Using Price Per Square Foot to Figure Home Values
Price per square foot might not tell you what you think it does
Square foot pricing can be a shifty concept that doesn't always mean what you might think it does. You might be looking at a 1,500-square foot home that's listed for $150,000. The price per square foot would be $100. The home next door is 2,000 square feet, and it's listed at $185,000. The price per square foot of the larger home is $92.50.
Which is a better buy? That's actually a trick question because smaller square foot homes command higher per-square-foot costs. Larger square-foot homes command lower per square foot prices. It can be a little like comparing apples and oranges.
Average 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's sold in a given area then dividing that by the number of homes that sold.
For example, three homes sold on Broadway for $200,000 each. Property A was 1,000 square feet, while Properties B and C 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's a big discrepancy between homes that are 1,000 square feet and homes that are more than twice that size, and that's why averages 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.
Therefore, the average per square foot cost is about $192—the total divided by the five properties.
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. Median price is often used as a more accurate measure of value, although it's better than average pricing, especially when there are extremes.
It isn't a clear picture either, however. In the example above, the median price would be $167 compared to the average of $192. Half the homes sold for more than $167.
Why Average Price Is Important
Per square foot costs are used a great deal in new construction. The square foot cost to rebuild your home is often likely to be higher than the cost to buy if the home is older. This comparison can be based on averages because 2 x 4s, Sheetrock, and other construction materials cost the same per square foot from one house to the next.
It's All About Trends
It's not wise to base the purchase price of a home you're buying on either median or average per square foot costs because each home is unique. Instead, think of these numbers as indicative of overall trends. Prices per square foot can vary based on location, condition, improvements, updates, lot sizes, and whether it's a one-story or multi-level home, among other factors.
You can determine whether values are rising or falling if you compare the average price per square foot for the past 12 months, but much of that depends on the average size of the home.
Keep It in Perspective
The average price per square foot will show you a trend as long as all homes are similar in square footage, but an average won't help much at all if some homes are larger than others.
The answer to whether it's better to buy a home that's smaller at a higher per-square-foot cost, or a larger home at a lesser per-square-foot cost, depends on the typical average square footage of homes in that area. Many buyers want to buy a larger home, but it might not be the best financial choice if that larger home is a white elephant.
The Bottom Line
You can't take the average price per square foot and multiply it times the square footage of the home you're 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 doesn't accurately compute the value in most cases.