Using Price Per Square Foot to Figure Home Values
Points to remember: Smaller square foot homes command higher per square foot costs. Larger square foot homes command lower per square foot prices. To get a good feel for square foot pricing, it helps to look at how square footage is calculated. Here is a look at the median vs average per square foot price.
Say you are looking at a 1,500-square foot home that is listed for $150,000. The price per square foot is $100. Maybe the home next door is 2,000 square feet, and it is listed at $185,000. The price per square foot of the larger home is $92.50. Which is a better buy? (Don't worry, it's a trick question.)
Average (Mean) Price per Square Foot
You can arrive at the average per square foot cost of a home by adding the square foot cost of each home that has sold in any given area and dividing by the number of homes that sold.
For example, say three homes sold on Broadway for $200,000 each. Property A was 1,000 square feet, and Properties B and C two were $1,200 square feet. Two more homes sold a block away. Property D was $180,000 and 1,200 square feet, while Property E was $585,000 and 2,100 square feet. There is a big discrepancy between homes that are 1,000 square feet and homes more than twice that size, but that's how averages and medians are calculated.
- Property A sold at $200 per square foot.
- Property B sold at $167 per square foot.
- Property C sold at $167 per square foot.
- Property D sold at $150 per square foot.
- Property E sold at $278 per square foot.
- The average per square foot cost is $192.
Median Price per Square Foot
The median price is the middle price point – half the homes sold above the median and half sold below the median. It is often used as a more accurate measure of value, although it's better than a mean pricing, especially when there are extremes. However, it, too, is not a clear picture. In the example for average per square foot costs above, the median price would be $167.
Per square foot costs are used a lot in new construction. The square foot cost to rebuild your home, if it's older, is often likely to be higher than the cost to buy. Those can be based on averages because 2x4's, Sheetrock, and other construction materials cost the same per square foot from one house to the next.
Since each home is unique, it's not wise to base the purchase price of a home you are going to buy on either median nor average per square foot costs. Instead, think of these numbers as indicative of overall trends. Prices per square foot can vary based on location, condition, improvements, and updates, including lot sizes, and whether it's a one-story or multi-level home, among other factors.
The main reason prices per square foot is important is to show you trends. If you can compare the average price per square foot for the past 12 months, you can determine whether values are rising or falling. But much of that depends on the average size of the home.
As long as all homes are similar in square footage, the average price per square foot will show you a trend. But if some homes are larger than others, an average won't help much at all. The answer to whether it's better to buy a home that is smaller at a higher per square foot or a larger home at a smaller per square foot cost depends on the typical average square footage of homes in that area. Although many buyers want to buy a larger home, if that larger home is a white elephant, it's not the best financial choice.
How the Price Per Square Foot Helps to Determine Values
In short, it really doesn't. You can't take the average price per square foot and multiply it times the square footage of the home you are thinking about buying. It doesn't work that way. Appraisers don't rely on square foot costs. The pricing per square foot simply gives you average or median ranges; it shows you trends. In most cases, it does not accurately compute the value.