, these are the most common “red flags” I see in the field - times I would suggest definitely having the home measured – any additions, oversized garages, 2 story homes.

Property Measures Out as Expected

This does happen and that is great!  You have one less thing to worry about.

Property Being Sold Measures Out to Less Than the Expected Square Footage

This is the one that can cause the most obvious issues.  My experience has shown me that price per sq.ft. is heavily relied on to price homes (it is not a valuation technique, but I will save that topic for a later blog post) – if a home is being priced based on 2 numbers, the sq.ft. of the home and a “price per sq.ft.” of a neighborhood, the sq.ft. of the home being accurate would be an important factor.  This doesn’t always seem to be the case; the following are a sample of notes taken directly from MLS listings currently active/under contract or sold w/in the past 12 months (as of 11/21/2018 – some **** used as to not indicate a specific listing):

Sq Ft was taken off of *** CAD. If important to you, have measured.

Square footage is not guaranteed so if important please get measured.

Square footage is different from the CAD, square footage is from appraisal when he bought it. If this is important, buyer might measure.

Measure if footage is important.

Sq footage is per tax records and rooms were laser measured. If important to your buyer please measure

Sq.Ft is per seller measurements after home was added on several years ago. If sq ft is important to your buyer, please measure.

Sq.Ft. is wrong in LCAD.  Closer to ***** but measure if exact sq footage is important

Unfortunately, I appraise homes that fall victim to this easily avoided piece of misinformation – sq.ft. was wrong in the MLS, home was priced too high based on this misinformation.  This leads to having to renegotiate the original terms of the contract – good for the buyer that they are not paying for more sq.ft. than they thought, but bad for a seller that had an expectation set for the size of the check coming back after closing.  I saw an example of this recently when the LCAD was used as a source and gave a combined sq.ft. for the home including the above grade Sq.Ft. and the basement – problem was, the home didn’t have a basement, and the above grade was incorrect too.  The home actually measured almost 400 sq.ft. smaller than advertised – this isn’t the first time I have seen something like this, and certainly won’t be the last.

Property Measures are Larger than Advertised on the MLS

Great! Right?  Depends on which side of the transaction you are on.  For the buyer, that is fantastic news.  They just bought a house that is actually bigger than they thought without having to renegotiate a higher price (the contract would only be renegotiated when appraised value is below contracted price, not above, as the appraisal only protects the buyer interests due to being in line with lender interests – neither want to overpay).

For the seller?  They will probably never know about this, the appraisal is not completed for them – they will go on to their next home never knowing that the home was underpriced with the wrong sq.ft. information, never knowing that they probably left some money on the table.

I recently appraised a home that had the sq.ft. listed per LCAD and the house measured to be about 10% larger.  As a result, the appraisal came in about \$10,000 higher than the contract.  Because the appraisal is done for the lender, who is lending money to the buyer, no one is stopping this transaction to let the seller know they are selling the home too low – the transaction is only stopped if they are selling the house above the appraised value.

What to Do – the Easy Fix

Call me – I have personally measured thousands of homes over the past 15 years.  Measurements are typically easy to fit into the schedule, and the time to turn them back over to you very quick.  They will not add any significant time to getting your home listed on the MLS and can be done while you ready your home for the listing.  Pricing is inexpensive – it is based on the size and complexity of the home being measured.  If you are listing soon, or currently listed and would like to verify the sq.ft. of your home that is listed, give me a call for a quote.

Posted in:General and tagged: measurementsprelisting