Is price per square foot a good estimator of home value?
In my experience working with my clients, price per square foot is one of the most misused statistic. Price per SF in valuing a home can be misleading if used improperly in estimating the value of a home.
Often people calculate the price per sf by simply taking the sales price of a neighboring home and dividing by the living square footage. Then, they use that price per square foot to adjust another nearby home to estimate the value. As a result, they may use that estimate to arrive at what they are willing to sell their house for. This often results in misleading estimates of value… either too low of an estimate or too high of an estimate.
An example of how price per sf can be misleading:
Here I illustrate recent sales in a community in Boca Raton called Millpond. I’m using the most recent 3 sales to derive the price per sq ft. Each of these homes have similar features and are located very close to each other…
In this example the sold price per square foot ranges from $290 to $384. The average is $334. The property I’m trying to estimate the value of has 1,790 living sf.
If I use the average of the recent 3 sales, I would multiply the living sf of 1,790 times the average sold price per square foot of $334 to get an estimate of value of $598,000.
Alternatively, I might use the highest price per sf, such as multiply 1,790 times $384 to get an estimate of value of $687,000.
Turns out this property sold for $745,000, which was much higher than the estimates of values produced by using the sold price per sf of similar home. If the seller were to rely the sold price per sf of similar homes they would have underestimated the value of their home by $58,000 or $147,000. This is a good example of how the use of price per sf in valuing a home can be misleading.
This is just one simple example of how far off estimates based on sold price per sf can be.
Many factors need to be considered in coming up with the value of a home. Whether you are considering selling your home or are looking to buy a home, I’m a local area expert that will serve as your trusted real estate advisor. I bring the relevant factors into consideration to help you make the best informed decisions.